When the press first reported the establishment of a new fund that meant to raise $500 million overseas for investment in Israel, many sniggered. There goes the press again reporting drivel, they figured.

The amount seemed bizarrely outsized for a private equity fund operating in the local arena. Half a billion dollars is tremendous for such funds in local terms.

But one must make a distinction between Markstone and Israel's venture capital industry, which relies on the enduring good name of Israeli hi-tech. Markstone isn't looking for sexy startups, it's targeting established firms operating in the domestic arena of Israel, a country still considered to be risky for investment.

Yet the dubiety is being replaced with awe. Its first closing brought Markstone $400 million and the fund is zooming in on its half-billion dollar target. Many questions come to mind about how it did it, but one thing's for sure: it is a major triumph.

So how did it do it?

"I believe in the Israeli economy"

The answer lies with two people, Elliott Broidy and Alan Hevesi. The fund was initiated by Broidy, an American businessman who for years managed investments for the Bell family, and founded the chain of Taco-Bell fast-food restaurants. He keeps to himself and it's very hard to track down information on the man abroad, but to judge by Markstone's achievement, he's well connected and wields a great deal of clout in the U.S. investment scene.

As for Hevesi, he's the comptroller for the State of New York, after ten years serving as comptroller for New York City.

The comptroller's position is an elected one. Hevesi was put in charge by almost two million New Yorkers, and now he, alone, calls the tune. He also manages the NYSCRF, or the New York State Common Retirement Fund, where he serves as sole trustee. He is the man who makes the decisions regarding the fund, free of pressure from any managerial board. There is an advisory board, but it is powerless.

Which suits him well. Ten minutes after we arrived in its Third Avenue office three months ago, he was demonstrating his world view and management style, in his own way. He opened a desk drawer, rested his feet on it, leaned back and declared, "I have a great, big and wonderful job. I don¿t report to anybody¿ I am the sole manager of a $110 billion pension fund of State of New York employees. I decided to invest $20 million in Markstone because I believe in the Israeli economy and I don't have to get anybody's permission." End of quote.

The test of the market

From the Zionist perspective, it's a nice story. But since Hevesi, who is politically motivated, is the man who enabled Markstone to make its mark and raise $400 million, one cannot state with surety that the fund, its model and its managers passed the test of the market.

Markstone boasts two Israeli managers, Ron Lubash, formerly the manager of Lehman Brothers Israel, and Amir Kess, who served as the deputy manager of Arison Investments. Both won great esteem in their previous positions. But clearly without the Broidy and Hevesi team, it's doubtful whether foreign or local investors would have deposited half a billion dollars in their hands. The investment world is based on the managers' track record, and Lubash and Kess have no record of managing investments or businesses.

Moreover, the fund's model is something new. On the one hand, it means to buy big chunks of established firms. Just last week the press reported Markstone to be eyeing the controlling interest in Bezeq (TASE: BZEQ ). On the other hand, Markstone's managers say they won't be involved in managing the portfolio companies.

Two questions come to mind. How many major transactions of the kind they have in mind happen in Israel each year? And now can one significantly improve a company without becoming involved in management?

Dispelling market domination

Markstone's managers keep saying that the fund's advent portends the end of an era, that era being the one of the big families. Namely, the ten big groups that basically divvied up almost all the major deals going down, sometimes making decisions based on ego and prestige rather than yield.

From the perspective of the domination of the market by the families, clearly the entry of a professional element with half a billion dollars in hand is a refreshing change. But despite all the bad things one can say about the way the families run business in Israel, it remains incumbent on Broidy, Lubash and Kess to pass the test of the market. They have to prove there is a place for a player like Markstone at the table, that it can locate worthy investments at good prices, make money on them, and get out in time.

Though the TASE climbed 50% in 2003, it isn't impossible to find alluring opportunities. But what's sure is that the opportunities aren't lining up to knock at Markstone's door.