Israeli investors have cut a well-trodden path to CEE and their enthusiasm for the region has only grown stronger as it has emerged as a hotbed for technological talent. In 2021, Israel confirmed it was a consistently important source of investment in the region, ranking the 17th largest foreign investor by number of deals, with eleven transactions, following on from 22 over the previous two years. For a country of Israel’s size, this is very significant activity.
According to Louis Glass, who manages the CMS Tel Aviv office and heads the firm’s TMT sector M&A group, the headline deal numbers do not reflect the broader level of investment activity generated from Israel. He says: “The fact that Israelis are doing business in the region is nothing new but, as these markets become more developed and open up, they become more interesting to Israeli investors.”
In the past, real estate, construction and manufacturing were the sectors that attracted most interest, but today there is a strong focus on technology, renewable energy and fintech which provide areas of mutual interest for Israeli investors and entrepreneurs and their counterparts in CEE.
Glass calls these sectors a ‘sweet spot’ for Israeli investors and says: “There is so much talent in software architecture and engineering in CEE but world-class entrepreneurial talent is rarer. Israel has vast technology talent too, but it is increasingly expensive, so what Israel can offer is the entrepreneurial skill that transforms CEE engineering capability into something compelling.”
In some cases, the aspiration to secure software talent has created a hybrid form of M&A known as “acqui-hiring”. Common in the US and to some extent elsewhere in Europe, on such deals the buyer’s motive is as much to recruit talent and expertise as gaining control of its products or services.
Although deals in CEE involving Israeli investors in 2021 were typically smaller transactions, they highlight the hot sectors that are attracting interest from Israel, such as the purchase of Croatian online ticket company GetByBus by Israel’s Bookaway Group and the purchase of a solar farm project in Romania by Nofar Energy of Israel.
In terms of economic maturity, CEE countries span a wide spectrum but, says Glass, Israeli investors are just as happy in those classed as emerging markets as those categorised as developed. One of the reasons, he explains, is that Israel itself is a hybrid, with some elements of a mature economy sitting alongside those of a less developed, emerging economy.
Glass says: “Israelis have a different attitude to risk which is why they have the finest entrepreneurial talent in the world. In many ways it is a very advanced economy but, in others, such as growth rates and technology, it has all the attributes of an emerging market. Because they are used to emerging market norms, they’re comfortable investing in other emerging markets whether in South America, Africa or CEE. It does not pose any problems or any fear for them.”
And if the global perception of some emerging European countries is that they bring a higher level of risk and that in turn deters international investors, that is helpful as far as Israelis are concerned, argues Glass.
Another reason that Israelis look outside their own borders is that, with a population of just over nine million people, Israel does not offer investors or businesses the opportunity to serve a mass market at home. Glass says: “There’s no way to build a large software business serving just the Israeli market, so they have to look abroad. That’s so different from, say, the UK where a company would develop their own domestic market and then look overseas. Israelis don’t think twice about jumping on a plane to do business. It’s not unusual to have an Israeli company that does all its business outside Israel. The US is the number one market and has a pretty similar business culture.”
CEE has the advantage of being just a short flight away, though the region does bring its own challenges with different languages, business cultures and legal systems. The distinction between EU and non-EU membership is not a major issue, according to Glass, though the consistency of rules that EU membership offers and the resulting benefits of financial passporting and data regulation, for example, mean that EU membership is rarely going to be a disadvantage.
CMS has worked with Israeli clients across its international offices, on matters including technology-driven M&A, energy, hotels, capital markets, financial services and gambling regulation. To build on the success of the Israeli practice, CMS opened an office in Tel Aviv in October 2021, creating a platform for growth and deeper integration between the Middle East and Israeli practices. The office also creates a focal point for Israeli clients who operate in CEE and for CMS offices across the region so that companies and investors can draw on the expertise within CMS and tap into its network of contacts.
Looking ahead to 2022, Glass says: “Israeli investors have a good affinity with emerging markets and with CEE in particular. There is a strong interest in the region and plenty of enthusiasm for activity and I don’t see any reason why that will change. If anything I expect it to get stronger.”