In 2014, Adam Mermelstein and Azi Mandel caught wind of a novel way to score cheap financing: they could issue millions of dollars worth of bonds on the Tel Aviv Stock Exchange at far better rates than they would get from stateside lenders.
“It’s made out to seem like a walk in the park,” said Mandel, co-founder of New York-based Treetop Development with Mermelstein. “You open the treasure chest and money comes pouring out.”
The partners decided to go for it, and dropped several million to cover the exhaustive process in 2015. Their holdings were audited and rated, the company was incorporated and approved, and the offer was tendered. But the results were disappointing, so Mandel and Mermelstein walked away empty-handed.
Much has changed since then.
Even three years ago, U.S. developers raising capital in Israel was something of a novelty. Scrappy mavericks and two-man shops willing to shepherd them through a long and hair-raising process while convincing a skeptical Israeli market stood to reap outsized rewards. But as the Americans have become a familiar presence in the market, Israel’s more established financial firms are trying to muscle their business away from the pioneers. And as they do, a high-stakes game of musical chairs among Israel’s financial talent is unfolding.
The four largest underwriting firms in Israel — Discount Capital, Leader Capital Markets, Poalim IBI and Leumi Partners — have taken a more aggressive role in the Israeli bond business in the last year. Most are subsidiaries of or affiliated with Israel’s largest banks, an advantage not lost on their clients and potential clients.
“Today, there is not a single investment bank in Israel, or self-respecting consultant that isn’t out traveling in the United States” scouting for potential candidates, said Yossi Levi, co-founder of Infin, a firm that specializes in bringing foreign companies to the Israeli stock exchange.
“There are busses now from Israel,” said Boaz Gilad, co-founder of Brookland Capital, an early adopter of the financing model.
The firms have all managed bond deals for American companies in recent months with more in the pipeline. Leader reeled in Larry Silverstein’s Silverstein Properties, Poalim IBI and Leumi netted Barry Sternlicht’s Starwood Capital, and Discount is working with an American giant — $20 billion co-everything-company WeWork.
The early players still have a foothold, of course, with deal flow from existing clients and a track record to lure new ones. Earlier this month, Moinian Group raised close to $175 million in bonds at the lowest rate awarded a U.S. company in Israel, guided by Ori Eisenberg of Barzell Global, who brought both Moinian and Gary Barnett’s Extell Development to Tel Aviv in 2015.
“Everyone wants a piece of the cake,” said Ziv Adato, head of investment firm Marom Capital and former analyst at Ayalim Mutual Funds.
Even smallish U.S. companies are whales by Israeli standards. Bringing them to market can represent a hefty meal for the whole food chain, including brokers, consultants, lawyers and underwriters. U.S. companies can raise hundreds of millions of dollars, rather than shekels, and Israeli institutions charge them higher interest rates and higher fees than they do domestic companies, said Adato.
Where Israeli companies rarely pay more than 1 percent of the money raised, Americans pay many multiples of that. Jeff Sutton paid $6 million in underwriting fees (and $10 million in total expenses) for the $240 million he raised in February, according to the shelf prospectus filed on the TASE. Los Angeles-based Hertz Investment Group paid more than $11 million to raise $160 million in November, close to 7 percent of the total. (“The underwriters’ gold mine,” ran the headline in Israeli news outlet Calcalist, which often reports on the deal fees.)
“It’s the holy grail,” an investment bank executive said of the bond deals. “It’s more worth it to land one New York company, than 10 Israeli ones.”
And the Americans are amenable. In 2017 alone, American companies raised $2.5 billion on the Israeli bond market, a 127 percent increase from $1.1 billion in 2016, according to figures from Poalim IBI. Last year, 12.5 percent of all bonds issued in Israel went to American companies. That includes both first-timers like Sutton’s Wharton Properties and Israeli road show veterans like the Lightstone Group, Joel Gluck’s Spencer Equity and Yoel Goldman, whose firm All Year Management raised more than $500 million across five deals in 2017 alone. In all, 29 U.S. companies have raised $6.5 billion in Tel Aviv since 2014, according to Poalim IBI.
For stateside developers, it means more lenders gunning for their business. Some Israeli financial firms work with U.S. firms, like Meridian Capital Partners or Ackman-Ziff, while others have boots on the ground in New York, Miami and other major markets. Others, like Discount Bank, even have offices here.
“I can’t even count how many people have come to me asking about taking us back to the market,” said Treetop’s Mandel.
While the dealmakers are widening their nets, pitching firms outside of real estate and outside New York, there are some prizes that everyone wants. “Everyone’s competing for the big players,” said one Israeli investment bank executive, name-dropping several notable New York developers. Silverstein, the executive said, met with every investment bank before finally choosing Leader.
Rafi Lipa and Gal Amit, who teamed up in 2008 to create Victory Consulting, were among the first companies that focused on getting U.S. firms to issue debt on the Israeli market. By 2017, they had brought 12 U.S. companies through the process, raising several billion shekel, and convincing the likes of Sutton, Lightstone and Brookland to seek bonds.
That book of business gave them heft in Israel’s underwriting sector.
Lipa and Amit did the consulting for their clients, while partner Poalim IBI did the underwriting and distribution. But in August, Victory split to form its own underwriting firm, and poached Poalim IBI’s CEO to run it — a move that revealed just how much Poalim IBI relied on their business.
Within days, Poalim IBI’s shares fell by 40 percent after it became clear that over 60 percent of the company’s revenue in 2017 had come from Victory’s clients, and 48 percent the year before. (By this point, most of the bond issuances were from the same clients who’d already undertaken the costly and tedious work of going public.)
When Poalim IBI’s CEO Erez Goldschmidt left to join Lipa and Amit, he brought his team to start the new venture, called Orion. It left a big void at Poalim IBI, which set off a chain reaction in the nation’s finance sector. Poalim IBI responded by poaching Ofer Greenbaum and Shai Nevo, the top executives from rival firm Leumi Partners, a division of Leumi Bank.
Clients have been shifting alliances too, sometimes as a result of the executive shakeup. Moinian, who worked with Eisenberg and the Leumi team, moved with them to Poalim IBI, while David Marx’s Marx Development Group switched from Victory to Discount.
“You can say that it’s the American business that caused the commotion in Israel’s underwriting sector,” said Adato.
Ronen Geles, a former executive at real estate firm Gazit Globe, was hired by Discount in 2016 to beef up the firm’s international activity. In his estimation, it’s not a zero-sum game, and the sector has room to grow.
“Everyone’s left New York,” he said. “Now, they’re looking all over the States. There’s space enough for everyone.”
But according to some, the search for more business could lead to looser underwriting standards, even as the market gets more sophisticated. Of the first 20 companies to come to the market in Tel Aviv, only two were rated below an A-. Of the 10 new companies that came to market in 2017, six were rated in the triple Bs.
If you ask InFin’s Levi, this is only the beginning. Since the process of taking a company to market takes roughly six to nine months, observers won’t see the full extent of the competition — or of the fallout — until those deals start to close. “When so many mushrooms pop up after the rain, there are bound to be failures,” Levi said.
“Every time someone else did a deal, he would go into mourning,” Victory’s Lipa said of his partner Amit.
So Lipa shared what his mother said: “If you have competitors, it seems you’re doing something right.”