The Tel Aviv Stock Exchange’s presentation opens with the Forbes 500 ranking of the world’s largest companies. Israel has only one firm on the roster: Teva Pharmaceutical Industries. Among seven other countries with a similar number of people as Israel, five have many more companies on the list. Switzerland leads at 16.
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“We haven’t managed to grow the next Check Point,” says the TASE chief executive, Yossi Beinart, referring to the software company. Beinart notes management problems, but even more so financing problems.
“We have a financing failure. Midsized companies with annual sales of around 20 million to 50 million shekels ($12.5 million) and a market cap of 150 million shekels run into funding difficulties,” he says.
“They don’t want to increase debt and prefer to raise share capital, but they’re too small for the Israeli stock market. So in the end they’re sold.”
The “exit culture” so well known in Israel makes Beinart lose sleep. He’s in charge of reviving the country’s financial markets, which have suffered for five years from a strange disease. The market is fading in terms of both turnover and the number of companies traded.
This is happening despite the deluge of money. Israeli pension funds have a record 1.2 trillion shekels of assets in the market. Some 70 billion shekels in “new” money flows in every year, and investors are keen to invest in new companies, shares in general, and bonds.
But while demand is swelling — bond and stock prices are setting record highs — the needed supply is simply not arriving. Few companies are listing in Tel Aviv; the number of public companies has fallen 27% to 475 in 2014 from 654 in 2007. And another quarter of listed firms are considering delisting.
So why are entrepreneurs fleeing the capital market despite the easy path to raising capital? The most disturbing explanation is found in the Forbes 500 ranking: Unlisted large companies don’t raise money in Israel simply because there are no unlisted large companies.
The Iscar metalworking company, the Taavura haulage and logistics firm, the Colmobil car importer and government companies — that’s it. That’s the entire supply of large Israeli firms not yet listed on the TASE, Beinart says.
“I think the privatization of Israel Military Industries was a horrible mistake, and it would be right for the next government companies to be sold to the public through the stock market — instead of selling them to private owners,” he says.
“But as for the number of large companies in Israel, there’s no horizon. There simply aren’t enough.”
So why is this inventory so small? To Beinart, the answer lies in what he calls the valley of death for midsized firms: companies that are no longer tiny startups and still need a lot of capital to grow.
These firms are afraid to make the big jump to manufacturing, and have trouble finding an answer for their capital needs. So most of them end up being sold quickly — usually to a foreign investor.
The case of dbMotion represents Beinart’s worst nightmare. The company made it into the “connected healthcare” (to quote its slogan) market in the United States and generated annual sales of a few tens of millions of dollars. But because of its low profitability it was sold to an American company — instead of trying to raise money in Israel and continue to expand on its own.
Hit the road, foreign investor
Market players estimate that around $10 billion in promising midsized Israeli technology outfits have been sold over the past decade — all of which could have been raised in Israel. This could have helped boost both gross domestic product and employment.
“This is the horizon — small and midsized technology companies that instead of being sold to a foreign investor are helped grow by the Israeli capital market,” Beinart says.
For this to happen, the stock exchange is taking a revolutionary step: establishing a new trading platform for growth companies, in cooperation with an international organization with which negotiations are underway. This new segment will operate under different rules than elsewhere on the TASE.
Reporting will be in English, based on U.S. rules, with simpler registration requirements and the support of the Economy Ministry’s Chief Scientist’s Office to encourage coverage of the companies by analysts. That in turn would promote trading in the shares.
Israeli regulations are designed to address the risks of corporate governance such as deals between interested parties, executive compensation, and the responsibilities of institutional investors, Beinart notes. This is appropriate for large companies with controlling stakes, but not for small firms where the risks aren’t those of corporate governance — the risks are simply business risks.
“As an investor, I don’t worry that they’ll milk the company with interested-party deals; at most of these companies there isn’t even a controlling interest,” he says. “What interests investors is whether the company breaks out. The risk is different, so the regulatory demands must be different.”
This approach to midsized firms will be accompanied by a call to startups too. The TASE wants to provide these firms with special services, and in doing so launch other special services, such as trading in employees’ options.
Such miniature markets are expected to be the future of such investing — especially in an era of crowdfunding. Many small investors will jump at the opportunities, and the stock market would join in on the trends crystallizing in the world of online investing.
The problem is, this small-scale trading isn’t enough for the enormous demand coming from institutional investors. It’s not clear how much interest these investors will have in the new arena.
Traded funds, which will specialize in investing in startups or other small companies, are one way to bridge the gap between the large institutional investors and the small companies that represent Israel’s future.
Again, the TASE hopes to use analysts’ coverage to help stoke enough trading in its new arena; it also plans a new “Startup Nation” stock index. To do so, the exchange intends to automatically list all shares of Israeli technology outfits traded in New York. The index would thus be broad and interesting enough to attract foreign investors — and Israeli institutional investors to boot.
“There is potential here for 100 to 500 midsized technology companies, which are the true future of Israel. If we manage to bridge their valley of death and get them to raise money in Israel instead of being sold to foreign investors, we can revive the stock market and stoke more economic growth,” Beinart says.
“Instead of institutional investors’ money fleeing overseas because they don’t have anywhere to invest, the Israeli public’s savings can be invested in midsized technology companies in Israel.”