* High-tech M&A, IPOs rose 16 pct in 2015 to $9 bln
* Successes seen boosting institutional interest
* Israeli pension, mutual funds manage $407 bln
By Tova Cohen and Steven Scheer
TEL AVIV, Jan 18 (Reuters) - Israel's pension funds are facing calls to invest more in the country's thriving high-tech sector, with complaints growing that the Israeli public is missing out while foreign investors reap the returns of the country's technology boom.
Burned by the tech bubble that burst in 2000 and hampered by regulatory constraints, Israeli pension funds have shied away from high tech over the past decade, during which billions have been generated from high-profile takeovers or flotations.
Now, with pension funds posting sluggish returns of between 2 and 3.6 percent during 2015, bankers, venture capitalists and entrepreneurs are saying they should put more into the country's best performing industry.
"It's mostly guys from California enjoying the fruits of the Israeli high-tech success," said Yaron Bloch, chief executive of Bank Leumi's investment banking arm Leumi Partners.
Israeli tech mergers, acquisitions and IPOs rose 16 percent in 2015 to $9.02 billion, according to the Israel Venture Capital (IVC) Research Centre and the Meitar law firm.
At the same time Israeli venture capital firms raised $1.02 billion, but the funds mostly came from U.S. investors, and increasingly from Asia, rather than Israel's risk-averse institutional investors.
However, recent successes such as Google's purchase of Israeli navigation app Waze and the large initial public offering of driver-assistance technology provider Mobileye are expected to gradually boost institutional interest.
U.S. funds such as the California Public Employees Retirement System (CalPERS) and the California State Teachers Retirement System have invested billions of dollars in Silicon Valley and Israeli venture capital (VC) firms such as Pitango, Carmel and Giza.
The $185 billion New York State Common Retirement Fund, the third largest in the United States, has invested over $140 million in Israeli venture capital firms and $22 million in two Israel tech-focused private equity funds.
Israeli institutions have started to place small amounts with venture capital - mostly in late-stage growth funds targeting companies with sales over $10 million. But specialists say it's not enough to deliver major pension fund returns.
"The government should give incentives to long-term investors to start investing in the high tech industry. It has to happen," said Eldad Tamir, CEO of the Tamir Fishman investment house and a partner at the Eucalyptus Growth Capital fund.
Israeli pension funds, insurance companies and mutual funds manage 1.6 trillion shekels ($407 billion). In contrast to the United States where pension funds allocate 50 percent of assets to equity investments, in Israel it's under 10 percent - the eighth lowest of 31 OECD countries.
Israeli institutions invest about 40 percent overseas, some of which goes to money managers to invest in private equity and investment funds. Ironically, some of that money is allocated to private equity and venture capital funds that then invest in Israeli high tech, said Koby Simana, CEO of the IVC Research Center.
One fund that raised money from Israeli institutions is Israel Growth Partners (IGP), which focuses on small but growing tech firms. It received $250 million from five institutions, including Leumi Partners.
"Things are changing," said Haim Shani, IGP's general partner. Institutions "prefer to invest in the growth stage which has a different risk-reward curve."
Assaf Shoham, chief investment officer at Migdal Insurance - Israel's largest insurer with $50 billion under management - said he was examining investing in a fund of funds that would invest in private equity and venture capital.
One problem for institutional investors though is the time it takes to show a profit.
"You won't see results for seven or eight years," Ilan Artzi, chief investment officer at investment house Halman Aldubi, noting funds could book an accounting loss early on.
The government can help not only by offering tax incentives to encourage pension fund investment but also by easing the restrictions imposed by the insurance commissioner on the amount pension funds may pay to external managers, such as venture capital funds, venture capitalists and pension fund managers say.
In the United States there is no restriction.
A Finance Ministry spokeswoman said the regulation's purpose is to ensure institutions don't charge too much in management fees, enabling higher returns for investors.
"That regulation that was meant to protect investors had good intentions but was done without properly understanding how VCs are structured," said Dan Shamgar, a partner at the Meitar law firm, which represents most of Israel's major venture capital firms.
Editing by Adrian Croft