Just two years after it was founded, Markstone Capital Group, managed by Amir Kess and Ron Lubash, is yielding its first profit for investors. The fund will soon return to them $40 million, which is more than 10% of the total investment made by the fund. Markstone entered public awareness when it established the Prisma investment house and acquired control of the PKN and Lahak mutual funds from Bank Hapoalim. However, even prior to buying PKN and Lahak it invested $50m. to acquire Golden Pages Ltd., which produces telephone books and advertising pages for specific audiences. That investment drew a great deal of criticism at the time but two years later the fund put a $100m. price tag on the company - double the price it paid. The price for the Golden Pages investment was in fact set by the institutional investors who, last week, bought a package of shares from the fund, reflecting a company worth of about $100m. That price tag constitutes a first phase ahead of taking the company public at a valuation of $100m. to $200m. Markstone Capital Group was established in 2004 as a private equity fund, raising $800m. mainly from large US pension funds. A private investment fund like Markstone specializes in acquiring companies with growth potential, improving them and then selling them as a single unit to investors or taking them public on the stock exchange. Markstone's incorporation agreement states that the fund was established for 10 years with an option for a two-year extension. Thus far, the fund has made six different acquisitions in Israel for an overall total of $350m. Besides the well-known investments in Golden Pages and Prisma, the fund bought control of Israel's largest bookstore chain, Steimatzky, and of Zeraim Gedera. It also purchased 20 percent of the shares in Netafim Ltd. and a 40% stake in PRS Mediterranean Ltd., an infrastructure company. Reducing risks for fund investors Markstone Capital is now preparing for the fund's second phase: investing the rest of its cash reserves, or $450 million, during the coming year. Recently, it was reported that people at Markstone are examining possibilities for entering the local real estate market and that they have even looked into acquiring A. Dori, a construction firm. The partial exit that Markstone carried out last week is interesting, mainly given the fact that Markstone is under a significant media barrage over its investment in Prisma. Private investment funds generally distribute funds to investors an average of every three to five years, from the day the investment is made. Markstone succeeded in doing so after just two years, a step that substantially reduced the risks to fund investors. The investment that last year drew most of the attention was the one in Prisma - a new investment house established by Markstone based on its forerunner, Solomon Capital Markets Ltd. Markstone assigned Prisma the activity of Bank Hapoalim's Lahak and PKN mutual fund management companies, and is soon supposed to give it responsibility for the activity of Leumi's and Hapoalim's provident funds. Ultimately, Prisma will manage NIS 50 billion, becoming Israel's largest investment house. In recent years, the large banks' mutual funds have been abandoned by investors who preferred the smaller mutual funds managed by private investment houses. Prisma was hurt in the process, and the mutual funds that it bought from Bank Hapoalim saw redemptions running into the hundreds of millions of shekels. Double-digit annual return Sources close to Markstone said Sunday "Prisma is a good investment. You need to remember that the purchase of Bank Hapoalim's and Bank Leumi's provident funds is still not completed. Unlike other investments, here it was necessary to build new management and marketing systems and in effect to build a company from scratch. That's a strategic process that takes time, but the capital market is not known for its patience. You need to understand that Markstone is operating for the long haul, and it will take at least another year to complete building Prisma. Only afterward will it be possible to examine the investment." The strategic plan that was drafted for Prisma includes managing short-term investments through mutual funds and portfolio management. The plan also includes medium-term savings through a system of advanced training funds, long-term savings through the platform of Leumi Gemel and Hapoalim's provident funds, and current activity in the capital market, which is now being put together. Activity in the capital market is garnering most of the attention, but due to the fact that the capital market has seen three years of increases, it appears that Prisma's level of risk in the financial sector has grown. Assessments at Prisma are that despite the rises of recent years, the capital market will continue to be strong in 2007, as well. At the same time, the investment house is developing the pension sphere, which is less sensitive to fluctuations in the financial markets. Ultimately, Markstone is supposed to yield investors a double-digit average annual return. On the one hand, that's a high return that is hard to attain. On the other hand, if the rest of the fund's investments yield a return similar to that of Golden Pages, it will not be hard for the fund to achieve a high return. Continued rises in the financial markets would support the fund's activity, and declines would make it difficult for it to reach its target. According to assessments by people close to Markstone, in 2007, as well, the fund will distribute some of its gains to investors. That dividend reduces the investors' risk, and brings them closer to the target of a double-digit return.