The last date for Tel Aviv Stock Exchange-listed entities to publish second quarter financials came and went this week, and only one failed to meet the deadline: research and development partnership HIVE 2040 (TASE: HIVE), and trading in its participation units was suspended as a consequence. Before the suspension, the partnership had a negligible market cap, just NIS 4 million, after its units lost 85% of their value since they were floated in June 2021. The suspension will be for up to 48 months, following which, if the partnership has not regularized its affairs, it will be delisted completely.
The disintegration of HIVE 2040, which is left without cash, comes at the same time as the collapse of the business of its moving spirit and financial backbone, Tomer Avnon. The partnership was formed as the R&D investment arm of the Avnon Group, which, until its recent collapse, was active in homeland security and cybersecurity. The partnership was meant to invest in companies with new technologies in cybersecurity, smart cities, and homeland security.
Besides Avnon, a string of prominent people in defense and cybersecurity were involved in the partnership. Among the members of HIVE 2040’s investment committee were former chief of the Israel Police, Yohanan Danino, who served as chairperson of the partnership at the time of its flotation, former Mossad head Tamir Pardo, former Israel Aerospace Industries CEO Joseph Weiss, and former director of the National Cyber Security Authority Buky Carmeli. Danino resigned as chairperson in July this year, and he has not been replaced. At the same time, CEO Avi Kochva also resigned. Kochva is a former commander of Mamram (IDF Computing and Information Systems Center) and deputy CEO and board member at Bank Hapoalim, and CEO of the Avnon Fintech Division.
The investors in HIVE 2040’s flotation also included some prominent figures: Psagot Investment House owner Rani Zim and Psagot CEO Yaniv Bender, an investment company connected to Wix founder and CEO Avishai Abrahami, and Together Investments. Today, 25% of the participation units are held by the general partner, in which Tomer Avnon, Zim, Bender and others are invested.
HIVE 2040 raised NIS 32 million in its IPO in June 2021. Even before the flotation, it declared its intention of investing in three target companies: zero trust protection company Nanolock Security; video security solutions company Viisights Solutions; and IoT cybersecurity company IXDen. To date, it has invested $9 million in these companies, approximately the amount it raised.
The Avnon Group was founded in 1989 and employed 300 people until its recent collapse. It was mainly active in producing drones, sensors, and other security hardware. The group got into cash flow difficulties in the past year, and a few months ago entered into negotiations with its creditors on a debt settlement, after accumulating debts amounting to some NIS 200 million.
Meanwhile, the HIVE 2040 partnership started to break up, because of a shortage of cash to cover its debts and the lack of financial support from the Avnon Group. Several senior managers and directors resigned. The partnership announced that it was unable to rely on support from its controlling partner, the Avnon Group, contrary to commitments given to it in March 2023. In August this year, the partnership published an invitation for bids to buy it, but no subsequent developments have been reported on that front.
At the end of 2022, HIVE 2040 had just $2,000 cash, while its investments were valued at $7.7 million. It made a loss of $2.4 million in 2022, mainly due to revaluation of its investments. It reported that the Avnon Group had refrained from drawing management fees and in March 2022 had promised a loan, a promise that it was unable to fulfil.
Failed Tel Aviv Stock Exchange experiment
Although there are special circumstances surrounding HIVE 2040’s difficulties, its fate Is not different from that of most of the R&D partnerships that were floated against a background of cheap money that was looking for opportunities in technology in 2021. The partnerships were set up at a time when interest rates were low and there were few investment alternatives, while technology company valuations were skyrocketing as the Covid pandemic waned.
The Tel Aviv Stock Exchange identified a desire on the part of the public for exposure to the high-tech sector at early stages of technology development. It promoted the flotation of R&D partnerships (in all, fourteen such flotations took place) "in order to enable the general public to benefit from the success of Israeli technology through the stock exchange, in a transparent, liquid, and accessible way."
For their part, the partnerships identified investment openings in a range of promising technology ventures, and ornamented their management and boards with glittering names from the business world and related professional fields, but, predictably enough, most of them have yet to score any great successes or make significant exits, and investors have by now given up on them.
"The new tool of R&D partnerships has not succeeded on the Tel Aviv Stock Exchange," the board of one of the partnerships, Menara Ventures, stated in an appendix attached to a proposal to realize investments and distribute the proceeds to investors that it issued early this year. It explained the failure by "the difficulty of the capital market in pricing privately-held companies, a lack of experience in the field and the limited information disclosed by the private companies and reported by the partnerships." It added that "the small size of the partnerships resulted in low liquidity, in addition to the situation on the capital markets."
Since the period when the R&D partnerships were floated, a dramatic change for the worse has taken place in the position of the market, and the appetite of investors for risk has substantially diminished. Apart from one (Bio Meat Foodtech (TASE: BIMT)), the partnerships have generally lost much of their value since they were floated. They still hold some portfolio companies that could prove successful in the future, but, as a model, they represent a failed experiment, to say the least, by the Tel Aviv Stock Exchange, and significant destruction of value for investors.
Published by Globes, Israel business news - en.globes.co.il - on October 3, 2023.
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