Is the Tel Aviv Stock Exchange Era Over?

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The new Tel Aviv Stock Exchange building.Credit: Yael Engelhart

The year 2015 will be remembered as another low point in the number of companies that joined the Tel Aviv Stock Exchange. Last year only two companies, Oron and Vitania, held IPOs, raising the total to just nine in three years.

The drizzle of IPOs pales in comparison to the boom years of 2006 and 2007, when 37 and 56 IPOs were made, respectively, and even the 17 of 2010, the year when the global economic crisis subsided.

The decline of TASE IPOs stands out compared to major exchanges like London or New York, where low interest rates, cheap money and meteoric stock price rises attract companies from various fields. The low IPO rate also reflects the exchange becoming a focus of real-estate firms, among them American companies, raising capital through bonds.

Several unique factors have contributed to this trend, such as the decline in asset managers like provident funds, mutual funds and portfolio managers. The capital markets have consolidated because there is less maneuverability for managing savings and regulatory supervision has deepened. For example, some 10 small and medium-sized investment houses have merged to become Meitav Dash, which manages some 125 billion shekels ($32b).

Consolidation is bad news for the market, contributing to smaller turnover and reduced liquidity. The decline led to focusing on large companies, with institutional analysts often ignoring smaller firms, which receive less investment in their shares. As a result, pricing of medium- and small-cap companies has been hurt, and equality declined. Drying out the trading market impacted, of course, the primary market, whose low valuation deters new companies from considering an IPO.

Another explanation of the primary market depression is low interest. While low interest abroad pushed market indexes upward, much of the cheap money in Israel streamed into real estate or global financial markets. Since 2010, the S&P spiked 70% while the TA-100 rose just 11%, and the Nasdaq jumped 95% compared to the Israeli tech index climbing 30%.

The modest impact of interest rates on the stock market was critical. It created significant differences between P/E ratios of high-tech and biomed companies in Israel relative to similar companies abroad. The high liquidity of VC funds also continued to serve the funding needs of young high-tech companies and pushed back the natural local market. The result was an almost total exclusion of two central groups responsible for most IPOs, and the picture won’t likely change soon.

Do the trends of recent years signal the end of the TASE era? It is certainly a reasonable scenario. Capital that doesn’t reach the market in bullish days will hardly stream in during days of volatility or a change in market direction. Social trends in Israel also signal that public faith in the market has yet to be fully restored.

TASE CEO Yossi Beinart, who works hard at registering high-tech companies, says that the local capital market will likely continue to take shape in the form of family companies like Carasso or Shapir, whose owners are interested in liquidating assets, engineering companies that will continue to benefit from massive infrastructure investments, government companies like Israel Military Industries or Israel Aerospace Industries and traditional industrial companies, who have recently enjoyed massive investments from private funds.

In any event, the general IPO picture won’t change soon. The number of companies joining the market will likely be low and certainly not approach the boom years. The coming years will reveal whether there is place for a stock market also in Tel Aviv, or if the exchange on Ahuzat Bayit Street changes its face and gradually turns into a debt market.

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