32 years after Psagot was established as a mutual fund company by Bank Leumi, the body that has since become an independent investment house is coming to an end. At the end of the week, the Apax Fund, which controls Psagot, signed an agreement to sell it to the Altshuler investment house Shaham for NIS 910 million, not including the debt and cash in Psagot. The signing brings to an end what the local capital market has long perceived as Apex’s worst investment in Israel and is among the worst local investments by foreign investment funds. Applications for approval of the transaction will be submitted next week to the Capital Market Authority, which supports it, and to the Competition Authority, which is expected to be a more significant hurdle.
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Apex bought Psagot NIS 2.5 billion 10 years ago with a debt of NIS 850 million, and the fund charged him an additional bank debt of NIS 550 million to finance the purchase. It is currently selling Psagot for NIS 910 million, and may reach a consideration of NIS 1.15 billion from the sale of the insurance agencies and upside on some of the investment house’s assets (see box). These amounts constitute for Apex an exit from an investment with a loss of 25% –30% of the equity of 373 million euros that it invested in the acquisition.
During its tenure in Psagot, Apex drew 73 million euros in dividends and is now expected to receive 150 million euros (about 600 million shekels) from Altshuler for the investment house: 910 million shekels in cash, of which 750 million shekels must be deducted for the balance of debt to Bank Hapoalim; And NIS 450 million in cash in the Psagot fund. In addition, Apex is expected to receive about 58 million euros from the sale of Psagot’s insurance agencies that remain in its hands, so that in the end it will recover up to 280 million euros.
Apex will have faith in the sale of Psagot’s mutual funds, which are receiving interest from Clal Insurance, Excellence and IBI, at a price expected to be NIS 350 million. The agreement between the parties entitles Altshuler to the proceeds from this sale, but stipulates a certain price beyond which Apex will receive 50% of the proceeds.
The same NIS 600 million net in which Apex sells Psagot constitutes a slaughter price that reflects a 5-6 times lower multiplier on operating profit (EBITDA). This marks the strong desire of the fund to get rid of the investment house, which has lost provident fund assets at a dizzying pace in favor of a number of other players in the economy, led by the buyer Altshuler Shaham. In fact, the calculation in euros – resulting from the fact that Apex is a London fund that conducts its business in the European currency – and the drop that the currency has experienced since the fund acquired Psagot, saves it from a much deeper loss and softens somewhat the blow of the failed investment. From a rate of 5 shekels to the euro when Apex bought Psagot in 2010, the currency fell to about 3.9 shekels, offsetting more than 20% of the loss.
From a strong and growing body to a fading and dwindling body
Although the last decade has been excellent for the capital market and the assets of large and medium-sized investment houses have been nurtured, Psagot has actually faded and transformed from a growing body to a dwindling body that mainly deals with the exit of funds from its activities. In 2020 alone, about NIS 10 billion came out of the mutual funds’ mutual funds, while the provident funds lost about NIS 5 billion. Beyond that, although Psagot manages assets to the same extent as Altshuler Shaham who acquired it (NIS 165 billion), the latter is traded on the stock exchange at a value of more than four times that of him. Similarly, the Moore Investment House, which has been considered a rising star in recent times, manages assets 20% of those of Psagot, but is traded on the stock exchange at a value of NIS 925 million, similar to the value of Psagot.
A possible reason for the gap between the volume of Psagot’s assets and its value in relation to its competitors and the minority bidding for its acquisition can be found in the financial data of the investment house, which were published against the background of the transaction. From these, it appears that in the first nine months of 2020, Psagot recorded revenue of NIS 513 million but a loss of NIS 153 million, following a one-time write-off of NIS 276 million due to a decrease in Montin recorded in the reports. This decrease is due to acquisitions of high-valued assets. In the last year under the corona crisis.
The fall of Psagot is reminiscent of the story of another investment house in Israel, Prism. It too was controlled by a foreign fund and was one of the leading entities in the market, and it too ended in liquidation. The lesson that emerges from both cases is that the world of investment houses is less suitable for the model of foreign funds, which are used to taking an asset and improving it, among other things by raising prices and becoming more efficient. However, the field of investment houses is very competitive and is characterized by a large number of players, and to this must be added the reform of management fees in long-term savings that has eroded Psagot’s income.
An examination of the investment bodies that have survived and intensified over time shows that these include those established by investment managers who served as dominant owners and managers, out of an economic interest in the success of the business. Investment houses such as Attelshuler Shaham, Yellin Lapidot and Moore circumvent the limits of the executive pay law in that their executives constitute shareholders who enjoy non-salary profits. Foreign investment funds lack the long-term perspective required to rehabilitate an investment house as peaks and the interest in the investment required to maintain it as an independent entity, and as evidence Apex has indeed had difficulty finding a buyer to preserve it as such. It seems that Altshuler Shaham understood this and waited patiently until Apex Israel CEO Zehavit Cohen realized that she had no choice and would be flexible in the price.
Apex did not find a worthy successor to Vermus in the Peaks
Cohen is a talented manager who managed to post a profit of 810 million euros to Apex in the sale of Tnuva to the Chinese Bright Food, so the loss it suffered on the investment in Psagot is relatively bearable and the damage is mostly prestigious. She led the high-priced acquisition of Peaks from the York Fund, which was well-managed to manage the investment house under Jeremy Blank, Eric Steinberg and Roy Vermus. Cohen was involved as a director at Psagot until the Tnuva cottage crisis in 2011, when she resigned from the board of directors of the investment house and left her right hand at Apex Shai Abba, while Psagot’s chairman was Erez Nahum, also a senior but lesser-known Apex executive.
Apex’s failure to lead Cohen and Abba in Psagot began with the selection of directors. Vermus, who built Psagot and under the ownership of the York Fund turned it into the most profitable and large investment house in Israel, was forced to leave the company following an investigation by the Securities Authority against him and other senior officials on suspicion of a securities fraud. Cohen could have stopped the acquisition of Psagot as soon as the arrangement reached by the State Attorney’s Office required him to leave the company, but did not do so. Psagot was built around Vermus and when he was forced to leave Apex, Lydia received a huge investment house but without a dominant CEO who was not appointed heir.
The executives appointed to the tops after Vermus failed to fill his shoes and the investment house began to deteriorate. The board of directors included the names of Chronon Tov, Hagai Badash, Michal Abadi-Boyanjo, Barak Sorni and Reuven Kaplan. Cohen did not recruit stars for the position of CEO both from a personal worldview but also because it operated under the salary cap of executives, who according to the market sent talented financial managers to the field of mutual funds.Fencing, Where there is no regulation on wages. At the same time, the Capital Market Authority imposed restrictions on management fees and management fees on provident and pension funds, and the market changed from a market of financial marketers to a market of pension marketers, which was controlled by insurance agents who did not like Psagot. Even the Profit insurance agency, which was partially owned by Psagot, preferred to market competing Altshuler funds, to the chagrin of Liba Cohen.
When the biggest player swallows the second in size
As the peaks began to fade Altshuler grew hot and grew. Altshuler Shaham Investment House was established 31 years ago by Gilad Altshuler and Kalman Shaham, and is today jointly managed by Altshuler and Ren Shaham, Kalman’s son. Against the background of good returns, the investment house has made a leap in the last decade, mainly in the field of provident and pension and its assets have grown almost in an engineering column: within ten years the provident fund manager managed grew from NIS 10 billion to NIS 147 billion. Altshuler Shaham’s pension and provident arm alone is traded at a value of about NIS 4 billion. Approval of the acquisition of Psagot by the regulators will bring the volume of Altshuler Shaham’s assets to NIS 280 billion – an order of magnitude that is more similar to the large insurance groups than to the other investment houses in the industry.
Although Psagot is in a faltering state, it is still a large entity, and as such a deal between two entities so large requires the strict approval of the regulators, the main ones being the Capital Market Authority and the Competition Authority. According to estimates, the Capital Market Authority, led by Commissioner Moshe Barkat, tends to approve the deal, which is expected to transfer Psagot’s assets to a strong, stable and growing body. The limitations of the law for approving mergers in the field set a threshold of 15% market share for the merged entity in the long-term savings market, a threshold that Psagot and Altshuler Shaham meet since they have no activity in the field of life insurance. However, this limit was set 15 years ago and examines all long-term savings assets as one piece, although these are different products in markets with different characteristics and levels of competition.
The approval of the Competition Authority, headed by Michal Halperin, is a more complex matter, and an examination of this authority is expected to focus on the power of Altshuler Shaham in the camel market. Altshuler Shaham is already the biggest player in this market and is now actually acquiring the second largest player in the market. Past experience shows that the Competition Authority is not keen on approving mergers between such large entities. Moreover, Altshuler Shaham is the largest fundraiser in the provident fund: while most entities in the market recorded a decline in accruals in 2020, the investment house accumulated additional assets of NIS 31.5 billion, a huge gap from second place Moore Investment House, which increased its assets by NIS 8 billion only.
In fact, the deal has already raised claims about its contribution to increasing centralization, and Economy Committee Chairman Yaakov Margi (Shas) has already expressed discomfort with the deal and now with its signing it is likely to hold a discussion on the issue. On the other hand, Altshuler Shaham is expected to claim that Psagot is not a body that creates competition, especially against the background of the loss of its assets in the provident fund. In addition, Altshuler Shaham are expected to argue that their strengthening will help compete with insurance companies. The capital market estimates that the competition authority may approve the deal under a restriction that Altshuler Shaham will not absorb Psagot’s assets in provident routes where it already has too large a presence – similar to the geographical restrictions imposed on the merger between Shufersal and New Pharm. In any case, Halperin’s approval of the merger is not self-evident, and the parties will be required to make an effort and persuade it to grant it.
Another future front that is expected for Altshuler Shaham is in front of 650 Psagot workers, many of whom may now lose their jobs. In another deal recently signed in the field in which the Phoenix acquired Hellman Aldubi, the insurance company undertook to absorb 70% of the investment house’s 270 employees for a period of at least one year. The agreement between Altshuler Shaham and Psagot does not include any commitment on the subject, and it is estimated that although some of the employees will be absorbed, their number is not expected to be significant. The extent of the workers who will now lose their jobs also depends on the identity of the entities that will acquire the rest of Psagot’s assets. Thus, if the activity of Psagot Mutual Funds is acquired by Clal Insurance, which does not currently hold such activity, it is likely that many of the relevant employees will be absorbed into its ranks.
The Psagot workers’ committee, which unites more than 500 workers, has already suspended work on the investment house for days last week, and Apex is now expected to sit down and discuss it. The coming period in the investment house, which has already experienced turbulent days, is expected to be more tense than ever.