Israel likely to see accelerated capital influx, especially from new regional alliances

To:

Al-Monitor Pro Members

From:

Daniel Frankenstein 

Co-Founder | Partner – Joule Ventures LLC 

Date:

July 7, 2022

Bottom Line:

As the global economy enters a more challenging period, with investors retreating, valuations normalizing, and the cost of capital increasing, Israel will remain a global destination for investment. Recently, due largely to the normalization efforts codified in the Abraham Accords, more regional countries are increasing their investments in the Jewish state. These trends bode well for a more stable, economically intertwined region. 

Background Facts:
  • A vast majority of funding into Israel’s technology ecosystem – the backbone of the country’s economy – comes from abroad. In 2020, foreign firms invested $7.5 billon as compared to the $1.9 billion from domestic Israeli firms. while in 2021, foreign direct investment rose to $18.6 billion with domestic investment rising to $5.8 billion. Foreign investment continues to outstrip domestic activity in Q1 of 2022 ($4 billion as compared to $1.4 billion). 
  • It is widely believed that most investors in many of Israel’s most reputable venture firms are also foreign, making the ecosystem even more global than the data might indicate. 
  • Regional players are expected to invest more in Israel, and we are already seeing the initial signs of investment activity from the Abraham Accord countries as well as other regional players that have not yet normalized relations with Israel. 
  • While tech is a main driver, these regional economic relationships also extend to energy, agriculture, and water
  • These ties are not limited to private funds or country trade relationships. Large global corporates have been and will continue to be highly active in Israel, and not just those from the United States.  
  • Israel’s trading partners are not merely confined to the EU, the United States, and China but also extend to countries where political relationships have been historically challenging. 
  • While much attention is paid to the private equity and venture capital investment data, there is also a compelling story related to Israeli public equities. In fact, many stocks trade at a significant discount to their US peers despite more compelling earnings and GDP growth.  
Alternative Scenarios:

Scenario 1: Global economic concerns disproportionately impact Israel, slowing regional cooperation. With higher interest rates and a general pullback on valuations, technology firms will be hit hardest, which will have significant short-term impact on Israel given its dependence on its tech sector. Fewer investments could slow down the pace of many of the early stage, regional economic relationships that have been budding over the past few years. 

○ Why is this less likely to happen than your primary scenario? The major source of capital from these new regional alliances is proceeds from the energy sector, which is not quite as exposed to economic cycles and where there appears to be a steady supply of capital. As prices come down for technology assets, those investments become more attractive. 

Scenario 2: Global political concerns outweigh economic priorities , lowing regional cooperation. With a war in Ukraine, regional concerns about Iran’s nuclear program, a long civil war in Syria, instability and a Hezbollah-controlled Lebanon – not to mention the continued fighting between Saudi- and Yemeni-backed groups – the Middle East has no shortage of political and military conflicts that could ignite a broader conflict.  

○ Why is this less likely to happen than your primary scenario? The fact that Israel is a major energy supplier to her neighbors, not to mention the significant increase in regional economic investment, makes a conventional war highly unlikely. Security cooperation is only increasing between Israel and her neighbors, as well as with more moderate factions of the Palestinians. It is in no one’s interest to have a broader conflict. 

Conclusion - Most Likely Scenario:

Israel will remain a global and regional destination for capital. With many Israeli public and private equities trading at a discount to their (specifically) American counterparts, there remains great opportunity for investors looking for safer havens during periods of volatility. Israel will of course see the same cyclical trends as the rest of the world, with falling asset prices and challenging public markets. However, the volatility will likely be less in Israel compared to other major economies. Combine this with a strong currency, a well-regarded regulatory environment, and an increasingly diverse set of trading partners and exports, the trend line will be up over the long term for participants in Israel’s economy.  

Contributor Background

Daniel Frankenstein is a co-founder and Partner at Joule Ventures with over a decade of experience in North America and Israel working with both C-suite executives and start-up entrepreneurs developing advanced technologies.

As a corporate expert turned venture investor, Daniel has a deep understanding for the value early stage technology businesses gain by partnering with multi-national enterprises at an early stage, which he leverages on behalf of the fund's portfolio investments.

Prior to Joule, Daniel spent eight years at the Corporate Executive Board (NYSE: CEB) in Washington, D.C. advising Fortune 1000 Chief Financial Officers on industry best practices. In 2009, he led CEB’s market entry into Israel where he worked with some of the country’s leading corporations.

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