Foreign investors bet big in TASE IPO, leaving Israelis scratching their heads

Tel Aviv Stock Exchange

Read the Wikipedia page for the TASE and you would be tough pressed to find any reason not to invest in the institution.

In 1993 the TASE had the third largest number of IPOs of all world stock exchanges. In 2005, foreign investment in TASE broke records at NIS 2 billion. Numerous foreign investment banks subsequently joined the exchange themselves, including HSBC and UBS.

By 2007, trading had grown to $500 million a day (50% higher than the prior year), with the TA-25 rising by 175%.

What isn’t mentioned in the Wikipedia article is that by 2018 daily trading volume was down to $313 million, and by 2019 to just $300 million. In fact, only a few sentences in the entry admit that anything might be wrong at the exchange:

“CEO Ester Levanon resigned on 18 July 2013, effective 31 December 2013. A week later, on 25 July 2013, Chairman Saul Bronfeld resigned. According to Bloomberg, the executives’ decisions follow a drop in trading volume and the bourse's failed bid to join MSCI Inc.’s Europe Index. Bronfeld, who served as chairman since 2006, cited the “hostile control” by the Israel Securities Authority and the regulator's interference in the executive management of the bourse as the main reasons for his resignation.”

So what happened to the TASE?

How did the record-breaking exchange fall so far?

A large component, suggests CEO Itai Ben-Zeev in an interview with Reuters, is the $300 billion in Israeli bank accounts that is totally uninvested.

"The main barrier (to retail investing) is that we don't have a proper distribution channel in place," Ben-Zeev said. "When you look at the United States, the UK, Canada and Australia, they have discounted brokers... We don't have discounted brokers, so we are putting a lot of emphasis on increasing liquidity inequities."

Essentially, during the 1990s and even early 2000s the TASE was competitive globally, but while the other exchanges experienced innovative changes to how retail investors trade, Israel has remained a relative dinosaur.

Capitalism, ironically, has humbled the exchange from its former glory days.

Has anything really changed?

In short, although the exchange is trying to improve things, the current situation is far from ideal. The TASE has lost 40% of its investors since 2010, with declining trading volumes and multiple large delistings. Compounding the problem, many Israeli companies have opted to go with foreign exchanges for their IPOs, with low trading volume making the TASE less of an attractive offering. One can easily see how a vicious cycle of delistings and disinterested consumers has proliferated in such an atmosphere.

Itai Ben-Zeev is reportedly in talks with several companies to expand retail investing in the exchange, but as of yet nothing has been announced. Anyone who has dealt with a legacy company attempting to change is very familiar with this situation. Even a small change in a dysfunctional corporate structure can take an enormous effort of leadership.

Can Itai Ben-Zeev be that leader?

For now, it is unclear, and we have mostly vague promises and shifting blame.

"Instead of being sold for $1 billion, you can do an IPO here and the Israeli market could benefit," said Ben-Zeev to Reuters in reference to Israeli firms present tendency to do their IPOs in foreign exchanges. According to him, some $112 billion has been bled from the Israeli economy thanks to foreign IPOs and subsequent acquisitions.

Why are investors so eager to join the TASE IPO?

One important fact to remember is that most of the demand is from institutional investors. Hardly uneducated or politically motivated, these investors see the TASE IPO as a safe, solid way to generate a return.

To be fair, despite the misgivings outlined in this article, they aren’t really off base. Investing into a struggling company is perhaps the best time, as the upside can be quite large. In the case of the TASE, it remains a stock exchange in what is a major technological and economic powerhouse (Israel). With the well vetted leadership of Itai Ben-Zeev at the helm, in both the short and the long term, the TASE may be looking at a major turnaround.

Based on the exchange’s spectacular historical performance, such a turnaround could see it to enormous growth. With institutional investors buying shares for the long haul, one might say that it is only a matter of time.