NSO’s cash dilemma: miss debt repayment or sell to risky customers


Faced with an imminent cash crunch so severe that Israel’s NSO Group, manufacturer of the cyberweapon Pegasus, could miss its November 2021 payroll, Shalev Hulio had a startling suggestion.

The foul-mouthed CEO told a team representing the company’s majority owners in New York that month: why not start selling again to risky clients?

NSO is the maker of military-grade spyware that thwarts the encryption on phones and turns them — surreptitiously — into listening devices, while mirroring their contents on terminals thousands of miles away.

Selling the coveted technology led to annual sales once topping $250mn. But after human rights groups documented the abuse of Pegasus by Saudi Arabia, the UAE, Mexico and more than a dozen other countries against journalists, dissidents and academics, NSO had gone months without a new sale.

Hulio said there was one option to bring in some cash quickly enough to pay salaries and service debt: reassemble a defunct internal committee and approve sales to customers flagged as “elevated risk” during due diligence.

To his audience, the suggestion was alarming. They were managers at Berkeley Research Group, which had been brought in recently by investors in a billion-euro private equity fund run by London-based Novalpina Capital, which owned a majority stake in NSO but had then fallen apart in a partners’ feud.

BRG’s job was to wrap up the Novalpina fund. Now they were being asked to get involved in decisions about whether or not Pegasus should be sold to countries that even NSO’s own staff may have red-flagged.

BRG declined, telling Hulio the plan was fraught with risk. He quipped back that it was risky to miss a debt payment too.

This account of the NSO Group’s struggles is based on interviews with nearly a dozen people from New York to Tel Aviv including company insiders, investors, creditors, government officials and a review of court filings and correspondence.

They reveal a company gripped by crisis, its owners pitted against each other in legal battles and its future requiring delicate diplomacy between the United States and Israel, which has used the lure of NSO’s technology to prise open relationships with customers, especially Gulf and Arab nations, whose abuse of the weapon now overshadows NSO’s reputation.

At the core of the dispute is the decision by BRG last October to decline to reassemble NSO’s Governance, Risk, and Compliance Committee, which had been set up by Novalpina Capital a few months after it bought a majority stake in NSO in 2019 at a $1bn valuation.

Hulio has told creditors that BRG’s decision has only deepened the company’s cash issues. BRG’s response to the creditors, in correspondence seen by the FT, was that given the publicity around NSO’s past customers, Hulio’s sales team had only been able to suggest potential sales from difficult clients, including one that BRG said had previously abused the weapon.

“You are demanding that (BRG) blindly sanctions the sale of . . . Pegasus . . . to elevated risk customers without a thorough governance review,” lawyers for BRG wrote to a consortium of creditors on December 13. “Please note that in no circumstance is (BRG) prepared to do so.”

Hulio did not leave empty-handed following last October’s crunch meeting. BRG made an immediate $10mn loan a NSO sister company, a nascent business that makes a drone defence system that Hulio has touted as the company’s future, so that NSO could make that month’s payroll.

Soon after those pay cheques were disbursed, the US Department of Commerce blacklisted NSO for selling Pegasus to countries that used it for “transnational repression”, catching both the company and Israel off-guard.

Since then, any US firm needs to get a hard-to-obtain waiver before it can sell NSO any technology, a crippling blow for a company whose terminals ran on servers from Dell and Intel, routers from Cisco, and whose desktop computers run on Windows operating systems.

NSO has unsuccessfully tried several times to meet the Department of Commerce’s Bureau of Industry and Security, which oversees export control restrictions, according to a person with knowledge of the situation.

As a result, NSO has been unable to argue its case for temporary waivers, such as those received by suppliers to Huawei, the Chinese telecoms company, which was blacklisted over concerns that it facilitates Chinese espionage. BIS declined to comment.

NSO said: “It is critical for direct policymaker engagement to provide a greater understanding of how our technologies work, the countless lives it has saved and the specific steps the company takes to prevent misuse and terminate contracts when misuse is determined to have occurred.”

The company also said that its products remained in “high-demand,” and that it “had a rigorous due diligence process,” and that a “small group of detractors . . . continue to circulate recycled and inaccurate rumours.”

The US blacklisting ended the initial plan that Hulio had discussed with BRG: a pivot to selling to western allies of Israel. The company had been cut off from US law enforcement, the world’s most lucrative surveillance market, which Hulio has told investors, clients and friends could help propel NSO to a public listing to rival Palantir Technologies or Verint Systems.

Once a darling of Israel’s security establishment, NSO appears to have been abandoned by the Israeli government which can instead champion nearly a dozen local firms providing the same technology, including some set up by ex-engineers at NSO.

“Hulio keeps telling everybody that the company is on the verge of a turn-around,” said one Israeli official, who has declined to lobby the US on NSO’s behalf. “It is not. Whether or not it will survive depends on decisions in Washington, not in Herzliya [the Tel Aviv suburb where NSO is headquartered].”

In recent months, Hulio has come up with a new plan dubbed the “phoenix plan” by company insiders. The idea is to split NSO’s greatest assets from its greatest liabilities — this meant separating the code behind Pegasus and company engineers who are highly paid graduates of Israel’s elite military intelligence units, from the clients that have drawn the ire of the US and human rights groups.

Hulio and a group of creditors hope that by spinning out a new entity that houses the code and engineers, it can sidestep the commerce department’s blacklist, especially if a new owner were a top US defence contractor.

By late November, the company’s finances appear to have recovered enough for it to host a massive party on Israel’s Red Sea coast. Hulio briefly was the DJ. The company posted pictures on LinkedIn, with the caption. “NSO Group. High Spirits. United. Winning.”

Meanwhile, BRG’s $10mn loan to the NSO drone company remains unpaid.



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