On the week in which the largest investment fund in the world, Blackstone, announced its entry into the local high tech market, and during the same month in which one of the largest venture capital funds in the world, Tiger Global, completed several investments in Israel, it may come as a bit of a surprise to discover who the largest high tech investor in Israel actually is. It isn’t a venture capital fund or an investment fund, rather a dull insurance company which has been making unflattering headlines from the time it was controlled by Eduardo Elsztain and IDB and through its latest power struggles between its CEO and Chairman, which even led to the intervention of the Supervisor of the Capital Market, Insurance, and Savings Authority Moshe Bareket.
However, under the radar, Clal Insurance has become one of the largest players in the Israeli tech investment market, and possibly even the largest with a portfolio that has reached an impressive scope of $2 billion (not including Clal’s investments in publicly-traded companies).
This portfolio is significantly larger than that of competing institutional entities, with Phoenix Insurance Ltd. most likely the next in line with a portfolio of NIS 1 billion ($308 million), including unicorns such as Otonomy and REE. The only other entity which puts up a fight is American venture capital fund Insight Partners, which became the most active investor in the Israeli high tech industry over the past year.
The $2 billion that Clal has invested in tech over a short period of three years is also what has resulted in the company’s advanced study funds and provident funds leading their rivals when it comes to returns. Last month, the company even achieved the unimaginable when it overtook the returns achieved by the Altshuler Shaham Investment House over the past three years. However, it isn’t just the size, but the identity of investments that Clal has made which even full-fledged venture capital funds would be proud of.
The company’s portfolio which it has built up over the past three years doesn’t include almost any small companies and is filled with unicorns, many of which have recently taken the fast track to Nasdaq through merging with special-purpose acquisition companies (SPACs).
“Don’t give me the evil eye”
A week ago Calcalist revealed what is set to be Clal’s biggest exit yet, reporting that fintech company Pagaya is in advanced talks to go public at an $8 billion valuation. Clal is also set to benefit from the SPAC deals of insurtech company Hippo Insurance at a $5 billion valuation, autonomous vehicle company REE at a $3.6 billion valuation, Cellebrite at a $2.7 billion valuation and Autotalks at a $1 billion valuation. All of those investments were made by Clal at a relatively early stage, with Clal writing out checks for tens of millions of dollars in each of the deals, which are set to result in an average return that is fourfold the amount of the original investment.
“Despite the fact that the scope of our managed assets is NIS 250 billion ($77 billion), $2 billion isn’t a completely negligible amount and is the reason why our study fund surpassed Altshuler for the first time,” said Yossi Dori, Executive VP and Head of the Investment Division at Clal. “Technology is definitely making an impact, and I think it will be one of the main driving forces of our results over the coming years. Whoever has technology - whether tradeable or not - will win.
“We already have several companies on which we made a tenfold return on our investment. In the next quarter, the internal rate of return (IRR) on our tech portfolio will be worth tens of percentage points. I am even hesitant to say the number out loud, because I don’t want people giving me the evil eye. In the meantime, we have zero wipeouts and 80% unicorns.”
You benefitted from an excellent period where everything you touched over the past two to three years seemed to turn to gold, but that trend could flip.
“It’s clear it won’t last forever, but the wheel can’t be turned back either. It’s not as if there won’t be crises in the technology market, but there is a change in awareness - not only for us - but at all institutional entities. It’s not even a trend since the market is hot right now, and that’s what I told our board when I presented the strategic change we began to lead in 2019. Adopting technology in an exponential manner the way we have done has an effect on all the economy, and that’s why it will have an effect on the entire world of investments in a decade as well. If we take a company like Paz for example, who will be purchasing its fuel in ten years? And that’s true for any field from insurance to banking to agriculture.”
Don’t the current valuations disturb you? You’re managing what is referred to in the U.S. as “widow-and-orphan-stock.” These are investors who can’t absorb dramatic drops in valuations or wipeouts compared to certified investors who are accustomed to investing in private high tech companies through venture capital funds.
“It’s true that over this period money is aggressively searching for investment targets, and that’s how it reaches companies who might not need it. These lofty valuations are too high, and the market is priced as if every company will be the next Google or Amazon. It’s clear that within the next five years, some of those companies will disappear or be acquired at much lower valuations. I think that some will be in our portfolio, but over time we expect to see high returns from the stock market or from bonds with zero realistic interest rates.”
So what do you do? Invest less?
“Our goal is still to invest billions of shekels over the next few years, but I must say that over the past six months we are starting to be a lot pickier. It’s important to decide what not to invest in. For example, our investment in Next Insurance, only entering in its latest round (Next raised $250 million at a $4 million valuation just six months after raising a similar sum at a $2.2 billion valuation). We were challenged by the valuation and if it were another company we wouldn’t have entered at such a high valuation. But they have a good business model and strong operational capabilities which justified taking the risk that the valuation might decline.”
“It only gets more challenging from here”
Clal Insurance’s romance with high tech began when Dori assumed the position of the company’s Long-term Savings Manager, replacing Anat Levin. “Until 2015, all of the institutions only spoke of debt and real estate, and the exposure to technology was less than 1%,” Dori said.
“At the end of the 1990s, institutions invested quite a bit in technology, mainly through venture capital funds, but after the 2000 bubble burst and over the next decade, returns weren't very good. The public market did better, as did investment funds. In 2010, with the entry of smartphones and the decline of the finance sector, real change began, and suddenly technology became attractive again as the Nasdaq started to climb and venture capital returns overtook other investment routes. In 2019, we led strategic change when we decided to focus on the fields of infrastructure and technology. Now, that division has 20 employees, financial analysts, and investment managers who have already developed expertise and some even arrived from the high tech sector.”
Liat Hazut is the person managing Clal’s Alternative Investment division. She arrived in 2015 to manage the infrastructure portfolio that the company had begun building, although currently it pales in comparison to the high tech portfolio. “We understand that it is going to be a lot more challenging than it was over the past year,” Hazut said. “The last three years were relatively easy, we could put down $20-$30 million in each company, but the good ones have now already filled up on cash and it won’t be easy for us to expand the list.”
How do you get a share in the biggest deals? Today, most entrepreneurs prefer the flashy names of U.S. investment funds, and more and more foreign entities are active today in the local market.
“Oftentime we invest along with venture capital funds, for example, with Next Insurance we invested along with FINTLV (which was one of Next’s earliest investors). We don’t sit on boards, only sometimes as observers.”
How much do down rounds concern you?
“We currently receive the same conditions and protections as the funds do, but at the moment there are hardly any protections since entrepreneurs have gotten much stronger, and that’s another sign that the market is hot. They receive much larger amounts and are diluted far less.”
What changes do you plan on making in light of the exceptional rise in company valuations?
“We are starting to look more at fields that we were less active in until now, like digital health, foodtech, agtech, and are also starting to invest in later-stage companies. Lately, we are also seeing more institutions taking advantage of the Israel Innovation Authority’s program which allows institutions to receive a 40% protection on their investment. Companies are also much more aware today of the possibilities to raise funds from local institutional entities, and come to us directly even without VC funds.”