BlackRock, the world’s largest investment house, has announced its entry into startup and technology financing with the acquisition of Israeli-European loan fund Kreos Capital. The move puts BlackRock in competition with banks, including Israeli banks Leumi, Hapoalim, Discount and Mizrahi-Tefahot, which benefited from the demise of what had been the leading lender to the tech sector, Bank of Silicon Valley, three months ago. Several startups in Israel have sought funding from these banks.
The acquisition will give BlackRock investors exposure to lending to the high-tech and life sciences markets and diversify their investment portfolios in this way without having to tap into one of their existing loan funds. BlackRock manages $45.5 billion in private equity, and $79 billion in private debt products.
From the niche market to the new growth engine
Startups have increasingly sought loan financing recently due to the significant reduction in financing capacity of venture capital funds and the high investment price they are asking for from entrepreneurs. Instead of absorbing declines in their company’s valuations and reducing their holdings, entrepreneurs prefer to take out loans. Funds such as Kreos and Viola Credit (formerly Plenus), the investment lending arm of Viola Ventures, have been active in the market since the late 1990s and early 2000s, but the market was always considered a small place, as entrepreneurs preferred raising capital over equity. And use loans only at very late stages when the stakes are low, or when they are in financial difficulty.
In the past year, since the stock markets began to decline, banks and investment houses have been detecting the growing demand for loans and credit from technology companies, and have begun to view this niche as a new growth engine. For their part, in the past few years, entrepreneurs have come to view loans as a new tool that enables them to grow their companies or lower prices in order to penetrate more markets. 2021, which was the peak year for fundraising for stocks, was also the peak year for debt raised by technology companies.
BlackRock does not buy Kreos’ loan portfolio or its investment funds, but the management company with its managing partners and staff of 45 people in Israel, the United Kingdom (where it is headquartered), Sweden and Germany, whom it will employ and who will manage it. Technology loan portfolio for that. Israeli partners include Raoul Stein, one of the founders, and Uri Galai, a young partner who joined in 2019. So far, Krios has raised seven funds, and all loan deals it has made so far will remain within it.
The price of the Kreos Capital acquisition was not disclosed, but is estimated at $300-350 million, which is higher than the price at which it bought rival P10 investment firm WTI (Western Technology Investment) nearly a year ago. Last August, P10 paid $170 million in cash and stock to WTI, which manages $7.8 billion. The price is a multiple of 13 on EBITDA of $12.5 million.
Kreos Capital is the largest risk lending company in Israel. Unlike SVB, it is purely a lender, and does not deal in deposits, currency transfers, checking accounts, and the like. Venture lending, or private lending, companies make loans to technology companies that are usually high-risk, often in a hybrid format that includes stocks or options. Kreos has commitments amounting to more than €5.2 billion ($5.56 billion) in credit to about 750 companies, about a quarter of which are Israeli technology and biotech companies, among them SolarEdge, Riskified, LiveU, Zerto and BioCatch.
“Over the past 20 years, BlackRock has built leading private debt capabilities to help clients achieve a variety of investment objectives by matching proven investment excellence with long-term market opportunities,” said James Keenan, CIO and Global Head of BlackRock Private Credit. “The team has built a world-class investment operation and delivered it to clients through multiple cycles. Along with our expectation that growth and project lending will figure prominently in expanding direct global lending opportunities in the future, we believe this is the right time to welcome the Kreos team to BlackRock.”
“We are excited to see BlackRock’s continued commitment to private debt in general, and growth lending in particular,” said Kreos founders and general partners Raoul Stein and Ross Algren. The combination of BlackRock and Kreos will provide a broad range of credit solutions for the growth ecosystem. BlackRock’s acquisition of Kreos is significant. It is a testament to the strength and importance of the innovation and technology sectors for the world’s leading asset manager.”
Published by Globes, Israel business news – en.globes.co.il – on June 8, 2023.
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