The European initial public offering (IPO) market looks to have turned the corner after the financial crisis. Last month saw Sunrise Communications Group, Switzerland’s second-biggest telecommunications company, and Spanish airport group Aena debut, with two of the biggest IPOs the world has witnessed in 2015.
But despite the recent flurries, the overall number of IPOs in Europe has declined over the past 25 years, according to the EU IPO Task Force, a self-appointed body representing Europe’s private equity firms, venture capitalists, stock exchanges and quoted companies. In the last ten years, money raised through public listings is around half the figure raised in the 1990s.
The fall in the number of IPOs has happened across economic cycles and the most telling reason is that the number of smaller, high-growth market newcomers has fallen off, says Rainer Riess, head of the Federation for European Securities (Fese) and one of the report’s authors.
“We’ve done a lot to help the top 10 per cent of blue chip companies in Europe achieve the efficiencies that allow them to list; it’s now time to think about how to make [listing] more accessible to the 90 per cent, of smaller companies,” he said.
What needs fixing?
The route to listing a company is strewn with many hurdles that could be dismantled.
To start with, the authors advocate taking a scalpel to financial regulation and stripping away “30 to 50 per cent” of the administrative costs associated with going public.
Listed US and Chinese companies, for example, have to present one set of annual tax statements; European companies two. “For a blue chip company, that’s not such a big deal; for a small company, it is,” said Riess.
Reform of the IPO prospectus, which investors use to review a company's strengths and weaknesses, is another thing the authors push.
For companies and investors, it is too legalistic, too long and is crammed with boring, irrelevant information. Riess puts it more politely. “Investors need the most relevant information presented in a readable, meaningful way; the effort for companies has to be reasonable in relation to the capital raised,” he said.
In addition, there is a discrepancy between access to advice and help when going public for big and small companies, Riess said.
Regulation and growing costs have hollowed out the network of bankers, brokers and analysts who help pave small companies’ path to the stock exchange. Institutions such as Morgan Stanley, JP Morgan and Goldman Sachs are built to serve the stock issues of bigger clients, said Riess. “Building up a local ecosystem that gets small companies access to smaller intermediaries is one thing we feel strongly about,” he noted.
Improving dialogue, meaning more conferences, information and networking sessions between companies, investors and brokers, is one solution, said Riess. Tax breaks would be nice too.
While no one is expecting a quick return to the flotation fever of the pre-2000s, reforms along these lines speak to a higher purpose: making European companies less reliant on debt financing. Three quarters of all corporate fundraising in Europe flows from banks. With only a quarter raised on markets, the continent is exposed to ebbs and flows in the availability of credit, said Riess. “It’s practically the reverse situation in the US,” he noted.
The report, the work of three Brussels-based trade bodies, Fese, EuropeanIssuers and the European Private Equity & Venture Capital Association, follows publication in February of the EU’s capital markets union “blueprint”, which is intended to boost investment and market-based funding for European companies over the next five years.
The European IPO Task Force is modelled on the US counterpart, which in 2011 called for a reduction in complexity around IPOs for ‘Emerging Growth Companies.’ This was embodied in the US Jumpstart Our Business Startups Act (JOBS) in 2012, a law credited with revitalising small business IPOs in the US.
But it is recognised that making good on all the report’s recommendations, especially those concerning tax incentives, is a tall order. EU capital markets come with a spaghetti bowl of fragmented national markets with separate rules, regulations and business practices, meaning a barrage of law-making is tricky.Full report here