Brexit could curb Israeli appetite for London share sales, fintech activity

The UK’s shocking decision to exit the European Union wiped out trillions of dollars in global markets and sent the pound spiraling amid uncertainty about what the move would spell for relations within Europe and whether there would be a domino effect on other European countries.

The impact on Israel’s economy and the start-up nation’s high-tech sector is expected to be limited, economists and commentators say, although they note there is still too much uncertainty regarding developments to be able to make any predictions. The prospect of London’s shrinking role on the European stage, however, could put on hold Israeli companies’ plans to set up branches in the UK and could keep them from offering shares in what is, still, the world’s second-most important financial center, after New York.

“As long as uncertainty continues it is clear that any activity vis-a-vis this geographical area will be in question,” Yaniv Pagot, an economist and head of strategy for Ayalon Group, a Ramat Gan, Israel-based institutional investor said in an interview. “The small-cap, mid-cap companies and start-ups that chose an outlet to European markets via an initial public offering in London will be affected. The UK won’t be the financial capital of Europe anymore and the activity of raising money in London will, it appears, lose its relevance in a significant way.”

Israeli companies, including financial technology companies, have set up branches in the UK or issued shares in London as a steppingstone to promoting their activities in Europe. The London Stock Exchange, together with its AIM market for smaller, growth companies, has provided Israeli startups not big enough to issue shares on the Nasdaq an alternative to the US markets.

More Israeli companies went public on the London Stock Exchange in 2014 than firms from any other place outside the UK, according to the exchange’s data. In terms of the number of IPOs on the LSE, Israel was outnumbered only by the United Kingdom, with nine Israeli companies going public on the exchange that year, including Matomy Media Group and Barak Capital. A number of Israeli companies are also listed on LSE’s secondary market, the AIM.

“In the short term, IPOs in London will be on hold,” said Nimrod Rosenblum, head of corporate and M&A at Tel Aviv-based law firm ERM. The firm advises Israeli companies operating in the UK as well as UK companies and financial institutions operating in Israel.

It is too early to know what the effect will be, and it may be too early to “declare a demise of London as a financial center,” Rosenblum said. “But it is quite clear that in the short term, this uncertainty will make people more hesitant to invest in general,” including in Israeli IPOs, Rosenblum said.

Brexit could also affect London’s status as a financial technology hub, New York-based data firm CB Insights said in a report. “As part of the EU, London’s advantages were clear: the status of London as a preeminent global finance hub, the abundance of European talent, and the uniformity of regulations that allowed London-based companies to easily roll out products Europe-wide,” the report said. But with Brexit, “all the comparative advantages are thrown at least partly into question.”

Indeed, according to the Quartz website, the race among European cities, including Berlin, Amsterdam and Stockholm, to replace London as Europe’s capital for startups is already on.

This applies also for Israeli fin-tech companies, said Eden Shochat, co-founder of the Tel Aviv-based Aleph venture capital fund, by email. “Almost every financial pitch I hear says ‘we will start with the UK and then passport to Europe,” Shochat said. The ability of firms regulated by one EU member state to offer their services across the union is called passporting.

Eden Shochat, Aleph venture capital fund (Courtesy)

“The specific arrangement reached in the coming two years still remains to be seen, but if this passporting ability goes away, startups will re-think the UK,” Shochat said. “For the Israeli fintech startup community, this definitely is an issue.”

Berlin is a good candidate to replace London, Shochat said.

Similarly biotechnology firms or other companies that mulled setting up offices in the UK as a bridge to Europe will rethink their options, on concern regulatory and other requirements may change, Ayalon’s Pagot said. “Will you open a branch of your store in London if you don’t know where London will be in two to three years in terms of regulation and ease of access? You’ll think twice, and opt to open somewhere else. Will you buy a machine from the UK if you don’t know what the export rules will be, going forward? You don’t know. You will wait. The UK is moving to a situation of hold.”

Even so, London is still an option for Tel Aviv-based PayKey, a financial technology startup that enables payments within social networks like Facebook Messenger, WhatsApp and Twitter so users can make instantaneous money transfers while chatting with friends and family members. The company recently raised over $4 million in funding and graduated Microsoft Israel’s accelerator program.

“We go to London a lot,” said Daniel Peled, PayKey’s chief executive officer. “All the big banks, which are our customers and target customers, have headquarters at Canary Wharf and that makes it easier to access them.”

The company doesn’t have permanent offices in London, and PayKey workers fly out from Tel Aviv for their meetings at the moment. “After our recent fundraising round we are now considering setting up a foothold abroad,” Peled said. “Europe is convenient because it is close to Israel. London is still Europe’s financial capital and is definitely an option for us, because the changes due to Brexit will take a long time and won’t be immediate.”

The volume of IPOs in London has already declined in the past two years, according to data compiled by Tel Aviv based IVC Research Center, which tracks Israel’s high tech industry. This is in line with a general drop in public offerings of shares globally as startups such as Israel’s Gett, an Israeli rideshare start-up, manage to raise greater amounts of funds from private investors. Gett raised $300 million in May from German auto giant Volkswagen.

Just one Israeli tech company issued shares on the London Stock Exchange in the first half of 2016, compared to none on the Nasdaq in the US, IVC data shows. Two Israeli high tech companies sold new shares on the AIM market in London in 2015, versus six companies on the Nasdaq.

“If companies in Europe and the UK are busy dealing with falling sales, there will be less appetite to invest in share offerings or buy other companies, and this could hurt the fundraising ability of Israeli companies,” Koby Simana, the CEO of IVC Research, said in an interview.

Either way, he said, the impact is not going to be as significant as in the 2008 crisis. “Then, in 2008, everything froze,” Simana said. “The impact was strong and immediate and was felt all around the world. The impact of Brexit will be far smaller, or so it appears anyway. The epicenter of the earthquake is not here in Israel, and it is not related to technology.”

Israel’s Finance Ministry said in a report that the impact of Brexit on Israeli exports is expected to be less than 0.1 percent. However, if economic growth in the UK stalls, then that could lead to a drop in demand for Israeli products.

Israeli exports to the UK, the fourth-largest economy in the world and the second-largest in Europe, totals around $5 billion, with $4 billion of products sold and around $800 million of services, according to Finance Ministry data. Europe as a bloc is Israel’s largest trading partner, and within Europe the UK is Israel’s biggest customer, according to the Israel Export and International Cooperation Institute.

The Bank of Israel’s governor, Karnit Flug, said on Monday that it was still unclear how the new arrangements between the UK and its trading partners would look, or to what extent the UK’s decision would strengthen trends that are negatively impacting the global economy and international trade.

“We can hope that the various arrangements that will be formulated, including between the UK and Israel, will prevent a negative impact to trade beyond what may take place as a result of the weakening of the pound sterling, should that persist,” Flug said. “Britain is a significant trading partner for the Israeli economy, and it is important to maintain the economic ties between our two countries.” The Bank of Israel left its key lending rate unchanged at a record low 0.1 percent on Monday.

There also could be some advantages of Brexit for Israeli companies, Israel’s Finance Ministry said, as these companies could step in with products such as pharmaceuticals, machinery and optical equipment where UK companies step out, the ministry said.

Jon Medved (Courtesy)

“If the Brexit leads to a domino effect then that could be bad as Europe is a key trading partner for Israel,” Jon Medved, CEO of OurCrowd, a Jerusalem-based equity crowdfunding platform, said in an interview. “As of now however, as far as the Israeli tech sector is concerned, the impact is neutral. Right now investment is flowing into Israel at an unprecedented level. I don’t see a huge impact unless this is the beginning of a collapse of London as a financial center, but I don’t think that’s the case.”