The Triple Discount Package in the Secondary Market for Tech Companies

In an era of high P/E ratios for technology stocks on NASDAQ and the S&P 500, combined with economic uncertainty particularly in the Israeli high-tech sector but also globally, the private market offers unique opportunities for sophisticated investors. While the public market is characterized by high multiples and overvaluation of leading technology companies, the private market presents a different picture: companies with impressive growth that can be invested in at attractive prices.

For patient investors with a long-term perspective, this is a rare opportunity to identify and invest in companies with genuine growth potential before they enter the spotlight of the public market. This opportunity leverages a triple discount: that of a private company versus a public one, discounted shares in secondary transactions in these private companies, and the discount of Israeli companies compared to global counterparts.

Avner Stepak

In the current climate, following a prolonged period of interest rate hikes, we're witnessing an investment landscape fundamentally different from what we've known before. Interest rates have stabilized and are expected to decrease slowly in the coming years. Conversely, after exceptional returns in stock indices, a natural fear of heights is developing.

In a world where bonds and money market funds offer stable and not insignificant returns, companies unable to demonstrate superior growth receive lower multiples. In fact, growth of 8-10% per year is no longer sufficient to attract investors from safer asset classes.

On the other hand, we see a clear distribution in the market. Technology companies, especially in cybersecurity and AI, are showing particularly high growth rates. The accelerated growth in these areas makes them especially attractive, often pulling the entire index along with them. The technological revolution, particularly the development of AI, is creating unprecedented growth opportunities in industries such as semiconductors, AI engines, and data storage.

However, the question arises - is it advisable to invest in these companies? The answer is complex. On one hand, the potential is enormous. On the other hand, the very high revenue multiples of these companies suggest that growth is already priced into the stock. In many cases, the best companies are already valued at full value or even more.

This is precisely where the secondary market - the private stock market in general, and technology stocks in particular - comes into play. Unlike the stock market, the private market exhibits a unique phenomenon: higher growth rates alongside lower multiples. In Israel, it even suffers from undervaluation relative to the global market due to the complex reality in Israel over the past year. This is a rare opportunity for sophisticated investors. Many private companies show impressive revenue growth but are still not priced according to their potential or even in relation to comparable companies from the US, Asia, and Europe.

This trend is partly due to the decline in foreign investments in Israel and the difficulty of venture capital funds in raising money, making capital more expensive. As a result, many quality companies avoid fundraising and prefer to wait for an IPO. They try to stay private as long as possible, continue to develop their growth engines, and wait for optimal market conditions to go public.

For investors, the current situation creates a unique opportunity. Not only can growing companies be found at attractive prices, but there are also deep discounts due to uncertainty about the timing of the IPO. Shareholders who need liquidity may be willing to sell at a significant discount, creating rare opportunities for patient investors.

We essentially have a "triple discount package" in the Israeli market, combining the general discount of private shares compared to the tradable market (which is also true abroad) with the general discount at which shares are acquired in secondary transactions relative to their full pricing according to the last relevant funding round of that company, and with the specific discount of Israeli companies suffering from greater liquidity distress compared to abroad and the booming markets overseas.

In conclusion, while the stock market presents many challenges, the private market provides unique opportunities for real growth at attractive prices. For investors willing to invest for the long term and accept a certain level of risk - albeit still hedged, this is an excellent time to examine the opportunities inherent in growing private companies.

Avner Stepak is one of the owners of Meitav Investment House. Meitav is a partner in the management company of the Valoo secondary fund for technology stocks.