A European IPO Task Force launched this week is the latest in a string of efforts to get Europe’s capital markets back to full strength and hopes to put equity investing high on the agenda for incoming EU politicians.
The IPO Task Force has been set up by industry bodies EuropeanIssuers, the European Venture Capital Association and the Federation of European Securities Exchanges (FESE).
It intends to investigate why IPOs in Europe have been in decline over the past 20 years and advise politicians on how capital markets can help boost economic growth.
Judith Hardt, director general of FESE, said changes at the top of the EU in 2014 provide a good opportunity to put the issue on the agenda.
“We have a new Parliament being elected in May and a new Commission due to be appointed in October and we want to make the task force will have recommendations for them on how to boost IPOs,” she said.
US leads the way
The Task Force idea stems from the Jumpstart Our Business Startups (JOBS) Act in the US, which included recommendations to improve conditions for IPOs. Since the financial crisis, IPOs have become relatively scarce in the US and FESE said Europe has been more badly affected and needs reform in order to help SMEs access financing.
In the US, roughly 70% of company funding comes from capital markets through share or bond issues, with the remaining 30% coming from banks. In Europe, this ratio is reversed, but regulations such as Basel III have constrained bank balance sheets, meaning many are unable to support businesses as they once did.
Hardt added: “Recent directives in Europe have had a negative impact on both pension funds and insurers’ ability to invest in both equities and bonds that companies need to help them grow. We recognise there is a need to protect investors but it needs to be balanced to ensure SMEs can get the financing they need.”
The differences between US and European capital markets are complex but the greater reluctance to seek out an IPO among European firms may be largely down to the way the market has developed, according to Magnus Billing, president of Nasdaq OMX Stockholm.
“It’s a historic issue. Banks have traditionally been very supportive of local businesses, but regulations means it is much more difficult for them to raise debt funding so we need to raise awareness of funding from other sources such as capital markets, bond markets and crowd funding,” he said.
Building consensus
The Task Force is the latest effort to prompt reform that will make public markets more attractive for both investors and SMEs. Last year, Nasdaq OMX launched a whitepaper on how to increase the number of IPOs in Sweden.
Billing believes issues identified in the whitepaper stretch beyond Sweden: “When we looked at how to increase the attractiveness of IPOs in Sweden, we found a number of structural issues which are also relevant across Europe.”
One key issue identified was changing investment trends from the buy-side, which were also identified in the Kay Review on UK equity markets commissioned by the British government in 2012.
“One major problem is that in recent years institutions have shifted their investment focus from active to passive investments, investing in indices instead of stock picking,” explained Billing. “However, this is short-termist and damaging for SMEs that want to list and grow to become the major companies of the future.”
Other issues include the large reporting burden that listed companies face compared to their unlisted counterparts. Billing said that investor protection is vital to maintaining confidence in stock markets and believes the best solution would be to increase the reporting requirements of unlisted companies to create a level playing field.
Automated listing
Technology also has a part to play and for many buy-siders the highly manual IPO process runs counter to the increased automation seen elsewhere in equity markets.
Adam Conn, head of dealing at Baring Asset Management and co-chair of the FIX Trading Community Buy-side Panel, said being able to automate the IPO process would be a major benefit to institutional investors that want to support new issues.
Buy-siders face a number of potential problems in the current IPO process that could be eased. Conn said: "Risk concerns arise, firstly because [new issues are] a manual process and secondly because a deal may stay open for two or three weeks, there is a risk an application may go unchecked for a period of time. To reduce potential risks and create greater transparency and timeliness in the application and allocation process, it makes sense to have one electronic route for new issues or order books."
"I understand the competitive issues, but there is a growing buy-side consensus that IPO application and allocation is one of the last great opaque processes."