On Wednesday night the European Parliament officially adopted the EU Listing Act – a crucial turning point for the EU’s primary markets, retail market inclusion and, by extension, overall liquidity. But what does the Act really entail – and how does it plan to fix what has long been broken?
In 2023, global IPO volumes fell 8% year-on-year with proceeds down by 33% compared with 2022, according to EY, with 2023 being the lowest for proceeds in five years. In Europe, total IPO issuance fell by a third (35%) to raise EUR10.2bn over the year. And in the UK, IPO proceeds were down 40% in 2023. Stagnant primary market activity in the region is a very real concern.
The background
First proposed by the European Commission in December 2022, the Listing Act is a package of measures to review the Prospectus Regulation, Market Abuse Regulation, Markets in Financial Instruments Regulation and Directive (MiFIR/MiFID II), and to introduce a new Directive on multiple-vote share structures.
“The public listing process is cumbersome and costly for EU companies, especially small businesses (SMEs) – which deters EU companies from raising funds on capital markets and means they miss out on the benefits of going public, such as exposure to a wider investor base, higher growth and job creation,” said the Commission.
The initiative aims to simplify the listing requirements, including post-listing, in order to make public capital markets more attractive for EU companies and facilitate access to capital for SMEs.
The journey
Approved by the European Parliament and adopted into law this week, the Act hopes to transform and improve European IPO volumes – which in turn, should help support regional liquidity. But how did we get here in the first place?
“There still is no single primary market in the EU, despite a decade of ambition to build a Capital Markets Union,” believes Michael Collins, director of policy and government affairs at fintech platform PrimaryBid, which helps retail investors to access share sales, raising EUR30m for European companies over the past three years.
“The different markets in EU member states are showing signs of becoming more integrated and cross-border, as PrimaryBid has shown through the cross-border deals it has facilitated. But we still have a European primary market that is considerably more fragmented than that in the US. Within that there are primary market success stories in the EU – Sweden, for example – but there’s still work to do, both at the national and EU levels.”
The plan
So how will the EU Listing Act address some of these issues? First, it will raise the threshold at which an issuer must produce a prospectus, and removes prospectus requirements for securities that are fungible with those already listed – thus ‘uncapping’ offers which include retail investors. Second, it reduces the number of days an IPO has to remain open. Third, it harmonises deal documents across the EU, making cross-border deals easier to execute.
“The Listing Act is a significant set of reforms that have the potential to make a real difference to the attractiveness of the EU as a place to list and to the inclusion of retail investors,” said Collins. “It sends a powerful signal to issuers and to investors: the EU wants public markets to thrive, and it wants to promote more retail participation in them. It removes some of the barriers and disincentives to listing in the EU and makes it more attractive for issuers to include retail investors when they do decide to go public.”
READ MORE: Savings & Investments Union would strengthen EU competitiveness, says Letta Report
The impact
It should be noted that despite a tricky 2023, the first quarter of this year has already shown positive momentum in the primary market, with PwC reporting the highest IPO proceeds raised in Europe since Q1 2021. The after-market performance of the European IPOs in this quarter has also been mostly positive, with 80% of top IPOs ending Q1 in positive territory. Successful private equity-backed IPOs and a backlog of maturing investments suggest a strong appetite for new listings, said PwC in its Q1 IPO Watch EMEA.
“Recent European IPO activity and largely positive aftermarket performance suggest we are entering a recovery phase of the IPO market,” said Kat Kravtsov, director of UK capital markets at PwC. “A diversified pipeline, strong market performance and low volatility continue to support a second half weighted IPO window with quality and valuation driving the investment decision.”
European IPOs raised EUR4.8bn in Q1 of this year, compared to GBP0.3bn UK IPO proceeds over the same period. However, the future could also be looking brighter for the UK market. “Regulatory changes in the London market, aimed at increasing the attractiveness of listing in London, are due to come into effect this year and add to the earlier Edinburgh and Mansion House reforms,” pointed out PwC. “These regulatory changes, the improving macroeconomic outlook and significant IPO pipeline point to potentially a pivotal year for the UK capital markets. Q1 2024 saw notable follow-on equity transactions on the London Stock Exchange.”
The future
The recent Letta Report on the EU single market identified a wide range of initiatives that are needed to build a Savings & Investment Union in Europe. But the challenge for the next European Commission and the next European Parliament will not be to diagnose the problems faced by EU capital markets, but to harness the political will to deliver reform.
“The Listing Act is a great example of the EU’s capacity to move at pace when it is motivated to do so. We need to build on that drive,” urged Collins.
© Markets Media 2024.
