Secondary Market Funds Thrive Amidst Israeli Tech IPO Freeze

The secondary market, where private company shares are traded outside of public exchanges, is experiencing significant growth in Israel, driven by a freeze in initial public offerings (IPOs). This trend has led to the rise of specialized secondary funds that purchase shares from employees, founders, and early investors at a discount. These funds aim to provide liquidity to stakeholders who are unable to exit through traditional IPOs or acquisitions, holding the shares for a relatively short period, typically up to five years, anticipating future liquidity events.

International players like Hamilton Lane, a major global investment manager with $1 trillion in assets, are expanding their presence in Israel. Hamilton Lane recently raised $5 billion for its sixth secondary fund, managing a platform of $20 billion. Keith Britton, Managing Partner of Hamilton Lane's secondary activities, noted the market's explosive growth from $10 billion in 2010 to approximately $240 billion today. The firm invests not only in tech but also in real estate and infrastructure.

Britton's recent visit to Israel aimed to meet with tech companies and venture capital (VC) firms for potential investments, as well as institutional investors for capital raising. Hamilton Lane has been active in Israel for over 20 years, investing about $1.5 billion in total, with $470 million invested in the last three years since October 7th. They have facilitated liquidity for investors in VC funds like Vgames and gained exposure to Israeli companies such as Wiz, Pantera, and CyberArk through fund manager-led deals.

Hamilton Lane evaluates a wide range of deals, from $5 million to over $100 million, seeking liquidity for funds and shareholders, and sometimes providing new capital for company expansion alongside liquidity solutions. They assess private companies based on their business model, financial metrics, market size, and recent funding rounds, often acquiring stakes at a 20%-25% discount from the fund's book value for LP stakes, and wider discounts for direct share purchases. The firm rejects a significant portion of opportunities, sometimes up to 98%, indicating a buyer's market.

The secondary market is booming due to a liquidity crunch in private markets, with VC funds holding onto assets longer and investors seeking returns. While IPOs remain a part of exit strategies, acquisitions are more common. The potential IPO of AI giant Anthropic is seen as a significant milestone that could encourage further IPOs and innovation, though a cultural shift towards remaining private is also evident, with many companies opting out of the complexities of public markets.