May 3, 2013, 4:42 PM ETConference Presentation, Panel

Financing Ideas: Reinventing Israel's Capital Markets

Israel achieved a nearly 40% increase in real economy investments between 2010 and the time of the report, recovering from a 6% drop in 2009 and a 34% drop relative to 2008.
Despite a global economic crisis and regional security tensions, Israel generated more jobs per capita than other developed Western nations between 2010 and 2013.
Minister Yuval Steinitz highlighted that the primary driver of this resilience was a dramatic surge in direct investment in fixed assets rather than just consumption.
A strategic diplomatic initiative to China in 2010, leveraging the country's intellectual capital ("C" in Einstein's E=mc²), resulted in Chinese investment in Israel rising from near zero to approximately $7–8 billion (20–25 billion shekels) over two and a half years.
The government identified three pillars for sustaining this growth: avoiding over-regulation, countering anti-profit populism, and maintaining stable incentives under the Law for Encouraging New Investments.

While Israel leads the OECD in R&D investment as a percentage of GDP and ranks 6th globally in investor protection, it suffers from low market liquidity and a high rate of IP expatriation via M&A.
Market microstructure issues include a lack of an Over-the-Counter (OTC) market for corporate bonds, creating a monopsony/monopoly structure dominated by a single clearinghouse.
Liquidity in Israeli equities dropped by 50% in recent years, and IPOs effectively ceased in 2011 and 2012, partly due to a "buy and forget" strategy by large institutional investors.
The concentration of pension funds has reduced to just eight major players, creating a risk where free float exists but actual tradable liquidity is absent.
Current regulatory frameworks face criticism for a lack of coherence, with four different regulatory bodies (Finance Ministry, Bank of Israel, Securities Authority, and Tel Aviv Stock Exchange) creating potential friction for investors.

Israel's demographics, with 51% of the population under age 30, project a doubling of pension and insurance savings within the next decade, creating a massive pool of domestic capital.
The Concentration Committee recommended flattening corporate pyramid structures to separate ownership from control, which is expected to unlock significant investment opportunities.
Basel III regulations have necessitated deleveraging, forcing large financial entities to sell assets or restructure, potentially opening the market for new entrants.
The government is actively promoting a "Financial Innovation Hub" in Tel Aviv, combining high-tech capabilities with financial services to attract global institutions.
A new public committee is drafting recommendations to encourage R&D companies to remain in Israel for secondary funding rather than seeking exit funding abroad, including potential tax incentives and crowdfunding frameworks.

The Israel Securities Authority (ISA) has published a three-year roadmap to ensure regulatory certainty, focusing on reducing regulatory burdens and developing market infrastructure.
Regulators are collaborating with market participants to lower compliance costs, acknowledging the difficulty in quantitatively estimating the economic benefits of new regulations compared to the ease of estimating costs.
A new definition for "accredited investors" has been introduced for individuals based on income levels or market activity, though it remains narrower than the U.S. Regulation D definition.
Discussions on equity-based crowdfunding are underway, aiming to create a dedicated infrastructure for R&D companies to access local capital markets.
Minister Steinitz emphasized that while Israel has high regulatory standards, the focus must shift to ensuring these rules are coherent and do not stifle the "startup ecosystem" through excessive or contradictory mandates.

David Gershon of Super Derivatives noted that early years required significant investment in training local talent to understand complex derivatives, a barrier that has since lowered as international talent migrated to Israel.
Financial industry leaders argue that a lack of a domestic B2B market forces startups to sell abroad immediately, increasing the pressure to exit early; they suggest tax breaks for local corporations purchasing Israeli tech as a solution.
The panel identified a disconnect where large pension funds invest heavily in foreign markets (approx. 20% of assets) rather than leveraging domestic growth opportunities due to the lack of large, liquid local deals.
Suggestions were made to model future policies on South Korea's approach of providing subsidies and tax breaks to domestic companies to foster a strong local market before expansion.
The consensus among panelists is that Israel must transition from a pure "startup economy" reliant on foreign exits to a "mature capital markets economy" capable of sustaining long-term growth through local financing.