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    • The triple discount package in the secondary market for tech companies
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    The triple discount package in the secondary market for tech companies

    Idris Bevan Posted on

    At a time of high P/E ratios for technology stocks on the NASDAQ and S&P 500 and economic uncertainty, especially 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 overvaluations of leading technology companies, the private market offers 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 real growth potential before they enter the public market spotlight. This opportunity takes advantage of a triple discount: that of a private company versus a public one, the discount on shares in secondary transactions of these private companies, and the discount of Israeli companies versus global competitors.

    In the current climate, after a prolonged period of rising interest rates, we are experiencing an investment landscape that is fundamentally different from what we have known before. Interest rates have stabilized and are likely to slowly decline in the coming years. Conversely, a natural fear of heights develops after exceptional returns from equity indices.

    In a world where bonds and money market funds offer stable and not insignificant returns, companies that cannot demonstrate above-average growth receive lower multiples. In fact, growth of 8-10% per year is no longer enough 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, have particularly high growth rates. The accelerated growth in these areas makes them particularly attractive and often pulls the entire index along with it. The technological revolution, especially 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 the one hand, the potential is enormous. On the other hand, the very high sales multiples of these companies indicate that growth is already priced into the stock. In many cases, the best companies are already valued at their full value or even more.

    This is 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 at lower multiples. In Israel, it even suffers from undervaluation compared to the global market over the past year due to the complex reality in Israel. This is a rare opportunity for experienced investors. Many private companies show impressive revenue growth but are still not valued according to their potential or even compared to comparable companies from the US, Asia and Europe.

    This trend is partly due to the decline in foreign investment in Israel and the difficulties venture capital funds face in raising capital, making capital more expensive. As a result, many quality companies avoid raising capital 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 presents a unique opportunity. Not only can growth companies be found at attractive prices, but there are also deep discounts due to uncertainty about the timing of the IPO. Shareholders in need of liquidity may be willing to sell at a significant discount, creating rare opportunities for patient investors.

    Essentially, we have a “triple discount package” in the Israeli market, which combines the general discount of private shares compared to the tradable market (which also applies abroad), the general discount at which shares are acquired in secondary transactions relative to their full price according to the company’s last relevant financing round, and the specific discount of Israeli companies that suffer from greater liquidity problems compared to abroad and the booming overseas markets.

    In summary, while the stock market presents many challenges, the private market offers unique opportunities for real growth at attractive prices. For investors who want to invest for the long term and take some risk – albeit still hedged – this is an excellent time to examine the opportunities offered by 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.

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    Idris Bevan
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