SMEs need to find it easier to access IPO markets, and investors must have fewer constraints and better incentives to participate in new company listings. Those are just a few of the recommendations from the European IPO Task Force, which published a detailed diagnosis of the IPO market's ailments this week, as well as a prescription to get it back on track.
Initial Public Offerings are a vital part of any capital market, and are firmly in the sights of the European Commission as it sketches an outline for a Europe-wide Capital Markets Union. They enable companies to raise finance from a wide range of investors, which in turn they can convert into jobs and growth. They also help large institutions to put their capital to productive use and benefit pensioners and savers across the continent.
But the European IPO market does not look healthy. That’s despite some recent headline-grabbing flotations, like the Madrid listing of Spanish airport operator Aena, which is the largest IPO this year and Spain’s biggest since the financial crisis. Or the Zurich listing of Swiss telecoms group Sunrise.
In fact the long-term trend is one of pretty relentless decline globally. In the ten years from 2001 to 2011, the average number of IPOs was 670 in OECD countries, compared with an average of 1,170 a year between 1993 and 2000. Similarly, the amount of capital IPO raised every year fell to $69.9bn from $132.7bn.
This matters. Not because IPOs are the only way that companies can raise finance (vital though they are), but because of the strong, positive relationship between listing on the public markets and future employment growth. IPOs are good for job creation: 92% of the job growth in a company comes after listing.
A healthy IPO market matters particularly for private equity, which is why Invest Europe was pleased to work with FESE and European Issuers - two fellow European-level associations - on the Task Force.
An open and functioning IPO market helps set a benchmark for private company valuations, and provides a critical exit route. While a sale to a corporate buyer or another private equity manager is a common way for a private equity or venture capital owner to realise an investment, the industry needs the IPO route to be readily available. Diversity and competition in exit routes is a good thing in itself. The private equity firm needs to be able to choose the right owner to take a business to the next level. A stock market listing might not suit every company; but it will work for many.
The Task Force report has made a series of detailed recommendations, covering everything from reform of the EU Prospectus Directive to possible changes to the tax system. But its detailed work can be distilled into two simple messages.
First, we need to increase the supply of companies coming to public markets by lowering the costs and increasing the benefits for them. And second, we need to increase demand for their shares by ensuring that institutional investors understand the benefits of investing in (particularly smaller) businesses coming to the market for the first time, and are not discouraged from backing them by regulatory capital or liquidity requirements.
There's a long way to go to reverse the long-term decline in European IPOs. But the Task Force's findings shine a light on the problem, and its recommendations can help shape a future European Capital Markets Union that will put equity at its core.