The general breakdown caused by the coronavirus pandemic has generated some surprising phenomena. One of them is the boom in IPOs in the US, and also in Tel Aviv, where, unless there are further surprises in store, it will break records for primary issues and new listings on the Tel Aviv Stock Exchange (TASE). The Israel Securities Authority recently estimated that if the current rate of offerings continued, more than 100 companies would be added to the TASE, after nearly 30 were newly listed last year. Underwriting firms in Tel Aviv, which have earned aggregate fees of around NIS 150 million in the past few months, report with satisfaction that they are working round the clock.
"We're at a peak, and everyone is running very hard," an underwriting industry source said. "Activity is super-intensive at present. There are no set working hours; when someone wants you and contacts you, you're available for him at any time. There are meetings and calls all day, and if a prospectus has to be produced, the timetable has to be met."
Another underwriter adds, "We haven't had anything like this for twenty years, and at this stage I see no decline in intensity, because there's a lot of 'meat' out there."
Underwriting firms in Tel Aviv are characterized by strong passions and a very high degree of emotional involvement by the players, as they chase the commissions and bonuses. It's a fairly concentrated market, consisting of fewer than twenty firms and a few dozen workers. On the one hand, they are in fierce competition with one another, as they try to win lead underwriting deals, but on the other hand they have to maintain working relationships, because in the end they are often involved in joint deals, marketing their services together and dividing the spoils. The most prominent underwriting firms are Poalim IBI, Leader, Epsilon, Leumi Partners, Discount Capital, Orion, Value Base, Barak Capital, and Rosario.
The holes in the sieve are getting bigger
As in any boom market, while the underwriters and the issuing companies themselves are enjoying high demand for new merchandise, those who are ultimately liable to get hurt in the rush of offerings on the local market are investors from among the general public. The fear has been growing lately that the holes in the sieve for entry to the market have been growing bigger, enabling unripe ventures with obscure futures to get through.
These "holes" are manifest through, among other things, going concern and other qualifications by the auditors of several companies being floated, because of the early stage at which flotations are taking place, with no substantial revenue and large losses, and questions over the ability of some of the companies to generate real growth.
Despite this, the trend is one of high demand for such companies in the IPO process, often against a background of financial institutions piling in, and amounts raised sometimes in the hundreds of millions of shekels.
Accordingly, there is a growing sense that a bubble may be developing. Such assessments are supported by generous pricing for technology offerings not based on financial data such as cash flow, revenue, and p/e ratios, but rather on plans for future growth - in other words, on the dreams being sold to investors, with great success at this stage.
"The Securities Authority may have moved too fast"
Not everyone welcomes the current wave of offerings, or, more precisely, its make-up, which includes many early-stage companies. A senior market source, who has seen fashions come and go on the local market, with companies raising mountains of cash from the public and leaving it with an empty pit of losses, speaks anxiously of the many IPOs by technology companies that in his view are not suitable for investment by the general public.
"A substantial proportion of them are simply startups, and with startups it's a matter of one success out of many companies. Unlike regular companies, they have no assets securing the investment if the business plan is not fulfilled. The Securities Authority, under Anat Guetta, and the stock exchange, wanted more companies in the market, and particularly to connect the investing public to the world of technology. That's a worthy aim, but in my view it could be that in the future it will turn out that the Securities Authority ran too fast and too far in its efforts to bring technology to the stock exchange, which is now absorbing companies that it is liable to have regrets about."
Discount Capital Underwriting chairperson Tzahi Sultan, a veteran of the local underwriting industry, says, "The market has become less selective. If in the past every company was examined through a magnifying glass, today that's less the case. But the market is dynamic, and at some point there will be a surfeit of all the inventions brought along by the technology companies.
"What's important," he says, "is to provide appropriate disclosure of the level of risk, so that investors will be clear about the risks and opportunities in the business of the company in question."
Will we see collapses after the current wave of offerings?
"Some of the companies that have come to the stock market will succeed, and some won't. These are high-risk companies, and everything has its price. They could break through, and they could fail. This is the profile of R&D companies and startups, and people have to realize that it's not a government bond with an assured yield, it's a completely different kind of investment. The US real estate companies that issued bonds in Tel Aviv also gave higher interest rates, because of the risk."
How long will the current wave last?
"At present there's still plenty in the cash fuel tank, enough to keep the market boom going for another year or two. The cash surplus can be seen in almost all investment instruments. At the same time, as in musical chairs, the music plays, and no-one knows when it will stop, but it will happen.
"According to standard economic theory, the massive injections of money in the US and other countries ought to cause inflation, but that's not happening, and the massive flow of money in current accounts and deposits partly goes to the capital markets, causing price inflation there. Companies are being traded at historically high p/e ratios, which will continue to add fuel to the trend."
Apart from his underwriting activity, Sultan is also involved in offerings from the company side, with the flotations of two limited partnerships in technology and healthcare - Big-Tech 50 (which raised NIS 85 million) and Almeda Ventures (which raised NIS 70 million).
Flotations of R&D partnerships have been gathering momentum on the local capital market, attracting some well-known business names. Among them are capital market players like Eyal Bakshi and Shuky Abramovich, investors with deep pockets like Leon Recanati, Ligad Rotlevy and Yigal Landau, and experienced managers such as Arik Pinto, Ronnie Kobrovsky, and Erez Meltzer.
"The introduction of the partnerships to the stock market is a welcome development," says Sultan. "A partnership like this is basically like a traded venture capital fund, and mistakes are corrected and adaptations are made on the move, turning them into something genuine and lasting.
"Critical mass is important for the partnerships, because you can't raise a NIS 20 million fund and charge management fees, and the commitment of management is also important. But as soon as you give full transparency and the 'torch' beam is on, then let the market make its decisions, because in the end it's smarter than all of us."
Published by Globes, Israel business news - en.globes.co.il - on February 14, 2021
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