The Israeli branch of one of the world’s largest international investment banks occasionally receives visits from senior management: executives from Switzerland, East Asia and Western Europe. These executives - accustomed to "old money" clients in real estate, finance, and commerce - have lately been visiting Israel more frequently. Attired in suits and ties, they’ve come to take a look at what's happening here: the emergence of a new class of high-tech, high net worth individuals.
They are met on the other side of the table by an Israeli in shorts and flip-flops, or perhaps, in the most formal case, a polo shirt. "At first, it seems impolite," one local investment manager, who asked to remain nameless, tells "Globes". "But the next day, it's the banker who has adapted himself. These days, people ask me in advance if they need to pack ties before coming to Israel."
Senior investment house managers from around the world aren’t just visiting Israel on a lark. Israel recently ranked among the 20 countries with the highest gross domestic product per capita, and took second place on the list of billionaires per capita. It's no surprise. Over the last year and a half, thousands of employees have been able to sell shares in a public offering or sell shares in privately held companies to huge funds. Estimates are that thousands of employees shared $5 billion in IPOs in 2020. The options in the latest IPOs of 2021 are still vested, but they have the potential to inject billions more into the market in the near future.
Where does the money come from?
The flood of IPOs is just one part of the picture. Another group of a few thousand entrepreneurs, veteran employees and senior executives have, since the beginning of the year, earned about $2 billion as a result of share sales to venture capital funds which invested in their companies through secondary deals.
In these transactions, the funds inject money into a company to help it grow, and at the same time purchase shares from veteran employees in order to create a "little exit" for them while the company remains private.
ironSource is one example of an ongoing exit that has not yet ended - and whose every step has produced new ripples of wealth for its founders and employees. Over the past few years, dozens of the company's thousand employees have become millionaires from as a result of private dividend distributions. In the second phase, during its SPAC merger, 850 employees were able to exercise their options as part of the $150 million share purchase. In the third stage, after the vesting period ends, these thousand employees will be able to sell their options and shares.
ironSource’s entrepreneurs, a group of nine people led by CEO Tomer Bar-Ze'ev, together hold 40% of the company's shares, meaning that their share in the IPO is worth $4.5 billion, not including dividends and private capital injections received even before the IPO. Bar Zeev’s net worth is an estimated $640 million.
Where do they come from? "Till recently, they lived with their parents"
Nurit Pirani, Head of LeumiTech Business Center, a division of Bank Leumi that, among other things also manages newly rich techie accounts - mentions a dramatic change which occurred about a year and a half ago, shortly after the outbreak of the Covid-19 pandemic. "For years, high-tech employees and entrepreneurs struggled to make do on middle-class salaries. Some couldn’t even make it till the end the month, others lived with their parents. They lived in hope for that long-awaited exit, and when that happened, the companies were usually sold at two or three times the value of the investment. Secondary rounds were almost nonexistent."
Within this newly affluent class are subdivisions. "You have to distinguish between the entrepreneurs, senior management, and veteran employees who’ve gained significant sums of money - five, ten, and even tens of millions of dollars," says Pirani, "and the junior staffers who earn sums ranging from hundreds of thousands of shekels to a few million. That does allow them to feel financially well-off, but it doesn’t make them rich enough to afford buying some real estate."
However, says Pirani, the wealthy population is more diverse. "The percentage of women in our high-tech accounts has jumped from a few percent to 15%. And, for a while now, the beneficiaries haven’t just been engineers, but also marketing, operations, and human resources personnel."
The day after? They coming to work as usual
Michael Grosz is the Israel CEO of Lombard Odier, a private Swiss bank specializing in wealth and asset management, with $350 billion in assets under management. "I’ve worked in Swiss private banking in Israel for 16 years, and I’ve never seen what I’m seeing now," he told "Globes". "The rate of IPOs and large secondary rounds is creating a host of employees and entrepreneurs who are coming into money even before the IPO. The result is a greater number of newly rich people than ever before.
"The vast majority of them are ordinary people, in their early thirties to mid-forties, who have served in IDF technology units, and who almost at a stroke - albeit after a period of hard work - come into big money. Most realize their shares in secondary rounds, but know that the really big money will come later, in an IPO or exit. So, they actually continue their normal lives, come to the office every day, and are committed to the idea that their company will continue to achieve success."
A key feature of this new wealth is the fact that current and future wealth is dependent on the person continuing to work at the same company, as what has been realized so far is only a small percentage of all shares held by employees and entrepreneurs.
One notable example is cyber company Armis Security, which was acquired in January last year by Insight Partners at a $1.1 billion valuation. "We remember the day of the sale very well to this day, January 6, 2020," Armis co-founder and CEO Yevgeny Dibrov tells Globes. "We notified the workers and everyone was happy about the large amount. But the next day, everything went on as usual."
Nadir Izrael, co-founder and CTO of Armis says, "Because everything continued to run as usual immediately after the exit, we were in denial mode. Many of us couldn’t believe something had happened and people were very financially cautious afterwards. After all, most are sophisticated people who make methodical decisions - buying a house, or closing a mortgage. It’s a long way from the ‘Mesudarim’ television series."
A senior executive at one of Israel’s family offices, providing wealth management services for millionaires, says: "Often in high-tech, you’ll see newly rich people who are mathematicians, various kinds of geniuses that no one would imagine are rich. They dress simply and act as if nothing had happened, in extreme cases, they even look shabby. They have other priorities and they’re not the kind of people to show-off. At most, they’ll get take up a hobby or become foodies. The party animals leading a wild life are a minority within a minority."
What to buy: Real estate in a good Tel Aviv neighborhood above all
Alexander (not his real name) works at a high-tech company that recently produced a large number of newly rich people. He had been negotiating an apartment purchase in Ashdod with the idea of renovating it. The exit changed everything; instead of Ashdod, he decided to buy a NIS 12 million apartment in Tel Aviv.
Daniel could have closed the NIS 1 million mortgage on his apartment in Tel Aviv. Instead, with his new earnings, he decided to buy another apartment in town as an investment, for $4 million, and take out a mortgage on that one as well. In this optimistic atmosphere, if an investment opportunity presents itself, ready cash isn’t always used to close mortgages.
"Real estate will be their first choice, and usually in high-demand Tel Aviv neighborhoods," says one family office services senior executive. "The fantasy is to live in Tel Aviv, in a good neighborhood like the old north near Yarkon Park, or near the sea, or in Neve Zedek. People who have made tens of millions of dollars won’t usually look for the usual family home but will want something hip, preferably with a cool rooftop. They’re less interested in a parking space and a private car, some even think that private cars will disappear from our lives, and don’t care about that at all."
Estimates are that real estate investment accounts for between one-third and one-half of the total expenditures made from exit earnings. This share usually includes improvements on primary residences, plus one or more other investment properties. "A few years ago, $10 million apartments in Tel Aviv would be sold to wealthy families from abroad or to ‘old money’ Israelis. Today, it’s the young high-tech folks who are snapping them up," says an investment manager at a European bank.
The next step? Helping parents, investing in themselves
In second place after real estate, new money is used to help parents, again, usually through real estate purchases. "This generation of millennials has different demands and goals from those of previous generations," a senior executive at a foreign investment bank serving high net worth individuals tells Globes. "If in the past, people would come to us at a later stage in their lives, to ensure their capital stayed in the family and passed on to the next generation, today we see very young people, some single or with a young family, who are caring for the older generation, whether by buying apartments or supporting them with cash."
The most striking feature, perhaps, of the high-tech newly rich is the capital they invest in other high-tech companies that belong to friends or industry acquaintances. Armis CEO Yevgeny Dibrov reveals that about 20% of his personal capital is allocated to investments in various high-tech initiatives, including small and large venture capital funds, and a number of cyber and crypto startups, such as Viz.ai, Fireblocks and Epsagon. "I’d define this segment as high-risk, but in the end, these are people we know and trust," he tells Globes.
A senior executive at a European investment bank reveals that many of the high-tech newly rich are interested in continuing to take part in the industry's growth by investing in private equity and venture capital funds that are themselves invested in Israeli high-tech. Thus, indirectly, the high-tech newly rich can continue to be part of the success of the Israeli and global technology market.
The mistake: Putting all the eggs in one basket
Techies tend to invest in other techies. They tend to invest in startups founded by entrepreneurs in their social network. In the capital market, they will choose to invest in technology stocks and ETFs.
Shai Yaron, CEO of Altshuler Shaham Mutual Funds, thinks these investments are risky. He calls for balancing high-tech investments with more solid instruments such as bonds. "A large portion of the profits in this sector are still on paper, so the get-rich feeling is sometimes misleading. The perception that technology will continue to lead global growth is correct, but there’s a gap between real life and the way stock market value expresses it," says Yaron. "Growth as high as we’ve seen over the past year cannot continue for more than a few years, and companies are having a hard time maintaining growth for various reasons related to increasing competition, regulation, and technological challenges."
An investment bank executive told "Globes" that many entrepreneurs - despite their mathematical backgrounds - tend to miscalculate their wealth. "Entrepreneurs who receive $100 million must keep in mind, over and over, that they’ll end up with half, after taxes and various outlays." Others may rush to invest abroad without taking tax considerations into account, with many paying tax twice over, in Israel and the US.
Published by Globes, Israel business news - en.globes.co.il - on July 26, 2021
© Copyright of Globes Publisher Itonut (1983) Ltd. 2021