Emergence of Israel and hedge fund

Startup to Innovation nation journey

In late 80s and early 90s, capital market was focused on emerging markets on the back of expected rapid economic growth. In early noughties, opportunities was zeroed in on country specific opportunities within “BRICs”. With unprecedented shifts in technology and enhanced global supply chain process, investors shifted focused on countries that are hotbeds of innovation and IP to capture next wave of economic growth. Israel, in particular, ticks all the boxes for next wave of capital growth as it (mainly Israel origin companies) is producing some path breaking technologies that is underpinning next phase of growth. Israel has reached a new level of stability and dynamism with considerable opportunities for public, private and alternate investors and it is backed by recent upgrades by S&P (rating upgrade to AA- from A+) and Moody’s (outlook change to “positive” from “stable”) and improvement in rating for competitive economy to 20th from 27th in 2018 by World Economic Forum’s Global competitive index.

Necessities lead to innovation

“Necessity is the mother of all innovation” goes perfectly with Israel. Aviation (geographical location), defense related innovations (history of war and hostile surroundings), agricultural technologies (world class drip irrigation due to lack of water) or pioneer in solar technology (reduced ability on imported energy) are all top of the list globally. Israel being an export driven economy (due to lack of home market) has produce advance technologies that reduce cost and increase efficiencies. The growth in GDP is even more remarkable compared to BRICs or comparable economy like Singapore or Taiwan as it is no longer driven by domestic need but for distant economies who are considered the developed economies coupled with declining public debt (compared to GDP) from 2010

Higher investible income….

Due to growth in overall GDP and improvement in business factors, wages have been trended upward which has led to country’s investible savings. Israelis are required to contribute 17.5% of annual income to a retirement saving plan which is currently around $440bn in value. The total market cap of TA-35 index is not more than $150bn which simply can’t absorb the inflows. Israeli institutions have put some $10bn to work in private equity; they are now also investing in other alternatives including hedge funds and real estate

Emergence of Hedge funds

The number of Israel hedge fund is close to 150 in 2018; all time high and substantial increase post 2016 mainly due to government decision to cap salaries of finance professional at 2.5 million shekels. This has led to retirement/exit of high profile executives from the institution and start their own firm and also added new clients. The other key driver is the tax benefits the government has rolled out for the Israel based companies in preferred industrial and tech enterprise which is almost 1/3rd of the normal tax rate and the tax break also applies to the funds that invest into the companies. The above drives has gained traction over last few years which has led to spur in Israel hedge fund sector aided by new class of Israeli millionaires due to emergence of world class tech industry who are keen to invest money in hedge funds.

Market depth finally ?

Emergence of Israel IPO market

After 4 consecutive years of low number IPO (below 20 for all the years), Israel in 2019 is expected to have a bumper year as companies are targeting around 8 IPO in Q1’19; equivalent to total number of IPOs launch in 2018. The surge in IPOs for home companies is mainly due to strong patience and ambitions of Israeli startups and strong financing options due to entrance of foreign investors with deep pockets and willingness to hold the company for longer period. The above hypothesis could be validated by the case of Mobileye, innovator of vision-based advanced driver-assistance systems, which was sold to Intel for c.$15bn in 2017 and the recent case of Nvidia Corp buying Mellanox technologies for $6.9bn wherein earlier entrepreneurs set up and run a company for a while and then sell off. Founders are increasingly in for a long run and hence IPO would be the best route to diversify the holding and maximize the potential of the company.
Do note, not all the Israeli companies coming for listing are targeting the home markets as most of the home companies have earlier targeted Nasdaq as Israeli companies are 2nd highest non-US companies on the exchange behind China

Israel Top 11 index performance vs. MSCI Israel

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