ISRAEL Trends and Developments Contributed by: Ronen Vinograd, Vinograd & Co.
returns, HNWIs sought higher yields through alterna - tive investments. Once the market realised low rates were here to stay, capital flowed into PEFs at scale. Billions of shekels were invested by Israeli qualified investors (IQIs) – those holding at least ILS9.4 million in liquid assets – as well as by smaller investors. Each PEF may raise capital from up to 35 non-IQIs per year and no more than 50 in total, in addition to an unlim - ited number of IQIs. The marketing of PEFs became a lucrative business for local brokers, intermediaries, insurance agencies, and (multi) family offices, some earning higher com - missions than the fund managers themselves. Certain intermediaries even began launching their own PEFs, sometimes structuring products to circumvent offer - ing restrictions by issuing certificates or notes that indirectly represented PEF exposure. Aggressive mar - keting practices proliferated. “only when the tide goes out do you discover who’s been swimming naked” (Warren Buffett) As long as markets remained stable and liquidity ample, few questioned these structures. But when the cycle turned, weaknesses were exposed. 2023: the reckoning When interest rates began to rise in 2022, liquidity pressures emerged. Many investors sought redemp - tions to cover expensive loans or reposition portfolios. Some PEFs implemented gates as designed; others opted for orderly run-offs, suspending redemptions and liquidating assets gradually to avoid fire sales. These were legitimate business responses under the circumstances. For example, Blackstone’s BREIT received many redemption requests in late 2022 and early 2023 and imposed an investor level gate allowing redemption at 2% of net asset value (NAV) per month and 5% of NAV per quarter. However, funds established by intermediaries or marketed aggressively with high up-front fees faced severe strain. Once redemptions began, asset valu - ations were tested, defaults surfaced, and losses
mounted. Some PEFs collapsed, leaving investors – including those who had invested retirement savings via IRAs – with heavy losses. Legal disputes followed, and high-profile cases such as Slice, Wealthstone, and Montro attracted extensive media coverage and regulatory scrutiny. PEF regulation in Israel Israel’s regulatory framework for PEFs remains under - developed. Whether structured as Israeli limited part - nerships (ILPs) or offshore entities controlled from Isra - el (eg, in Delaware, Cayman, Ireland or Luxembourg), the Israeli law that PEFs operate under, predates the state itself. The Israeli Partnerships Ordinance, dat - ing back to the British Mandate, provides minimal guidance for ILPs, with fewer than ten relevant provi - sions. Euroclear even refuses to issue International Securities Identification Numbers for ILPs, citing legal uncertainty. As a result, the Israeli Securities Authority (ISA) reg - ulates PEFs primarily through restrictions on distri - bution rather than fund operations. Key constraints include: • the Securities and Mutual Funds Law, which limits each PEF to 50 non-IQI investors; and • the Advisory Law, which treats PEFs as financial products and as such, to market them one must have a marketing licence issued by the ISA, unless the investor is deemed “super-qualified” with at least ILS12 million and substantial market exper - tise. 2025: tectonic regulatory shifts Following public outcry over failed PEFs, both in local media and from investors, regulators took deci - sive action. In November 2024, the ISA published its policy paper on the marketing of PEFs and similar investments (the “ISA 24 Paper”), clarifying permis - sible practices. This triggered extensive audits of both PEFs and intermediaries: • PEF audits examined offering practices, investor limits and intermediary relationships; and • intermediary audits reviewed compliance with non- IQI limits, conflict management and disclosure of placement fees.
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