The number of companies choosing to go public in Europe and the UK is continuing to decline, with firms opting for US markets when launching their IPOs. As capital continues to flow out of Europe, the Federation of European Securities Exchanges (FESE), along with the European Startup Network (ESN), have published an open letter to EU finance ministers and the European Commission, calling for the fulfilment of the Capital Markets Union (CMU).
The CMU intends to create a single market for capital in Europe, increasing the flow of investments and savings to the benefit of consumers, investors and companies. After a decade of discussions, legislative proposals, rewritten packages and action plans, the union has not yet been realised – and European markets remain fragmented.
According to a McKinsey report published in June, since the first action plan for the CMU was introduced in 2015 Europe has missed out on US$439 billion in ‘lost’ IPOs – not counting companies that have jumped ship and relocated pre-IPO. In 2021 alone, the US hosted more tech IPOs than Europe did between 2015 and 2023.
FESE stated that tech companies’ decisions to go public in the US are logical, with the region offering “deeper and broader pools of capital, potentially higher valuations, and a better-integrated listing and trading ecosystem”. Led by Nasdaq and NYSE, the region represents half of global market capitalisation.
However, what appears too good to be true often is. An April study from Euronext has shown that, comparatively, “the presumed dominance of the US in equity liquidity is not as advantageous as it might seem”, FESE said. European firms may not see the same benefits as their American peers when going public in the region, it suggested, citing lower valuations, reduced liquidity and less comprehensive analyst coverage as potential downsides. As such, there is an opportunity for Europe to claw back more of the pie.
Europe needs to provide an environment in which companies can access sufficient investment opportunities, FESE argues, encouraging them to go public in their region of origin. This will allow for jobs, patents, talents, tax payments and economic returns that are created to remain in the EU, it said, while improving EU competitiveness, innovation, sustainable growth and job creation.
The European Commission is already taking action in this space following pressure to complete the CMU. Following a report from former Italian prime minister Enrico Letta earlier this year, commission president Ursula von der Leyen has voiced her intentions to also implement the European Savings and Investments Union. This will unlock private savings, Letta argued, which can then be channelled into the region’s markets rather than diverted to the US.
READ MORE: Savings and Investment Union would strengthen EU competitiveness
In their letter, FESE and ESN outlined four additional aspects of the CMU that could improve the European IPO market.
Growth-stage venture capital should be boosted in order to strengthen upstream investment in the stock market, the organisations argued, giving scale-ups sufficient funding to scale and, in the long run, fostering a tech and startup ecosystem in Europe.
Cross-border transaction costs for equity investment should be eliminated, they continued, stating that European investors are currently incentivised to buy national or American shares rather than European shares by complex withholding tax regimes. Streamlining these processes will help investors to diversify portfolios and support company growth in the region, the firms said, adding that the taxation of options products should be harmonised as much as possible in order to support scale up and participation for EU startups.
READ MORE: “Game-changing reforms” needed to fix Europe’s capital markets, say European associations
Mobilising retail investment is another priority, with the letter stating that the wealth of retail accounts needs to be unlocked to support both the primary and secondary tech markets. To do so, financial literacy among EU citizens must be improved. Currently the letter says, just 28% of European citizens are invested in financial products. In order to change this, European governments and local financial ecosystems need to create a narrative that encourages trust in capital markets, induces interest in financial products and increases investment in technology. Tax incentives for savings to stimulate long-term equity investments rather than short-term deposits and low-risk instruments are also needed, the organisations continued, arguing that risk-taking should not be overly discouraged. “These investments are not only crucial for advancing the EU’s twin digital and green transition, but also for creating prosperous European savings,” it affirmed.
READ MORE: Balls calls for UK to adopt risk culture to encourage IPOS; defends LSEG
Incentives also need to be offered for both retail and institutional investors to invest in European companies, the letter continues. In the first instance, it said, a tax and regulatory environment that removes barriers to existing investment flow should be implemented. Creating a pan-European label for trusted venture capitalists, or a European fund-of-funds, would give institutional investors an incentive to invest in tech and other industries at both pre- and post-IPO stages, it added.
Deutsche Borse, Euronext, France Digitale and Startup-Verband have also backed the letter.
©Markets Media Europe 2024
