Harel seeks to deepen its activity in hedge funds - in talks to acquire Tulip

Harel is seeking to expand its activity in the hedge fund sector through the acquisition of a management entity. It has come to the attention of "Calcalist" that Harel, led by CEO Nir Cohen, is in talks to acquire shares in the management company of the Tulip hedge fund - Tulip Capital GP - at a valuation of approximately 40 million shekels, according to market estimates. Tulip was founded in 2012 and manages, by estimates, about 400 million shekels in its hedge fund. Its acquisition by Harel is expected to significantly strengthen the fund's marketing and distribution capability, both among Harel's clients and among other investors. Harel is one of the largest financial groups in Israel and possesses a broad distribution network that may contribute to increasing the volume of assets managed by the fund.

The controlling shareholders in Tulip are Micha Malka (41%) and Baruch Zibin (44%), both of whom have a professional background at Harel. Malka, managing partner and CEO of Tulip, previously served as CEO of Harel Finance Investment Management and as manager of the group's economic and analysis department. Zibin, managing partner and chief investment officer, previously served as a senior investment manager at the Sphera hedge fund and at Harel. Another managing partner is Moshe Gabay, who previously managed the Prisma mutual funds and served as VP of Investments at Migdal.

Harel has deep familiarity with the hedge fund sector in general and with Tulip in particular. The group manages a number of hedge funds for qualified investors, mainly in the fields of private equity, real estate, and credit, and views them as an avenue for expanding investment options and diversifying client portfolios. In 2023, Harel and Tulip jointly launched the Harel Multi-Strategy mutual hedge fund. As part of the collaboration, Harel is responsible for operations, while Tulip manages the investments. This is one of the first mutual hedge funds in Israel, which is also considered one of the largest and leading in the industry, with assets under management totaling about 1.2 billion shekels. In the last 12 months, the fund yielded a return of 35.6% after management fees, compared to a 40.7% increase in the TA-125 index. The fund's main exposure is to stocks in the Israeli market. Unlike classic hedge funds, which are open only to qualified investors, a mutual hedge fund is also available to the public and can be purchased through the mutual fund system, similar to any other mutual fund. Harel presents the product as a way to expose private investors to investment strategies that were previously the almost exclusive domain of qualified investors. The success of the collaboration between Harel and Tulip may explain the desire of Harel's management to deepen the connection between the parties through the acquisition of the fund's management company.

An expanding trend in the industry

Harel is not the only one acting in this direction. In the last two years, the trend of convergence between investment houses and hedge fund managers has sharpened. Meitav acquired control of the management company of the Trio hedge fund, with the aim of expanding its alternative investment activity. The deal was executed at a valuation that could reach 50 million shekels. At the time of the deal, Trio managed about 550 million shekels. IBI also expanded its activity in the field when it acquired 50.05% of the management company of the Plutus Value hedge fund for about 15 million shekels. Simultaneously, the managers of the Sphera hedge fund acquired the Sela investment house, which manages mutual funds for the public, and Gabi Dishi, the controlling shareholder of the Alpha hedge fund, became a financial investor in the Kivun investment house.

A senior figure in the hedge fund industry explains that:

"Investment houses are currently walking around with an open checkbook because they understand that the real value lies in the revenue model of hedge funds."

He further added:

"Today there is an almost perfect match between what investment houses are looking for and what hedge fund managers want. Investment houses understand that the business model of hedge funds is significantly more profitable than that of mutual funds. In a mutual fund, management fees usually hover around 1%-1.5%, from which distribution fees must also be paid. In a hedge fund, by contrast, management fees stand at about 2%, and in addition, performance fees are collected, which in good years can significantly increase revenues. Therefore, investment houses are willing to pay high multiples for the management companies of hedge funds."

According to him, "on the other side, most hedge fund managers are not interested in dealing with marketing, client acquisition, and operations. They want to focus on investment management. When an investment house enters as a partner, it brings with it a distribution network, a brand, and the ability to raise new funds, while the fund manager continues to do what he knows how to do best - generate returns. Therefore, this is a deal that serves both sides."

Harel refused to comment. A response from Tulip was not received.