A letter to Profimex’s investors, by the managing director, Elchanan Rosenheim, April 2009
From: Elchanan Rosenheim, Profimex
Sent: Sunday, April 19, 2009 8:53 PM
Subject: The crisis` effect on profimex’s activity
I would be glad to go back to being 40 years old, with the experience I have today, having all the investments we’ve participated in to date realized during the last couple of years and having the reputation and knowledge that we have acquired to date.
This is of course, impossible, just as it is impossible to be free of exposure to the market situation in our active investments.
An investment without risk doesn’t exist. Furthermore, there was no investment made in the last three to four years where the level of risk has not since increased or that the road to realization has not been extended. Furthermore, there was no investment made in the last three to four years in the common level of leverage, and where the current value covers the mortgage.The bottom line, almost all the investments made in recent years are worth today less than the mortgage granted.
The problem of asset valuation today is lack of transactions and the ability of receiving finance from the banks; therefore any estimation of the value of properties is based on assumptions one can’t validate. In fact, with today’s market values, all shareholders’ equity, the mezzanine and even part of the mortgage invested in leveraged deals that were done in the last period, has been wiped out. We are experiencing a financial crisis of the like none of us has ever seen or experienced.
The world economy is in a low-tide like it has never been and the news is only getting worse. I have no doubt that a partial cause of the crisis, if not all of it, is the result of corruption, greed and fraud spread in the financial system. Apparently regulation does not ensure honest business management. Such management must come from inside, from education received at home, the way in which we, the managers, ask our businesses to be managed by our managerial colleagues, by our employees and by our partners. Only he who believes that his underlying obligation, before anything else, is to conduct his business honestly, will do so.
We at Profimex and our loyal partner abroad, are working much harder and are dedicating much more time in order to preserve the funds we investments .
We must remember the significant difference between our method of working and what we are seeing and hearing about other investment companies: our managers are not becoming rich whilst our investors are becoming poor, our managers are not celebrating whilst our investors are crying, our manager director is not making profits whilst our investors are fearful of losing their money. Furthermore, our managers, of which I am one, personally invest in each and every transaction. Both our managers and our investors have the same interests and this is the most important safety measures we can give our investors.
The companies where the managers have huge salaries and in financial institutions and investment houses where they have arranged scandalous salaries for their children and those close to them, indicates the nature of the improper
business concept where the investors’ money is irresponsible deserted. This is not so with us.
Our profit is a direct result of the investors’ earnings after realization. Our managers’ profit comes after the investment is realized and the investors have received their equity back plus the agreed per annual return.
This is a big difference, so investors know that the managers and investors’ interests are aligned. We gain afterwards, and this is important to remember, especially today. This does not guarantee that every investment done by us will be successful, but it does ensure that we will do the maximum and more to bring a successful realization of the investments.
It is important to note that as investors in every transaction our conditions are the same as all investors.
We have completed to date a number of deleveraging operations, where we raised additional funds in order to neutralize the element of the lender, which is the main risk of the investment.
We are proud to inform these operations have been successful, thanks to the understanding of our investors that this is the way we plan to bring the investment to a safe harbor.
As some of Profimex investors know, we set up a dedicated fund for investments in Russia, where Profimex has 24% of the equity and the management and control rights.
Following the establishment of the fund, we opened an office in Moscow and hired staff in Israel and Russia for its operation. After receiving commitments of $130 million from investors in Israel and abroad we entered the stage of the due diligence.
Before the outbreak of the crisis, we looked at tens of deals and decided not to invest, which turned out to be a good decision. Recently, we decided to close the fund due to the fact risk level of investment in Russia has risen. After working for nearly for two years, he decision to release the investors of their commitments was not easy. But there is something that is more important than this guiding us – the interest of investors. Even if this decision costs us a lot of money at the end of the day, we will do everything to prevent investors putting good money after bad. Despite the decision in Russia, we believe that all the deleveraging processes we’ve undertaken in past six months and will continue to do as and when necessary, including the capital calls within the framework of funds that take advantage of current opportunities, are serving the interests of investors.
Many companies in the sector will go bankrupt or abandon the business. The companies that will survive are those that combine key parameters of professionalism, understanding real estate and having a reputation of a clean, ethical and transparent operation.
Understanding real estate is a necessary but alone is not sufficient. He whose business is not based on a reputation of reliability and transparency, will not last.
Anyone who gave up values for money will disappear One must hope that people who sold values for money will be punished and that . The relations between wealth and power will not further disrupt the economic recovery.
In the hi-tech crisis of 2000 when hi-tech shares collapsed, Apple, as one may remember, lost more than 80% of their value, Microsoft fell by 58% and Amazon lost 94% of its value. Who would not agree these companies, seeing the fall of such value, are the main gainers from this crisis? But many paid the price – many companies disappeared and weren’t able to survive.
We believe that we are witnessing a similar process in the real estate industry, a market where there were no barriers to entry for a long time.
Everyone who knew how to spell the word real estate and had a passport flew around the world to make deals and in most cases didn’t risk a single penny from his own pocket. Institutional investors and the population opened their wallets and decided to join the party, while ranking companies forgot what their real function is.
The crisis will finish the career of many companies. We saw so many companies and operators in the real estate market that were not transparent. Horde of active transactions carried out during Monday and Thursday flights. There were a lot of people that caused us to act among the crowd. But this time the good operators will survival, the competition will reduced, prices will return to normality, opportunities will return and transactions will be done on the basis of fundamentals rather than relying on unreasonable ratings, and reliance on regulation that didn’t prevent a state of euphoria. Modesty and conservativeness will again be appreciated instead of advertising and pubic relations campaign will set the tone.
Did these same players actually understand the fundamentals? I suspect not. Clearly, we all made mistakes and took part in investments that are now problematic.
The only way we could have been clean of the influences of the period, would have been to realize all the investments we have done and exit the industry entirely before the outbreak of the crisis.
A few years ago I visited Las Vegas and Florida. The pressure to invest in these places was great and I decided that the fundamentals in the residential sector don’t exist in those places and so we didn’t invest there.
I visited Spain, where I saw more cranes than people, and we decided not to invest, I visited Bulgaria and there too we decided not to invest.
Dozens of Israelis knocked on our door asking us to take part in their investments in Romania, Poland, Ukraine and Georgia and after our due diligence; we decided not to invest in those places either.
The advantage in joint investments is clear: it allows dispersal between partners, countries, sectors and currencies as long as the management carried out adds value, professionalism, straightness and honest.
It is hard to believe that we will survive the crisis without us facing losses in some investments made in recent years; none of us are immune from the effects of the market. We are sure we will come out if it stronger.
Tali Meretsky, director of the institutional sector of the company, and I wrote an article on the current subject of managing the investments in the current market that was recently published in the Globes. The article is attached and in the illustration in the article cannot better describe the situation that we the investors are in. We at Profimex and our partners abroad are doing and will continue to do everything possible so that we can safely stand up to the obstacles we are facing. Clearly, we cannot do that without the trust, support and cooperation of all of our investors.
Along with the non-compromising commitments we have in current investments we are preparing ourselves in order to take advantage of the great opportunities that the crisis has created.
The added value of our partners will be clearer now than it was in the past. Real estate experience and understanding of real estate as well as the reputation can be seen more in light of the crisis, and it places us in a position from which we can exploit opportunities.
There is no doubt that we bring significant added value to the Israeli market, our overseas partners , from the well-known and respected companies in the industry that we invest with , this is the extraordinary advantage that Israeli investors that will join us in these investment opportunities in the next few years, will have.