Yossi Beinart, the new CEO of the Tel Aviv Stock Exchange, has his work cut out for him.
Two years ago, Israel’s stock market fell into a slump. Through all of 2012 and halfway through 2013, not a single company had decided to go public here, usually opting for buyouts (exits) from foreign companies instead. In 2013, Mellanox, the sixth-largest company on the exchange, decided to delist, keeping it shares exclusively on the NASDAQ.
The exchange’s regulator, Israel Securities Authority chairman Shmuel Hauser, laid the blame on the exchange’s leadership, and forced resignations from CEO Ester Levanon and chairman Sam Bronfeld in July 2013.
It took several months to find a replacement for Levanon, but the exchange settled on Beinart, an Israeli who had made his name on the US investment scene – most recently as the head of the Chicago-based NADEX exchange.
On the job since January, Beinart has laid out a goal of getting 100 companies to go public here in the next five years. The new CEO invited The Jerusalem Post for an exclusive interview in his Tel Aviv office, where he explained his take on his predecessor’s legacy, his thoughts on inequality and his suggestions on what regulations need to be fixed to help Israeli companies grow.
What is your vision for the Tel Aviv Stock Exchange?
The vision in some way has to include an analysis of what it takes to grow a regional, or in our case, country exchange. If you look at exchanges worldwide, a lot of the small ones are struggling.
It raises fundamental questions in a day and age where money and investments can go from anywhere to anywhere in a heartbeat: Should there just be three major exchanges? One in Europe, one in the US, one in Asia, maybe? The vision has to do with understanding the role of a small exchange in a country of 8 million to 10 million people. I think the answer lies in specialization of size and sector.
If you look at the life cycle of a company, from inception of an idea, then you get some money from your grandmother and a bit from your uncle and some of your own money, then you go to a venture capitalist three or four times, and now you’re worth, let’s say, anywhere between $100 million to $200m., and you need capital to expand – what do you do? What happens in Israel is one of two things. Either companies get sold early, because they can’t do anything at that point, or they find a market, and the market they find is potentially the [London Stock Exchange’s] AIM and... question mark. And this is where we come in.
It’s very possible [companies are] being sold too early because they can’t do the natural thing of growing up themselves, and this is who I’m trying to cater to.
How do you cater to size and specialization? What benefit do companies get by listing in a specialized market?
If you’re big enough to go to NASDAQ and your ecosystem is in NASDAQ because of your size, you should go there, there’s nothing wrong with that. But there’s a certain size that’s potentially too small.
But if you’re at $1 billion and you decide to list at NASDAQ, you’re still a very small fish in a very big pond. If you’re the same size or even half the size and you come here, you’ll be a large fish in a small pond, which puts you on indexes, which means people will create exchange-traded funds on you, which means you’ll get more liquidity.
Israel is known for biotech and technology, so we should concentrate on helping companies in this sphere list here.
We need to create a listing product that will cater to the specific size and sector, but wrap it around other services. When it comes to biotech or tech, when you list for the first time, you can get sponsored analysis for the company, and maybe other services we can provide you with.
At the end of the day, all [companies] care about is the valuation that they get. If you provide analysis in the R&D sector, in biotech and technology, eventually there will be a cadre of analysts that are in Israel who know the companies, and if analysts know the companies, the institutions will know the sector, and if the institutions know the sector they will potentially give you a better valuation. So the ecosystem builds around biotech and technology.
As the hi-tech nation, those companies are not represented on the exchange, and that’s very odd. I think they’re maybe getting sold too early. It’s possible that the entrepreneurs just aren’t culturally inclined, or they run out of funding options and sell the company because they don’t have a choice. If we can provide a choice, maybe they’ll take the other option.
What were the biggest problems you saw at TASE when you came on?
I think on the functional side, I found the exchange is really good. There are no failures; everything works.
If you look, on average exchanges have four to five failures a year. We haven’t had one since 2008.
Because of historical reasons, the exchange has never gone out and looked for business. I think it grew from the fact that it was the only exchange in the country, and markets were less global, so if you wanted to raise capital you just came to your local exchange.
If you counter that with the fact that CEO of NASDAQ comes here to visit companies, that explains everything.
That’s exactly what we should do. We should make sure we know any company in any stage above a certain size, that they know us and that we are part of their thought process. You have to be out there and say, “I will do everything I can to help you list, and list here.”
What is your pitch to companies that are thinking of exiting, as opposed to an IPO? It depends what you want to be when you grow up as a CEO. There is a huge sense of personal fulfillment if, instead of selling your company for $100m., you become the CEO of NICE systems.
What does it mean to exit “too early?” There’s no formula, but if you sold an idea or technology instead of building a company with 5,000 employees if there was an option. There isn’t always an option, sometimes the right thing is to merge. But make sure that the reason you’re selling isn’t because you couldn’t raise capital, that you did the right thing because it was good for the company and the business, not because you didn’t have an alternative.
What is the measure of success for you? IPOs, volume, stability; a hundred more IPOs in five years, and trading volume should at least double. And stability should be... I can’t say better because it’s 100 percent.
One thing we didn’t talk about is that after 2008, when the government realized that financial markets can bring down countries, a set of new regulations came about in the US and Europe. It represents a bit of a challenge, because you have to comply, but it’s also an opportunity you should take advantage of.
Specifically, I’m referring to the fact that those regulations want to move as much trading as possible to be centrally cleared and centrally traded. Things that have traditionally been done bilaterally between bank A and bank B should be done on a clearing facility and trading facility.
There’s a lot of opportunity there. We should make sure that when things move from off-exchange to on-exchange, we’re not left behind. We should be prepared, otherwise foreign clearing houses will come and take the business.
What kind of regulatory changes do you think need to be made to move the TASE ahead? The most important one right now is to allow me to trade the equivalent of “unlisted trading privileges” in the US, which allows exchanges to trade anything listed on any other exchange.
Look at Dupont in the US, which went public in New York 100 years ago. Today, if you look at their trading patterns, less than half of trading is done there. The rest is done on alternative trading systems, dark pools, etc.
This is very significant because, in effect, what it says is that outside of Israel, the listing, trading and clearing are unrelated, they don’t have to happen in the same place. It’s not a function of one company or exchange.
In Israel, the law says that if I want to trade anything, it is considered an offering to the public to buy securities.
I want to create a structure where you can trade something that is not an offering. They’re not raising any capital, they’re just trading existing shares. At that point, I will be able to trade anything I want, like Checkpoint and Mellanox and all those companies, without them being required to ask to be listed, which is a regulatory burden.
Basically we want to follow the world model, where trading and listing have nothing to do with each other.
There are three pillars to this idea: listing, trading and infrastructure. It’s not unique, but that’s what it is.
The last thing I want to change is a prohibition on Israeli banks from 1983 that says they cannot make markets in equities. This is a result of banks in 1983 manipulating their own stocks. I feel this ban should be removed. To my knowledge, there is no country in the world in which this exists. Even the Volcker Rule in the States exempted banks.
It’s needed. When banks make markets, it adds a lot of liquidity.
The effort to get the TASE listed on the MSCI Europe Index failed.
What’s the latest news on that?
That’s a tough one; it’s a reasonably high priority.
There are two possibilities. Either go back to MSCI and say, “Your process is not as transparent as you say it is, because you said you go to your constituents and they decide, but when we asked who the constituents are you refused to tell us. Tell us and I will go sell them.”
If the investors are the ones making the decisions, I can convince them. The second possibility, and I don’t know if it’s viable, is to look at what’s done in Korea. It’s in the Organization for Economic Cooperation and Development, but in the developing market index, which would solve the problem in the other way.
Either one of them would be fine, but we’ll continue to push. We think what happened was unfortunate and unwarranted.
Your predecessor left in somewhat acrimonious circumstances, but she had previously received praise for upgrading the exchange. What do you think of the job she did overall?
In 1997 this was an open outcry trading exchange, and now it is fully electronic. To move from the traditional old line exchange to fully electronic is not easy.
NYSE hasn’t even finished yet. She computerized the exchange, and that’s a humongous achievement.
It’s also, as I mentioned, incredibly stable – and that’s also an enormous achievement. So what I inherited was a place that functions really well, and she should get credit for that.
When former chairman Bronfeld quit, he complained that the exchange was being blamed for problems which really come from regulation. Do you think that was a fair assessment? I have no idea. Listings went down and so did trading.
The regulatory environment is tough, but you never know. I think the exchange has to be very proactive – it should have a strong sales function, a marketing function, a business function. Whether it was in the past, I don’t know.
What do you think of Thomas Pikkety’s work, which is making a big splash in the economics world and suggests that the increased inequality we’re seeing is a return to the natural state of capitalism. Does it change anything in your thinking of the role capital markets and stock exchanges should play?
I think there is probably merit to the idea that when capital markets grow faster than economies, it’s a sign of inequality. It makes sense. In Israel, the cost of living is too high. Let me tell you, as someone who came back from the States, I don’t get it. It’s really too high.
We have to worry about levels of inequality, because it’s not good for society. The real difficulty is how, and I really don’t have good answers. Attempts to make salaries public caused exactly the opposite effect. I do believe you should tie compensation to performance, but you should make sure it’s done on the long term, not the short term, otherwise incentives are reversed.
The public participates in the capital markets through pensions. Do you think there are other ways the public should invest in the capital markets? For example, give everyone a share of the TA-25 when they’re born, or require them to pay into a fund that invests in the market?
I fundamentally believe in a safety net, there’s no doubt. We could explore something as radical as when you privatize state companies, maybe you give shares to every citizen. Has that ever been tried? But I think that fundamentally, the biggest participation among the public in financial markets is through the pension system, and that’s a good thing.
The other thing I would consider is: When I was growing up, I didn’t know what a share was. I think financial education should start really early. I think people would take responsibility for their lives if they knew what to do. A lot of people don’t have the tools to make those decisions.
How do you feel about lowering capital gains taxes? I think going from 26 to 25 doesn’t make any difference. I think doing long term versus short term might. Maybe moving to an American system of short-term capital gains is better.
Are you concerned that the low interest rate environment is creating a bubble?
I’m the wrong person to ask. I understand trading, but I’m not an economist.
Someone asked me how I would feel if during my tenure here, the stock index goes down, and I said, “If it goes up, it’s not because of me; if it goes down, it’s not because of me.”