Jonathan Zimbalist | Nili Capital Partners

Jonathan Zimbalist | Nili Capital Partners

How an experienced private equity fund manager arrived in Israel and quickly recognized value and growth opportunities in buy-and-build PE transactions.

Jon, you made aliyah quite recently and you’ve already founded a private equity firm in Israel. Was this all part of your plan when you decided to move to Israel full time?

Yes and no. I had spent 23 years in private equity in the US – first at the Berwind family office and then as co-founder of Eureka Growth Capital where we raised and invested three institutional-backed funds. In both places I was focused on lower middle-market buyouts, but at Eureka we were specifically looking for buy-and-build opportunities and add-on acquisitions in the US, Europe, and Asia.

Before we get to your crossover to Israel, define a “buy-and-build” strategy.

Buy-and-build implies buying a platform company to which you then add a competitive business to grow on a more aggressive basis, and eventually guide them to an exit; in our funds we often focused on cross-border opportunities. Think targeted acquisitions, versus a roll-up strategy where you’d buy 10 companies. In the lower middle-market segment specifically, we also add value to the platform company – often owner-operated businesses where we could add professionalization and resources not common in that space.

You arrive in Israel in August 2018. What stood out to you about the private equity arena?

When I joined my family in Israel, after investing the third Eureka fund, my impression was that the PE market was somewhat sparse. There were a few notable firms - with successful deals like Netafim, Caesarstone, and SodaStream - with smart, diverse management teams known in the domestic market for doing both low-technology traditional private-equity deals as well as high-tech deals. But there was little focus on the lower middle-market.

My background was really in low-tech industrial companies, of which Israel has many. When I started looking more closely at some of these businesses, not only were they growing it was also apparent that that they often fostered more innovation than their US peers. Moreover, from a valuation standpoint, these companies were often selling at 6-7x EBITDA versus 8-10x in the US. So as potential platform companies to execute a buy-and-build strategy, I started to get pretty excited.

So, it sounds like you saw in Israel both a growth and value opportunity. Let’s drill down into that to understand why buy-and-build PE in Israel is compelling?

Exactly; valuation first, but these companies are also fundamentally different. Let’s start with value: the value play in my space (lower middle-markets) in Israel is where it was in the US 5, 10, maybe even 15 years ago. Capital is currently provided mostly by family offices, and a PE fund should win that race every time because of the resources they can provide in addition to capital. From our experience just 6 months into looking at deals, 90% of these companies have no banking relationships – deals are brought to us by CEOs or a family or board member. Today, there is not one similar company in the US that is unbanked.

Are these good companies? Maybe sophisticated capital isn’t interested for a reason?

Absolutely. Think about it for a minute: Israelis didn’t suddenly get really smart at the dawn of StartUp Nation 20 years ago. The same intelligence and drive that today comes out of the IDF and solves cybersecurity challenges has been problem solving for decades – founding businesses like Netafim, a kibbutz company that pioneered drip irrigation. Israeli companies excel at creating innovative product lines with attractive profit margins, and they’ve been doing it for a long time. The question they face is how to build market share? The domestic market in Israel is tiny, and to achieve success you need to dominate your sector domestically and be able to export to Europe, North America, and Asia.

Let me give you an example: we’ve looked at a packaging business. Senior management had considerable engineering background and realized that to differentiate in Israel and overseas they needed the ability to offer clients unique product solutions. In Europe or the US, where the demand for packaging is enormous, companies don’t need to focus on innovation - they focus on efficiency in their production runs to boost operating margins. To be value-add to clients they need to go out and source the technology their clients are looking for.

You mentioned Netafim. Any other examples that personify this unique growth profile?

Sure, it’s a not-uncommon story with kibbutz-owned companies - look at Caeserstone. The common thread is these great innovations are owned by the most conservative entrepreneurs (because they are a collective.) They can’t or don’t want to risk their own capital to expand. So, if you can supply them with capital and a strategy to properly expand overseas, you may find an amenable partner who isn’t looking at the same dynamic as a traditional seller.

And that’s where Nili Capital steps in?

Exactly; through a buy-and-build strategy we see the opportunity to mate the innovative technologies or products of an Israeli platform company to overseas businesses that we can also acquire, to create a global business that is far more attractive to potential acquirers.

Where is there growth and opportunity in your sector? Tell us more about the typical profile and supply of your target platform companies.

We look at lower middle-market companies across a range of manufacturing and industrial sectors - including agriculture, water, aerospace, packaging, and industrial technology – that have achieved sufficient scale to serve as a platform company. These include some of the oldest companies in Israel; the first entrepreneurs in the State brought with them what they were good at in Europe – apparel, etc. – which then evolved into things like tech fabrics. This bucket also contains some kibbutz companies that were originally handed a mandate but didn’t stagnate. Later, as Israel focused more on industrial sectors like defense, Israeli companies sprang up for heat treatment, casting, and welding that all needed to be done locally. And today, in Israel’s tech boom, ancillary businesses in wires, connectors, etc. have grown side-by-side with the mass of operations from companies like Intel, Microsoft, or Amazon. We’re focused on all of these.

Do you worry about foreign capital – from either financial or strategic players - driving up multiples?

Most of these deals are too small of US players, and Israeli owners want high-touch partners. Nili has an advantage because we have access to foreign capital based on my years in the US market, but we are on the ground in Israel. The other factor keeping multiples lower on a relative basis is that the leverage market in Israel is so conservative – there really are no cash flow or mezzanine lenders.

So, what does concern you? Or, since you are in the middle of a capital raise, what issues are investors bringing up most often?

The biggest issue for any buy-and-build strategy is integrating the businesses. It’s why the other founding partners at Nili come from operational backgrounds. That said, in the lower middle-markets you look to exit earlier. Our main focus in integrating sales. Once we do that, we can be attractive to a larger PE firm or a strategic buyer.

Thanks, Jon.