Last month Barclays Israel CEO Ilan Paz spoke at a conference on capital market offerings organized by the Herzog law firm. He believes that the market for IPOs on Wall Street will remain weak in the first half of 2023 and, "The second half of 2023 depends on the economy and the US fed's interest rate. If things will be eased, the market will open, if not it will take longer," Paz said.
A month has gone by and Paz has become more optimistic. He told "Globes," "I think that there will be some sort of reawakening during the year. We won't return to the levels of 2021 but there will certainly be a reawakening compared with 2022."
2021 was a record year with hundreds of IPOs including many Israel tech companies (including Golbal-e, monday.com, SentinelOne, and many more). In contrast, 2022 was a particularly weak year that was a low-point for many years in terms of the number of IPO due to the macroeconomic environment and market situation.
"What happened is that the market rose significantly in January, and this has given companies optimism that this year will look different from 2022," says Paz. "If you look at the investment institutions that are participating in the offerings, in 2022 they lost money, no matter what investment they made - equity, bonds, and convertible bonds.
"As soon as you lose, your inclination to make new investments is small, and this is what we saw in 2022. A new year began, which opened in a different way, and the investment institutions are sitting on money, have put 2022 behind them and want to invest.
"In the bond market we have already seen a strong opening, including significant bond issues from Israel, the state, Israel Discount Bank and Bank Leumi. The equity market is a bit behind, and certainly the market for IPOs takes time to wake up."
Paz says that from a historical perspective, 2022 was not an exception in terms of the valuations and multiples, and the exception was precisely in 2020-2021, in which there were "valuations that significantly exceeded the multi-year averages".
In 2020 and 2021 there was also a preference for companies that show growth at any price, compared to value companies that grow more slowly, and are usually profitable. "In 2022, it turned around, and investors preferred profitable companies or a clear path to profitability. This remains the case at the beginning of 2023," says Paz.
"A desert not seen for decades"
If on multiples 2022 marked a return to average multi-year levels, on IPOs the situation was different. "We saw a 'desert' that we haven't seen in several decades, an almost complete halt in tech IPOs," observes Paz.
"In the last few months this has changed and we see a bit of a comeback, although not yet by Israeli companies, but US companies that put IPO procedures on hold and have come back and are talking about the potential for an IPO later this year.
"This is definitely a good sign. If two months ago they would have asked me if it was a good time to issue, the answer would have been an absolute 'no', but today the situation is improving, after January was a very positive month on the markets."
Are Israeli companies starting to put out feelers about a US IPO?
"Yes but I believe that in the second quarter we will first begin to see IPOs by large US companies. The Israeli companies will be one step behind."
Will these be a different type of IPO to those we saw in 2021?
"Not necessarily but the focus of the investors will look more into the companies story.
"If in 2021 investors wanted to hear how the company grew and increased market share, today they want to hear about profitability, or at least a path to profitability in a year. As a result, the companies have to change their narrative. This affects all of them, and the Israelis as well."
Last month Paz estimated that the first companies to issue after the dry spell will have to compromise on valuations. Even today, he thinks this way: "Whoever sticks his head out and 'takes a risk' first, will give up some sort of relative valuation. As time goes by, and more and more companies enter the market, the discount will probably be less big."
The IPOs in 2023 will be a "market of windows"
Paz believes that the IPO market in 2023 will be a "market of windows" - it is possible that one month it will be possible to issue, and the month after that it will not. "If a company has not finished the preparation procedures for the IPO, preparation of a prospectus, talks with investors, etc. - it will not be able to enter the window.
"It's very important that companies don't think, 'Okay, the IPO process is six months, I want to issue in the fourth quarter, so I'll start the process in March.' Because no one now knows when the windows will be closed."
What do these windows come from?
"From the volatility on the markets. If there is a week in which the market is falling, investors will say stop, don't show me new offerings. After two weeks the market will start rising again then okay come show me. So a company not ready to go for an IPO might miss out."
What about the macroeconomic environment and risk of recession in the US?
"Today, the expectation is that there will be a mini-recession. Most economists, including at Barclays, expect the second and third quarters to be weak, but there will not be a disaster that will last for a long time. We see in the US that there is a slowdown in inflation - a sign for the Fed to stop raising interest rates, or to raise them less aggressively - So investors look ahead and expect that the interest rate will level off or fall towards the end of 2023, so they are ready to invest before then."
Are there sectors that will find it easier to hold IPOs
"The field of energy, and certainly renewable energy, is absolutely the hot field today on Wall Street. Investors contact us and ask if there are any companies dealing with this in which we can invest. This is the only field that worked even in 2022. There is an understanding on the part of the international investor that there is an energy crisis and that there is a shift towards renewable energies".
Barclays was one of the underwriters supporting the recent IPO of Israel's Enlight Renewable Energy, which held an IPO at the start of the month on Nasdaq at a valuation of over $2 billion. Regarding the tech sector, Paz believes that, as in the past, it will be easier for software companies to hold IPOs than for hardware and chip companies.
"Performance is what counts and not everything around it"
Do you hear concerns from investors regarding Israeli companies about the plan to weaken the judicial authorities?
"We spend time with companies on a daily basis and not just when they are going public, and these questions come up in a way that they didn't come up until two or three months ago. Does it affect the investors? At the moment we don't see it. At the end of the day we feel that Israeli companies are good, the Israeli economy is strong, and what is interesting is the performance of the companies per se, and not everything around it. So yes there are more questions, but we don't see an impact on the question of whether to invest."
"We see a kind of slowdown in M&As"
How is talk by tech companies about withdrawing money from Israel influencing foreign investors that are interested in Israeli companies?
"Since I mainly deal in investment banking, I am less exposed to transfers of funds by companies or individuals abroad. Israel still continues to be an attractive place for foreign investors, but it is clear that the situation you describe is another factor they take into account when they come to make an investment in the near future. I think that as a society we must do everything to return the economy to a growth path, as it was until recently."
What is happening in the mergers and acquisitions sector?
"The first half of 2022 was similar to historic rates but the second half and also in the beginning of 2023, we have seen a kind of slowdown.
"Today there is a return to this market in terms of interest but there is still a big gap in valuations between companies being sold and companies being acquired.
"My expectation is that the mergers and acquisitions market this year will be relatively small compared with the historical average. By the way, in 2021 there was a significant decrease in the acquisition of public companies, because the valuations they could get on the public market were so high that less strategic investors could beat them. In 2022 there was a return to the average, and return to acquiring public companies at 'normal' values. I expect the trend to continue in 2023.
"Another phenomenon is that due to the rise in interest rates, leveraged deals with aggressive debt have fallen significantly. When there is less leverage, then buyers are also less aggressive in prices they are willing to pay."
Published by Globes, Israel business news - en.globes.co.il - on February 26, 2023.
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