As anyone who follows the local capital market can tell you, the relationships between people and companies in the business sector are fickle. Those who smear their colleagues one day, may find themselves in partnership the next. And always, the solution is money. In other words, any time you are impressed by the "ill-starred relationships" in the business sector that make the morning news, know that the crisis will lead to one of two events ¿ a financial settlement, or a law suit that will lead to a financial settlement. It is true of the underwriting market, the brokerage market, and certainly true of the venture capital sector. The problem is that these settlements sometimes are harmful to the other parties at interest ¿ usually minority shareholders.
And this is exactly what happened in yesterday¿s agreement between investment banks Ilanot Batucha and Tamir Fishman. The two banks have a long and storied history of tensions over Ilanot's investment in Tamir Fishman's venture capital fund. When Tamir Fishman raised money on the capital market in March 2000, Ilanot Batucha, the underwriter, was forced to exercise its commitment and actually acquire 27% of the shares. It was clear then that Ilanot was none too thrilled with the investment it was forced to make, and the bank did succeed in convincing Tamir Fishman to take 9% of the shares of its hands further down the line.
Since then, the relationship between the two banks has not been rosy, to say the least. Institutional investors, including Ilanot Batucha, have claimed in the past that there is not justification for the existence of a fund that sits on NIS 167 million in cash with investments in 11 portfolio companies that amount to just a few million dollars. The money is therefore not invested in venture capital at all, but managed by Tamir Fishman¿s management company, which draws NIS 5.5 million in annual fees for its troubles.
Based on this situation, institutional investors raised the possibility that the fairest thing to do, in light of the situation in the venture capital sector, would be dissolve the fund and distribute the cash to the investors. Ilanot Batucha never ruled out this option, even supporting it covertly, as the alternative, holding on to shares in the fund with their 58% negative return since going public, was none too attractive.
Ilanot will receive "service fees" from fund
Yesterday, the sides signed a joint voting agreement, which followed a similar agreement with Gmul in which Gmul committed to buying 10% of the fund¿s share capital on the market floor. According to the agreement, Ilanot Batucha promises to vote with Tamir Fishman at the fund's shareholders meeting. Ilanot Batucha also promises to provide Tamir Fishman with "ongoing consulting services concerning venture capital and as much deal flow as is legally viable, as well as assistance in networking with concerns able to assist in examination of matters related to the fund's activities". In consideration, Ilanot Batucha will be entitled to "service fees" from Tamir Fishman derived from the management fees on the fund, as well as part of the carried interest profits that are distributed to fund managers.
In practice, Ilanot Batucha is getting a perq no other shareholder will see, not even Gmul. Ilanot gets part of the management fees and part of the profits that go to venture capital fund managers. Couldn't Ilanot have offered the services simply because it is a shareholder in the fund with an interest in the fund's success, without getting special perqs? Apparently not, considering the relationship the two banks had in the past.
Institutional investors argued today that venture capital funds, including Tamir Fishman, collect management fees in keeping with a fund that invests time in the management of its portfolio companies. In this case, we are talking about managing money which does not justify this kind of management fees, and certainly doesn¿t justify adding another shareholder to enjoy the management fees, while the rest of the shareholders are left holding the bag, a bag of shares that have lost 58% of their value.
There will be those who will call this a strategic agreement between the investment banks, but anyone taking a close look will hear Ilanot Batucha's hush money screaming loud and clear.