Long after Wall Street fell in love with initial public offerings by high-tech companies, it seems that the Tel Aviv Stock Exchange has been smitten, too. Tech companies are expected to account for much of the swell of IPOs expected on the TASE over the next few months.
The Tel Aviv Stock Exchange’s interest in tech comes after a jump of more than 30% since the start of the year in the TASE’s TA-Tech Elite index at a time when the rest of the market is languishing in coronavirus blues. It’s also been given a boost by new regulations encouraging high-tech companies to go public and a change in investor sentiment in favor of tech.
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The Israel Securities Authority is examining scores of IPO prospectuses. The ISA said the majority of candidates are mid-sized tech companies as well as research and development partnerships that invest in start-ups (in effect publicly traded venture-capital funds). Most belong to the cleantech, agro- and foodtech, medical devices and insurance tech sectors.
“Until the onset of the coronavirus, we were seeing many offerings by property companies or debt offerings. Now a lot of the available money is heading into small and medium-sized technology companies,” said Gur Nabel, an attorney with the Tel Aviv law firm Goldfarb Seligman & Co.
He said the phenomenon wasn’t just about demand but about supply, namely that tech companies were now opting to tap the public instead of private markets for capital. “Everyone who in the past would have trend to a private investment fund and an angel investor, is now looking to go public on the stock market. Also, the regulatory atmosphere at the ISA, the Tel Aviv Stock Exchange and the Competition Authority is supportive of a wide range of startup companies, who suddenly have begun thinking that the stock exchange is a good option.”
That said, the bigger tech companies still prefer to list their shares on the Nasdaq in the United States instead of the TASE, Nabel said. “Right now, it’s medium-sized companies that are testing the waters. At some stage, a big technology company will choose to go public [in Tel Aviv] and institutional investors will welcome it warmly. That will lead to other big tech companies going public. We’re still far from that moment,” he said, estimating it would take another two to four years.
The average tech offering on the TASE thee days raises between 25 million and 30 million shekels ($7.4 million-$8.9 million) for between 15% and 25% of the company, Nabel said. If they already have revenues, the IPO can reach 60 million shekels.
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In contrast to the past, this time around institutions are showing interest in technology IPOs and are investing more human resources to develop expertise in the areas.
“There’s a lot of competition for the money and everyone is going from meeting to meeting. There are institutions that are still hesitating about jumping into the pool because they have difficulty making valuations and determining the level of risk,” said Nabel.
The pandemic has made that harder, especially for less established companies.
ISA chairwoman Anat Guetta told Reuters that the coronavirus has also contributed to the tech industry’s interest in going public locally.
“It’s become very local. There is less flying, less meeting investors around the world,” Guetta said. “All you need to do is leave your office and head to Rothschild Boulevard,” she said referring to the financial heart of Tel Aviv. “It’s much simpler, more accessible and safer these days.”
One of the tech companies readying for an IPO is Ecoppia Scientific, which has developed robot solar-power panel cleaners. Like most of the IPOs in the current wave, Ecoppia has chosen to do so via book building – closing sales of shares of big institutional investors before selling what’s left to the public. Last week, the company won commitments from big institutions for $75 million in orders at a company valuation of $300 million before the money.
Another is GenCell, founded nine years ago by the tech entrepreneur Benny Landa, whose technology enables clean backup power for telecom, homeland security, healthcare and other industries. It has raised about $70 million at a $180 million valuation before the money from institutions and from the energy company Paz Oil.
A third company is Aquarius Engines, which was formed in 2014 and has developed an innovative internal combustion engine that uses energy much more efficiently than conventional engines. Backed by blue chip shareholders such as Marius Nacht, a cofounder of Check Point Software technology, and Leon Recanti, Aquarius has already lined up $60 million of orders at a before-the-money company valuation of $260 million. The buyers include the insurance companies Phoenix, Psagot, Clal and Migdal.
These three are relatively big, but two smaller companies are also on line to complete IPOs.
Highcon, which is developing a digital cutting and creasing solution for the paper and carton industry, has already begun a road show for an IPO in the tens of millions of dollars that values the firm at more than 500 million shekels.
Meanwhile, Human Xtensions, which has developed a minimally invasive surgery platform, also plans to raise tens of millions of dollars.
An unusual category of tech IPOs is the R&D partnership, of which four already trade on the TASE and at least another 10 are on their way.
“This is a new instrument that makes investment in the industry accessible to the public, not just investors with lots of capital,” said attorney Itay Brafman of Dr. Zeev Holender Law Offices & Notary. “We have several more such partnerships in the pipeline. The hot areas are foodtech, insuretech, agrotech and fintech. Every day I’m getting calls from other interested parties,” he said.
But the partnerships aren’t necessarily for the faint-hearted, warned Eli Daniel, deputy director of the ISA’s disclosure and reporting division.
“Investors have to be aware that investing in these R&D partnerships, which are a kind of VC fund, are by their nature relatively risky. They have to be ready for a situation when maybe three or four of the partnership’s portfolio companies fail – although the success of the fifth companies could cover the losses,” Daniel said.