Initial public offerings (IPOs) should be an important way for Europe's growing companies to raise capital, and are a crucial part of the exit and further financing strategies for many private equity and venture capital investors. That means that healthy growth capital markets are not only vital to the industry, but they are also critical for the economy more generally, offering an alternative to bank lending for businesses with big ambitions. It is therefore welcome that the attention of EU policy-makers has recently returned to the big question they have grappled with many times before: how does Europe improve access to public markets and reduce reliance on bank debt?
Alongside the consultation on building an EU-wide Capital Markets Union (CMU), the subject of a recent Private Equity Comment, the European Commission has also identified a decline in IPOs, and heavy reliance on bank lending in Europe, especially when compared to the US, and has asked for suggestions on how that can be remedied.
Last month, the IPO Task Force – a body established in 2014 to offer solutions to the challenges facing the IPO market, and which includes practitioners from private equity and venture capital firms among its numbers with the EVCA as a supporter – published a report aimed at all EU institutions and Member States. The report highlights the decline in the number and value of IPOs in the period from 2001 to 2011, when compared to the 1990s. And while data shows a significant recovery since the financial crisis, the numbers are still well below those seen from 1993 to 2000. One reason for this is that smaller companies are finding it harder to access the public markets, and if the decline is to be arrested then it is these companies that need to be encouraged to return.
There have already been some market responses to this decline; for example, in May 2013 Euronext launched EnterNext – a pan-European initiative comprising the 750 SMEs listed on Euronext markets in Belgium, France, the Netherlands and Portugal. Enternext is dedicated to SMEs with a market cap below €1bn, and has already seen over 90 IPOs.
But regulatory change is also needed, and the IPO Task Force’s report makes several recommendations. The key messages are focussed on increasing both the supply of companies coming to market, and the demand for their shares. To help address the first, the report advocates making it easier and cheaper for small and medium sized companies to raise money on public markets. The process of drawing up a prospectus and getting it approved by the relevant authority is perceived as expensive, complex and time-consuming, especially for smaller companies. This means that, even if listing on a growth market is possible without having to produce a full prospectus (for example, AIM in the UK, and lighter-touch rules for SMEs in France), this is rarely accompanied by a retail fundraising (for which a prospectus would be required).
A review of the Prospectus Directive was put in train alongside the CMU consultation and the task force has made specific recommendations: these include increasing the still relatively low thresholds for full prospectus requirements (despite amendments to the Directive in 2010), and making prospectuses simpler and more user friendly – a benefit to both companies and investors. Tax incentives throughout the EU to encourage long term investment in small and mid-cap quoted companies would encourage investors and increase the demand for public shares. It is also important that these investors are not restricted by regulation from investing in public markets across the EU, which in part relies on regulators in individual member states dismantling their own barriers.
The IPO Task Force welcomes comments and further suggestions from stakeholders, and presents an opportunity for the private equity and venture capital industry to express their views on how Europe can create a better more widely used IPO market.