By Maximilian Clarke
Structural reforms are needed to make the IPO (Initial Public Offering) market more attractive to small and medium-sized enterprises (SMEs) in the wake of considerable volatility across European Exchanges since 2000, according to a new report published by the City of London Corporation today.
Trends in IPO Listings by SMEs in the EU, authored by Colin Mason at the Human Centre for Entrepreneurship at Strathclyde Business School, shows that the number and value of IPOs across Europe remains well below 2006-2007 levels despite a recent upswing.
This trend mirrors activity over the same period in the US market, which unlike Europe has actually seen the population of publicly-listed companies decline since the late 1990s with current IPO levels below replacement rate. In contrast, IPO levels in Greater China reached record levels in 2010 and with 492 listings worth €98bn outperformed both Europe (380, €26.3bn) and the USA (168, €29bn).
In the first half of 2011 the volume of IPOs in Europe exceeded that of China (229 cf. 206) but the value of the Chinese IPOs was considerably greater.
The low number of European IPOs in recent years could be attributed to cyclical factors such as market sentiment and liquidity issues. However, the report also highlights several structural issues that potentially act to discourage businesses from seeking an IPO including: the pricing of small IPOs, relatively lower funding rounds for EU venture capitalists, a decline in demand for venture capital in technology sectors, and - on the supply side - a disconnect between business angels and venture capital funds.
“Helping the small and medium-sized business sector to grow is one of the few economic policy aims to be shared across party, national and regional boundaries,” said Stuart Fraser, Policy Chairman at the City of London Corporation. “Viable SME growth is rightly a priority given the benefits this brings to the whole economy. Indeed, SMEs together account for 99.9% of all private sector enterprises and 59.1% of private sector employment, providing over 13 million jobs in the UK.
“At a time when bank lending is constrained and bank finance for SMEs has contracted, it is essential that other flows of funding are accessible, liquid and function competitively. The IPO market brings huge economic benefits but recent volatility in both Europe and the US highlights the need for small but significant changes in policy to boost the attractions of this route.
“Governments need to ensure that their intentions to deregulate and cut red tape are delivered, in order to make it more attractive to start and grow small businesses. In the UK, the cutting or even the abolition of stamp duty on equity trading would cut the cost of capital and boost aggregate market values. The regulatory presumption that a smaller company is by definition a riskier company needs to be challenged, and other measures to boost liquidity will of themselves reduce — though they can never remove - the risk of holding smaller company shares.”
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