Tech firms dash for cash before Wall Street party ends

Wall Street is celebrating historic highs, tech stocks are once again leading the way and just before everything might come to an end, companies are rushing to take advantage of the gains. Three Israeli companies, Nayax, Oddity and Pagya, launched over the past two weeks secondary IPOs and it is likely that more companies will join them in the coming weeks.

It is simply too tempting and also too scary not to at least partially cash in after the rapid, and some would say abnormal surge, in view of the explosive geopolitical situation accompanied by prophecies of the resemblance to 1929 and other past painful crashes.

The Nasdaq index, for example, has already produced a return of 8.2% since the beginning of 2024, a return that even in annual terms can be considered pretty decent. In the last 12 months, the technology stock index has jumped by 36%. So has the S&P 500, which has become no less technological in the last few years, and has managed to jump by 7.9% in less than three months and by 29% over the last year.

Although most of the discourse is focused on the magnificent seven that did most of the work to boost the indexes, smaller technology companies, which include most Israelis firms, have also benefitted from the surge.

The sharp climbs of the last few months have pushed the shareholders in the companies to realize some of their holdings, as in the case of Oddity, to inject capital into the company, as in the case of Pagaya, and a little of both, as in the case of Nayax. Not in all cases have the shares returned to record levels, but in all of them there was a sufficient increase to create a good opportunity for realization.

Oddity, best known for its make-up and skincare brand Il Makiage, represents the biggest success story for its investors, although the speed with which they are cashing in on the holdings may raise an eyebrow. The L Catterton fund, which is the investment arm of the Louis Vuitton Corporation (LVMH) that first invested in the company in 2017, has recently sold 4 million shares. This follows the exercise of 4 million shares during the Israeli company's IPO in July 2023. After the latest transaction, its holdings in the company have dropped to less than 30%.

Also in Nayax, which developed technology to automatically manage vending machines, this is not the first time that the founders and controlling owners are exercising their holdings. In the company's first IPO held in Tel Aviv three years ago, at the height of the technology hype, Yair Nechmad, his brother Amir, as well as CTO David Ben-Avi, sold Nayax shares for approximately $60 million. The offering was completed according to a similar value at which Nayax currently trades on Wall Street, after it was registered for trading there at the end of 2022. On the eve of the current sale, Yair Nechmad owned 24.5% of Nayax shares, Amir (who did not sell in the last offering) had 23.5% and Ben-Avi held 20.7% of the shares. In Wall Street terms, this is still a high percentage of ownership by the founders and executives compared to the norm.

In the case of Pagaya, the move is not beneficial to the existing shareholders because of the dilution that accompanies it, but it is intended to increase tradability. Pagaya, which entered Wall Street on the wrong foot after it was merged with a SPAC, has been desperately trying to attract institutional investors. Pagaya became one of the symbols of the problems with SPACs. It was issued at a value of $8.5 billion and the small number of shares floated made it a favorite of the speculators. In the first months of being traded, it went all the way from a value of $2 billion to $20 billion, but now, in order to get rid of the speculative image that stuck to its stock, Pagaya had to give a deep discount to buyers in the latest offering, which also sank the stock immediately after the announcement.

The offering follows a series of additional steps taken by the management of the fintech company that assists in the underwriting process of consumer loans, and among them is a reverse split in the stock at a ratio of 1 to 12 that was completed on March 8.

What appears to be the beginning of a wave of secondary IPOs on Wall Street has broader implications than just signs of a recovery in the broader technology stock sector creating the opportunity for stakeholders to meet with cash. While the IPO market still remains largely closed and predictions are that it won't open until the second half of 2024, the return of secondary IPOs could be a positive signal for private tech companies. In the last two years, it has been very difficult for investment entities to liquidate their holdings in public high-tech companies against the background of the sharp falls in their shares from the record levels of the end of 2021. This lack of liquidity, together with the decline in the value of public investments, has also stopped the flow of capital to investments in the private sector - a trend that may change now.

In the case of the L Catterton fund, it is a realization that will allow it to both provide a return for its investors and make new investments for them. Nayax has already made use of the money with the purchase of a Brazilian company that operates in its field, for $28 million, and Pagaya is also looking to expand by competing for the acquisition of activity in the field of real estate credit in the USA. Although in these examples, the targeted purchases are outside of Israel, the possibility of realizing investments in the public market at prices that will be similar to or even higher than the levels of 2021, will also lead to a recovery in the Israeli ecosystem. This is provided, of course, that the level of security risk in Israel does not rise to higher level.