Israel’s NSO Group has been deemed worthless to its private equity backers, just three years after they bought the maker of the notorious Pegasus spyware at a $1bn valuation.

It has become “abundantly clear” that the equity in NSO is “valueless”, the consultancy firm brought in to manage the fund that owns the blacklisted cyber group said in court filings.

The assessment was detailed in documents filed for a case heard in London’s High Court in which the consultancy, Berkeley Research Group (BRG), is suing two founders of Novalpina Capital, the private equity firm that originally raised the fund.

The filings show the sentiment was shared by Proskauer, the law firm representing the fund, which said in February that the entity “has lost substantially all its investment in NSO”.

The case, to which NSO is not a party, underscores the difficulties now facing the Israeli technology group. As recently as January the tech group was in talks to be sold for about $300mn to Integrity Partners, a company run by former US soldiers.

NSO, once a highly prized asset that Israel used as a diplomatic calling card, has been blacklisted by the US and is facing lawsuits from Meta and Apple. 

The US commerce department said NSO had supplied software to foreign governments that had used it to “maliciously target” government officials, journalists, businesspeople, activists, academics and embassy workers.

BRG has not completed a formal valuation of NSO but its view that the spyware group has no equity value is a blow for the investors that ploughed money into Novalpina’s €1bn fund.

They include Abu Dhabi state-owned investment group Mubadala Capital, public pension funds in the UK and US, and the pension fund of British Gas’s parent company Centrica.

NSO revealed on December 1 that it had received no new customer bookings to use the Pegasus hacking tool since July 2021, Finbarr O’Connor, head of BRG’s asset management arm, said in the filings.

That was when a group of media outlets published the Pegasus Project, an investigation that found it was used on phones belonging to journalists and human rights activists. 

The company faced “an imminent liquidity crisis” towards the end of last year in which it could not service or repay its debts and ultimately “entered into a forbearance with its lenders,” O’Connor said. 

Asked to comment on the assessment that its equity was valueless, the lack of new bookings, last year’s imminent liquidity crisis and the forbearance, an NSO spokesperson said “the information detailed in your inquiry is baseless and simply has no merit in reality”.

“NSO products continue to be in strong demand from clients across the world who rely upon our technologies to save lives and protect the public,” it added. “It is unfortunate that this legal matter, which has no relation to NSO, is being used to make assertions about the company that are incorrect.”

A slump in the trading price of NSO’s debt suggests “market participants ascribe a valuation to the assets of the NSO Group several hundred million dollars below the amount of its indebtedness,” O’Connor added. 

Credit Suisse and hedge fund Senator, which are leading a consortium of NSO Group creditors, declined to comment.

O’Connor said he had “conversations with parties that had informally considered investing in NSO in early 2021, but had never advanced to conducting due diligence.” These conversations had “corroborated” the view that the fund’s equity was impaired, he said. 

The investment in NSO Group accounts for 40.7 per cent of the money that the €1bn fund raised by Novalpina had invested altogether as of late September, he said. 

Novalpina’s founders, Stephen Peel, Stefan Kowski and Bastian Lueken, were last year stripped of control of the fund and replaced with BRG after investors decided the trio had fallen out so badly they could no longer work together. 

Since then, the founders have received “significant cash sums through the entities they control,” O’Connor said in the court filings. This consisted of a payment of €43.3mn, equal to the amount of their cash the fund had invested by the time they were ousted, and a separate payment of €18.6mn to the entity through which they previously managed the fund.

Separately, the fund itself, which still owns NSO Group as well as Estonian gambling business Olympic Entertainment Group and French pharmaceutical group Laboratoire XO, has had its bank accounts blocked by Barclays in Luxembourg and can only access them on a case-by-case basis with the bank’s approval, O’Connor said in the filings. 

This creates the “potential for defaults with catastrophic effects for the fund,” he added. 

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