Americans Rush in as Israeli Hedge Funds’ Whiz Kids Send Markets Higher

IPO action is booming, and U.S. real estate companies are issuing bonds in Tel Aviv in droves as economic growth remains solid and inflation modest

A dealing room in Israel.
Eyal Toueg

This year has been an extraordinarily brisk one for offerings on the Tel Aviv Stock Exchange, one reason being that high share prices lure companies to try their luck. Another is the increase in the number of players, notably the country’s plucky hedge funds, said participants at an offerings conference held by PricewaterhouseCoopers on Tuesday.

Meanwhile, the Israeli bond market is expected to stay frisky as Israeli hedge funds and so-called nostro players – companies that create an investment portfolio for their own account – dive in.

“The increase in the number of players, which now include more [Israeli] hedge funds, is what’s driving the equity market and IPOs today,” says Rafael Lipa, cofounder of Victory Consulting, which helps companies raise money through bond offerings. Plenty of these offerings are by American real estate outfits.

“Look how many hedge funds have sprung up in Israel with amazing results,” Lipa says. “In our offerings, we go all over the place in Tel Aviv and find kids shorting securities .... These kids are sophisticated and ask the right questions,” he says, adding that executives of American companies find these young ones very impressive.

One player who expects the Tel Aviv offerings trend to keep surging is Ofer Grinbaum, executive director of Leumi Partners. “It’s a matter of dynamics. Issues are becoming more than legitimate,” he says.

“If in the past there was a negative dynamic to raising capital through offerings on the stock exchange, today the trend is reversed. Don’t underestimate this. We lit the fire and the coal is burning, so the more wood we put in, the more it will burn.”

Pricing of these offerings of course is key. “If investors make profits, they’ll have the appetite for more IPOs,” Grinbaum says. In the event, companies are lining up to issue.

Another new development is that the market isn’t snubbing the minnows. A few years ago, investors wouldn’t touch a company worth less than around $100 million, says Grinbaum, but today a company can issue even if it’s worth a quarter of that – it just needs an interesting growth story or a unique market.

“The stock exchange doesn’t need to attract only stable and large companies – it should be a place for companies to grow. Some, of course, won’t make it,” he says.

Nir Moroz, chief investment officer at Menorah Mivtahim, which has 140 billion shekels ($40 billion) under management, notes that the offerings market depends on the overall economy and the direction of world markets.

And he expects Israel to sustain brisk economic growth in the next 12 months.

“As long as inflation remains under control, we see no signs of a downturn,” he says. “These are good conditions for the IPO market.”

Also, Israel has inherent demand at offerings: Massive sums go into institutional investors every month, he points out. “If good companies come, demand will be there.”

Regarding American real estate firms that he helps go public in Israel, Lipa says that “even in my wildest dreams I didn’t think there would be 27 companies today that would raise 17 to 18 billion shekels combined. I think it took many years to educate the long-term savings institutions that these IPOs aren’t just Americans who think they found suckers in the Middle East and are in for the short term. The initial suspiciousness of institutional investors has been replaced with thorough work and analysis.”

Serious American companies view the Israeli market as a legitimate source of funding, Lipa added. Canada is famed for its mining offerings, Nasdaq for tech companies, and Israel has become a bond market.

“Our bonds are traded electronically and people here understand debt,” Lipa says. “It’s a developing area and I’m crossing my fingers that no rotten apples show up.”