It’s been a remarkable quarter for the Tel Aviv Stock Exchange: Some 30 companies have had initial public offerings, raising a combined 3 billion shekels ($910 million).
Even with a week to go before the end of the first quarter, the number of IPOs this quarter already exceeds 2020’s annual total. It is less than the 4.5 billion raised for all of last year, but there are more IPOs on the way. Sources say the Israel Securities Authority is examining large numbers of draft prospectuses based on companies’ third-quarter earnings.
“The last two months have been an IPO party like we haven’t seen in decades,” said one underwriter, who asked not to be named.”But like in previous waves, this time, too, some of the companies are going public at inflated values. Now, the time has come for a price correction.”
The TASE has come a long way in the past year. When the coronavirus pandemic first emerged in March 2020, the assumption was that stock markets in Israel and the world would suffer just as the real economy would. Companies would struggle to raise equity and debt.
But, starting last June, companies began turning to the TASE to raise equity capital and that trend hasn’t let up since. Underwriters, led by Hapoalim IBI, Leader Issues, Discount Capital, Leumi Partners, Orion and others, are collecting tens of millions of shekels in fees and commissions.
In contrast to previous IPOs waves, which were mainly of companies in older industries such as real estate and finance, the current one has been mainly about high-tech companies. Many of them are going public without being profitable and sometimes with out any revenues either.
This has been a familiar phenomenon on Wall Street at least since the dot.com bubble, but for the TASE it is something wholly new. The individual most responsible for that happening is Ittai Ben-Zeev, the stock exchange’s CEO for the past four years who worked hard to promote changes that enabled it to happen. The phenomenon has also been aided by the spectacular rally in technology shares in the United States and Europe.
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But many of these tech IPOs are risky, especially as the analysts who were for Israeli institutional investors are not entirely sure how to value them. Last year, two thirds of the 27 IPOs were for tech companies, including GenCell (hydrogen fuel cells), Aquarius Engines (high-tech engines and generators), Human Xtensions (surgical devices) and Ecoppia (solar-power equipment). In the year’s first quarter, they were joined by PlantArcBio (novel gene development), NextFerm (food-tech), NRGene (genomics), Razor Labs (artificial intelligence) and others.
“One of the phenomena we have to deal with is that companies that succeed in raising tens or even hundreds of millions of shekels have low trading volumes of tens or hundreds of thousands of shekels a day, which impinges on their share price performance. Every move they made up or down drastically affects it,” said one underwriter, speaking on condition of anonymity.
Apart from tech companies, another phenomenon in the current IPO boom has been research and development partnerships. Some of them have gone public without any operations at all. Nevertheless they succeeded in leveraging favorable market conditions and the reputations of their partners to raise tens of millions of shekel for future investment mainly in tech companies, making them in effect publicly traded venture-capital funds.
These R&D partnerships include Millennium Foodtech, Smart Agro Fund and Big-Tech 50 represent an even riskier investment that requires careful scrutiny, which even institutional investors are not always capable of making.
Another important segment in the IPO wave is alternative energy, an industry that has enjoyed strong demand from all over the world. In that category, the TASE trades the companies Doral, Meshek Energy and Nofer Energy, all of which went public last year, and Phinergy, HomeBioGas, Solar Renewable Energy and Airtouch.
The non-tech companies that have listewd on the TASE are led by companies in non-bank credit, financial technology and digital insurance, among them Mimun Yashir (Direct Finance), Menif Financial Services and MLRN, which all went public in 2020. This year, Blender Financial Technologies Michman Business Credit joined them.
Old-line businesses have not disappeared either in the current wave. This year’s biggest offering was a 360-million-shekel fundraiser by construction company Denya Cebus at a 1.8-billion-shekel company valuation. Other big IPOs were for 300 million shekels by food importer Diplomat, Delta Label’s 263 million fundraiser and 100 million by online grocer Quik Super.
Another difference between the current IPO wave and previous ones is the way new offerings are done. Most of the offerings being done now use the U.S. and European system, in which the lead underwriters build an order book from among their institutional investor clients before the IPO begins. That gives them an idea of demand and what price the stock can fetch. But it leaves the rest of the investing public with little stock left over to buy.
The huge increase in the number of IPOs and the underwriting system have aroused concern among regulators. The Israel Securities Authority of the treasury’s Capital Market, Insurance and Savings Authority have begun getting more involved, for instance demanding from underwriters and institutions communications and other data about their activities in the run-up to IPOs.
At least half of the companies that have gone public in the first quarter have seen their shares fall in trading, a phenomenon that could deter institutions from subscribing to future offerings and cause them to value companies less than they did just a few months ago, said market sources.
One company that has been a disappointment on that account is Quik Super, whose shares were 16% down from their IPO price earlier this month as of Sunday. On the other hand, others such as Diplomat have already provided investors strong returns.
In one case, differences of opinion between underwriters and insider shareholders over the company’s valuation led to an IPO being pulled. The shareholders of Dalia Energy, which operates a power plant at Tzafit at the Judean Hills, believed the company was worth 5.7 billion shekels, based on a consultant’s report. But underwriters, led by Leumi partners, Hapoalim IBI and DIscount Capital, couldn’t sell the stock at a valuation of more than 3.5 billion. The IPO was canceled.
The next test for market appetite will come with SatixFy, a satellite-communications company founded by former executives of Gilat. The company is trying to go public at a 1.4 billion shekel valuation before the money.