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(Re)inventing Israel's Capital Markets: Financing the Transition from Startup Nation to Global Nation

Mar 18, 2014



In 2010, Israel graduated to developed country status in world stock indexes, a move that should have opened its markets to a large pool of global investors. Instead, there has been a real decrease in foreign portfolio investment and an increase in local portfolio outflows. Israel's capital markets have suffered a decline in liquidity that threatens economic security and growth. From 2008 to 2012, the average daily trading volume on the Tel-Aviv Stock Exchange (TASE) has dropped more than 50 percent, from NIS 2 billion to around NIS 800 million. TASE liquidity ranks a low 30th among exchange turnover ratios in international securities exchanges.

The Israeli IPO market has collapsed, mostly due to high regulatory costs in the NASDAQ and TASE, leading to 95 percent of start-ups being sold to foreign entities. These conditions, a result the failure to attract and retain portfolio investors from outside Israel and overconcentration on early-stage financing, put at risk the future of local capital investment and overall economic growth.

The lack of late-stage financing, along with human capital constraints, is leading startups to premature exits through mergers and acquisitions. Knowledge-based firms and their exports, the heart of Israel's competitive advantage, require a longer financial runway for takeoff in transitioning into global companies.

"(Re)inventing Israel's Capital Markets" comprises the discussions in a Financial Innovations Lab(R) - a gathering of senior leaders in Israel's public and private sectors along with representatives of financial institutions and regulators - convened by the Milken Institute in Los Angeles in May 2013. Participants explored ways to improve access to capital with an eye toward securing Israel's future as an innovation hub and came up with concrete solutions that Israel can enact now to reverse its liquidity crisis.

Among their recommendations:
• Increase transparency and accessibility to foreign investors, in part by creating new financial products, such as exchange traded funds and global benchmarks.
• Remove regulatory, institutional, legal, tax, and market infrastructure requirements that impede the establishment of a financial services landscape supportive of new technologies, and modernize regulations for IPOs to lower transaction costs of public offerings.
• Expand private equity through public markets with venture trusts and business development corporations for under-financed firms; and, especially, create late-stage technology venture funds.
• Build a "technology bridge" to institutional investors for pre-IPO companies by bringing them into an institutional investor asset class, such as a non-exchange-traded, private-shares market.

See the report for details and additional recommendations.