Israel – promised land for IPOs?

I went to Tel Aviv for several days in early November last year together with my Technology Partner, Tim Ryan and Corporate Associate, Vivian Klaf.  I have worked in and around the AIM market for much of my career, Tim advises clients in the digital media and cyber-security space – a particularly strong sector in Israel and Vivian has worked as a corporate lawyer at one of Israel’s leading law firms. In that time, we managed to squeeze in some 20 meetings with a variety of professionals and corporates and somehow, we also managed to find time for some excellent food and a couple of brisk morning jogs along the Tel Aviv beach front!

Why did we go?

The firm has acted for Israeli clients in the corporate and real estate fields for many years.  Our first Israeli AIM experience was in 2005 when we acted for the Nomad and Broker of Telit Communications Plc.  Since then, we have been involved with a number of Israeli floats.  There were a number of Israeli IPOs in London in the early to mid 2000s which came to an abrupt halt with the financial crisis of 2007/8.  Like many tech-focussed IPOs of the time (and not just from Israel), these companies were often characterised by one or more of: illiquidity; thin management/lack of corporate governance; over-reliance on early stage technology; and a fragile balance sheet.  Don’t blame the companies, blame the market! To float on AIM today, whatever the rules say, you have to be larger, more mature and better managed.  Not surprisingly, this first wave of companies had a mixed record and so, when the financial markets  returned to a semblance of health in 2011/12, it was unclear whether investors would look kindly at Israeli applicants, notwithstanding the undoubted and remarkable dynamism of its tech sector.

New York or London?

For many years, there has been a perception in Israel that Israeli companies seeking to IPO, particularly the larger ones, would naturally gravitate to NASDAQ rather than AIM.  Traditionally, this was because promoters could achieve higher valuations in New York than in London, and New York had a larger, Israel-friendly, retail investment community than London.  However, whilst new entrants continue to access NASDAQ, the pendulum seems to have swung back in favour of London and here’s why:

• The convenience of location/travel times/time zones.  London is only two hours behind Tel Aviv, it is a one stop-5 hour plane journey and several airlines now fly the London-Tel Aviv route, bringing added choice and lower prices.  London is the gateway to Europe, it houses several of the world’s top universities and is the single biggest centre of innovation in the TMT sector.
• Sarbanes Oxley enormously increases the compliance time and costs for companies moving to NASDAQ.
• NASDAQ does not “do” gaming or gaming-technology businesses.  There is also a perception that London better understands digital advertising and marketing businesses.
• The AIM market itself has turned against smaller, younger, more fragile IPOs which can be evidenced by some of the more recent entrants (see below).  At the same time however, its principles–based approach and lighter regulatory load remains attractive to smaller, high growth businesses.

Perceptions

There also seems to have been a shift in investor sentiment towards Israeli businesses. Whilst concerns remain about the geo-political situation in the region, there does now seem to be less of a negative knee-jerk response to the periodic flare-ups in the region.  Recent conflicts in Gaza may have brought protesters out on to the streets, but it did not affect UK institutional appetite for Israeli stocks.  Moreover, investors rightly see many of the recent AIM entrants as global rather than specifically Israeli businesses.  Often these companies are incorporated outside Israel, the majority of the Board is non-Israeli and most turnover is from outside the country.  Israel has a small population and internal market and extremely limited trade with its immediate neighbours.  However, with a highly educated population who culturally and linguistically hail from/look to all four corners of the world, it is incredibly outward looking and export driven. Israeli companies and businesses are not just doing business in Europe and North America but also Africa, Asia and Latin America.  Over the last few years, there has been a particularly dramatic increase in Chinese investment in the Israeli tech sector, both with investment in tech-focused Israeli funds and through direct investments.  During our visit, we were also told of the increasing level of R&D co-operation between Israeli and Chinese entities.

The recent wave of Israel IPOs

In the last year or so, there have been some 6 Israeli-linked IPOs on AIM and Main Market. These included, Matomy Media, Marimedia, XL Media and Crossrider.  Those companies raised an aggregate of £254.23 million and have a combined market capitalisation today of some £958.27 million. These businesses, together with the likes of PlayTech and Plus 500, have tended to be significantly larger than the first wave of Israeli IPOs in London, they have more of a track record and more attention has been paid to robust management and corporate governance.  Only time will tell, but these businesses look more likely to stand the test of time and reward their shareholders over the longer term.

The Israeli Landscape

We only visited Tel Aviv and one or two of its satellite towns, including Herzliya.  Whilst there are other areas of Israel boasting flourishing tech businesses with the potential for IPO (there are clusters around the world-renowned Technion in Haifa, for example), there is undoubtedly a very high concentration of such businesses in the greater Tel Aviv area.  Tel Aviv, for those of you who have not visited, is a modern Mediterranean metropolis with a flourishing arts and culinary scene. Think Athens or Barcelona or even, in some of its older neighbourhoods, Nice!  It is easy to get around, taxis are plentiful and not too expensive and compared to some business centres I have been to, the traffic does generally move, albeit in a noisy fashion!  Most of the professional firms and businesses who we visited were within a 20 minute taxi ride of each other.

We were very impressed with the professional firms we met there.  There are a number of sizeable Israeli law firms who have helped bring their clients to IPO in both London and New York. They are staffed by fluent English speakers, many of whom have lived and worked in the UK and the States. Israeli corporate and commercial law, whilst influenced in more recent years by the US, is largely based on the English system.

Ironically, whilst Israel is known for the dynamism of its start-up sector and the energy and “chutzpah” of its entrepreneurs, the Tel Aviv Stock Exchange does not seem to be well regarded by many of these entrepreneurs who find that it imposes a heavy regulatory burden with little flexibility.

We were struck by the sheer number of start-ups in Israel.  One medium-sized law firm who we met claimed to have some 200 start-ups on its books. This individuality and fragmentation is typical of Israeli society.  Undoubtedly, many of these start-ups will fail to find adequate finance to keep going and many may find that they are doing pretty much the same thing as several other companies.  However, the message we heard is that seed capital continues to be available as earlier entrepreneurs exit and recycle exit proceeds.  It would appear that round A and B funding from traditional private equity providers is becoming tougher although as noted above, there is now an increasing amount of Chinese investment.

Conclusion

As a leading law firm servicing the smaller-cap equity capital markets and with our sector focus on technology, we will definitely be focusing our resources on Israel and we both hope and expect that there will be an increasing number of IPOs finding their way to the London markets from Israel.  At the time of writing, we have just been instructed on an IPO for an Israeli broadband and telecoms group.