The wave of issuances that was here in 2020-2021 received great criticism here. It was quite clear to us that these were issues with an inflated value, even very inflated. It was quite clear to us that most of these issues are issues of inappropriate companies and also the issues of the appropriate companies are at inappropriate prices.
So we wrote, we visited, we warned, and we hope we helped you make decisions, but 130 companies issued during this period. They succeeded thanks to “friend issues” and thanks to a classic “give and take” between underwriters and investors. They succeeded even though by definition an IPO is the sale of a controlling owner and if a controlling owner sells there is no reason to buy. That doesn’t mean there aren’t good IPOs, but it definitely means that IPOs in general are not the place to be. And you can see it in history as well.
Now the Bank of Israel is also waking up. Good Morning. And explains why the issuances are a fake. “Between the years 2020-2022, a wave of IPOs took place on the stock exchange in Israel, as part of a global phenomenon of revival in IPO activity. In Israel, the scope of IPOs stood out compared to other developed countries. Nevertheless, the performance of the shares issued in the initial market after the IPO is inferior to that of the other shares in the market.”
The bank’s economists also write – “The contribution of the shares of the companies that issued for the first time to the levels of liquidity and tradability in the market is small – which is reflected in their non-inclusion in the stock market indices”.
It was a wave of new issues that had no precedent in the last 20 years: 133 companies issued their shares to the public for the first time. When looking at the IPOs of new companies over time, it can be seen that the IPOs come in “waves”: a period of active IPO activity alternates with a period of low activity to the point of an almost complete absence of IPOs. The issuance activity is coordinated with the market conditions: in the rising market the activity is active, and in the falling market the volume of issuances is low.
The Bank of Israel examined the issuances of previous issuance waves, however, the wave in Israel stands out in its scope compared to other countries in the world. From the issuing companies and the performance of the shares of the companies and of the current wave in different parameters: the proportion of “losing” companies after the issue (in the long term). The question was also examined whether companies issued in waves of issuances are included in the stock market indexes later on; This is because the trading quality (marketability, floating quantity, etc.) of the companies included in the leading indices is significantly higher than that of the other companies.
From the sample examined (2000-2022) it appears that the IPOs on the Tel Aviv Stock Exchange came mainly in two waves: the first wave took place in the years 2004-2007 and was interrupted due to the great financial crisis, and the second wave took place in the years 2020-2022, during the exit from the Corona crisis. The year 2021 was an exception in the perspective of the last twenty years. The second wave was interrupted in 2022, against the background of worsening financial conditions in the world and significant interest rate increases in the world and in Israel. An analysis of the characteristics of the companies shows differences between the two waves: the issuances of the second wave are characterized by a high and unusual rate of loss-making companies compared to the companies issued in the previous years. A possible explanation for the difference lies in the composition of the companies: in the wave of the 2000s, mainly trading and service companies stood out, while in the wave of 2020, high-tech companies stood out, which were the absolute majority (about 75%) of the loss-making companies. High-tech companies without profits are considered relatively high-risk companies. For the most part these are young companies, which have not yet presented profits, therefore the uncertainty regarding the continuation of their activity is higher than that of profitable companies. The second wave was therefore characterized by a higher risk than the first.
Studies that examined the performance of shares after the initial offering showed that the shares were characterized by underperformance, which was reflected in negative excess returns in relation to the market in general and in relation to companies with a similar market value from the same industry in particular. The excess cumulative return (minus the return of the TA 125 Index) from the day of the issue was calculated. It can be seen that the cumulative (median) return becomes more negative over time; it means that the companies continue to show inferior performance in relation to the market. To address the fact that the issues are not evenly distributed Over time, rather than in waves, the holding yield for 36 trading months was calculated for each issue year.
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