Current Investment Boom Is No Bubble, Says Barclays Israel Chief

Israelis are joining the worldwide pile-up into the IPO market, just like in 1999, but bankers are no longer taking companies to market on the basis of a dream; Len Rosen says the companies going public are quality businesses.

“The IPO market is booming,” declares Len Rosen, the CEO of Barclays Israel, as we kick off our interview.

Rosen is right. After years in which Israeli technology companies didn’t consider an initial public offering as an option for raising money or as an exit for investors, the mood has changed in the last few months. A cheap supply of money and the success of a handful of high-profile IPOs – like those of Twitter, Linked-In and, not the least, Facebook – have contributed to a huge wave of investment in trendy technology fields, such as social media, digital advertising and cyberspace.

Investment bankers are playing a key role in this revival, bringing the investing public as many of these types of assets as possible and as quickly as they can, before the window of opportunity closes. Representatives of many of the world's major investment banks have descended on Israel, meeting with both startup firms considering issuing stock and Israeli financial institutions, in the hope that they can take a more active role in the local technology scene.

“Today, there’s an excess of free capital for this type of investment,” says Rosen. He is one of the most established investment bankers in Israel, having begun here with Lehman Brothers before its collapse in 2008, when it was taken over by Barclays. “Surely, the possibility that everything will instantly be flipped upside-down exists. However, if we set aside the paranoia and examine the reality, we encounter plenty of positive macroeconomic indicators that provide tailwind to the equities market -- liquid assets of large cap companies, low interest rates and the Fed’s continuous quantitative easing.” United States share prices have reached record highs, as the U.S. Federal Reserve, following the policy known as quantitative easing, pumps money into the economy in order to stimulate business investment.

“High stock prices are encouraging further appetite for mergers and acqusitiions and IPOs,” explains Rosen. “All of this generates new opportunities that didn’t exist previously. The current trend we’re seeing is truly robust. We believe the market will continue to prosper, perhaps at a slightly slower pace than in the past, yet in a satisfying way. I’ve been in investment banking for 20 years and I have never seen this amount of innovation coming out of Israel. There’s potential for a golden era for the local tech market. We will provide companies with the opportunity to float, and I hope they will grasp this opportunity.”

How is the situation today different from what we’ve seen in the past?

“I don’t hear the term ‘bubble’ nowadays. Indeed, some of the recently floated stocks have soared considerably following the offering, in a way that might resemble the dot.com bubble. Yet today, unlike in the past, the companies are solid.

“Bankers have drawn the conclusions and are not willing to take a company public solely on an idea or a dream. Companies are not going public at an exaggerated valuation. If you check most of the Internet IPOs over the past couple of years, you’ll see that most of them have generated positive yields. We’re not talking about overly exaggerated yields, but solid reasonable ones. This means that the underwriters priced the offerings reasonably.”

Not pushing IPOs

Rosen is cautious in his approach to notable IPOs, such as that of Twitter – which is currently considered a huge success after jumping 58% since it began trading at the beginning of the month. “Once in a while there’s a mega deal that affects the entire market,” he says. “The Facebook IPO, for instance, was one of those deals. If that IPO had gone better, we might have seen further Internet company IPOs during 2012-2013. The Twitter IPO is without a doubt the largest IPO of this year and its success will positively affect upcoming IPOs.” However, Rosen doesn’t anticipate any additional IPOs on the scale of Twitter and Facebook to fuel the market in the near future.

In Rosen’s opinion there are more than 10 Israeli companies suitable for floating and being listed for trading on Nasdaq. “Israeli innovation is very solid,” he claims. “The fact that all international corporations are active in Israel and continuously looking for investments is a testimony to that. It’s a great time to be a venture capitalist in Israel. They meet all the entrepreneurs and invest in the hottest sectors, such as big data, cloud, cyber, Internet and social networks. All of these sectors are creating a new golden era.” Rosen also points to digital advertising as a strong field, with several companies in Israel generating over $100 million in annual revenues.

Are you encouraging companies to pursue IPOs?

“There are various reasons to go for an IPO, and various reasons not to. We view ourselves as advisors to companies. We do not push for an IPO but rather advise on the process. Companies can utilize the IPO to raise funds and invest in further growth. Plenty of vendors and customers would prefer to work with publicly traded companies due to the transparency. Moreover, stockholders benefit from the liquidity, allowing them to easily monetize their stake. However, an IPO might not always be the right solution. We always tell companies: ‘If you lag on projections and quarterly growth, the investors will not be forgiving, so you may want to consider whether to pursue an IPO.’”

Where would you recommend that companies issue stock and list for trading?

“Nasdaq and the New York Stock Exchange are naturally the preferred choice for tech companies. The American market holds Israeli innovation in great esteem. It’s easier nowadays to convince an American institution to invest in Israeli companies. The Israeli tech companies are founded with an American mentality and prefer first reaching out to the American market when looking for customers. When American investors visit [Tel Aviv high-tech business park] Kiryat Atidim they feel at home. Whereas Israeli companies once traded at a discount in comparison to their American peers, we don’t see any discount now. Israeli companies trade at the same multiples as the rest of their respective industries.”

As for the Tel Aviv Stock Exchange, Rosen says that the current bullish environment in the U.S. has diminished its ability to offer an alternative to companies trying to raise capital. “This hurts the local stock market, which didn’t develop as it should have,” he says. “An environment that can support trading in such companies still hasn’t arisen here.”

Israeli institutions now more inclined to participate

Rosen appears uneasy when asked about the weakness of Israeli financial institutions, since these are major clients for investment banks such as Barclays. “Israeli VCs raised a lot of capital from foreign institutions,” he says. “I think the Israeli institutions don’t sufficiently invest in venture capital. These are indeed high-risk investments and therefore should be done in a proportional manner. However, we do see a change over recent years. Israeli institutions are now more inclined to participate in IPOs of Israeli companies. In the past, we were concerned about them selling the shares quickly to exploit the IPO discount. Today, we can say they continue to hold the stock just as the foreign institutions do. Due to that, we are now willing to market global IPOs to Israeli institutions.”

Do Israeli financial institutions have the knowledge required to invest in IPOs and high-tech companies?

“The Israeli institutions need to further develop their capabilities in this area, yet this is already happening. Israeli tech companies are a sort of a bridge to that. Institutions that invest in Mellanox get to learn the sector and then are able to invest in similar companies.”

Why do you think Israeli institutions hold global technology stocks like Apple and Facebook?

“Some of the Institutions may hold some shares of this kind, yet their allocations to those stocks are relatively small. We would have expected them to hold more at this stage. I presume they’re increasing their stakes in foreign stocks.”

AP