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Giuseppe Corsini, PwC
Giuseppe Corsini, PwC

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The grass may be greener on the other side: Europe’s IPO dilemma

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Giuseppe Corsini, Partner of Capital Markets and Accounting Advisory Services in PwC Luxembourg, writes that the ASPI Critical Technology Tracker, which monitors 64 cutting-edge technologies globally, highlights Europe’s absence as a leader in any key development area, with only Germany, Italy, France, and the Netherlands sporadically appearing as top contributors to high-impact research. 

This shortage of innovation and investment significantly dampens Europe’s Initial Public Offerings (IPOs) market.

As of early December 2023, European IPOs garnered only USD9.2 billion, contrasting starkly with the USD20.3 billion raised in the US. This represents a 35 per cent decline for Europe compared to 2022, while the US witnessed a staggering 157 per cent increase. Additionally, prominent European companies like Birkenstock, Oatly, and On Running are opting for US stock exchanges, exacerbating the situation. The absence of a unified European market compounds these challenges, yet innovation in Europe requires robust policy support. Policymakers must devise creative solutions beyond regulatory adjustments, emphasising the need for funding and financial backing to rejuvenate innovation and bolster IPO activity.

Red tape

European innovation is underfunded and burdened with labyrinthine regulations. This situation is reflected in the small number of IPOs in Europe, especially when compared to the rest of the world. European IPOs made up 2.31 per cent of global capital in 2019, and by the period from Q1 to Q3 2023 this had been reduced to 1.17 per cent.

France Digitale, the largest start-up association in Europe, claims that the lack of European investment into start-ups can be attributed to regulatory barriers that limit the extent to which institutional investors in the EU can fund new companies, while making it riskier to start a company in Europe than in other jurisdictions. Pension funds in the US are far more likely than their European counterparts to invest in venture capital (VC), and this relative lack of pension fund investment is not compensated by other institutional investors. While the US’ lax regulatory landscape on pension funds may not be right for Europe, this situation illustrates the extent to which EU startups have trouble raising the necessary funds to innovate or go to market. 

Indeed, European tech companies are estimated to have raised USD45 billion in 2023 – down from USD82 billion in 2022 and over USD100 billion in 2021. What’s more, according to PwC’s IPO Watch Europe series, most IPOs in Europe have occurred outside the EU in recent years. Indeed, in the first three quarters of 2023, 33 out of the 44 large IPOs in Europe were not in the European Union.

Public investment into research and development is also especially low in Europe, which removes much of the public sector support that startups enjoy in other regions of the world. Just 2.27 per cent of EU GDP is spent on innovation, compared to 3.45 per cent in the US, 2.40 per cent in China and 4.81 per cent in South Korea.

The European Round Table for Industry (ERT) has called to integrate European capital markets by creating a capital markets union with the intent to abolish internal barriers. This would certainly help institutional investors fund start-ups and lead to more IPOs, but the root cause runs deeper than that, and the lack of IPOs is burdened by an adverse macroeconomic environment, in addition to a sub-optimal investment landscape.

Economic hindrances

The period of high interest rates is making it more difficult to take new companies to market in the EU, as capital is harder to come by than in previous years. This also helps explain why in 2023 and 2022 an increasing number of European companies went public outside the EU. However, interest rates are not the full story. Türkiye is the country with the most IPOs in 2023 – yet its central bank recently raised its main interest rate to 40 per cent, making the ECB’s key interest rate of 4 per cent look meagre in comparison. 

It should be noted that IPOs in Europe have grown in value and quantity for four consecutive quarters from Q4 2022 to Q3 2023. However, if European economies are to remain competitive this growth will need to accelerate, and IPOs and value will need to be created in a wider swathe of the continent, rather than a handful of hotspots.

The surge in private capital and acquisitions is outpacing IPO growth, contributing to a decline in IPOs. In recent years large corporates have increasingly opted to buy their would-be competitors before they go public, a trend taking place in the US as well as in Europe. This means that many companies that may have gone public are instead shelved, harming innovation. 

Conclusion

Public investments in research and development coupled with support for private ventures are crucial but insufficient on their own. Europe requires new institutional frameworks to enhance its attractiveness for bringing innovative ideas to market. Establishing a capital markets union would facilitate investment flow to talented entrepreneurs within Europe, while safeguards against anti-competitive practices are essential to protect startups from being absorbed prematurely by larger incumbents. 

Currently, Europe’s innovation and startup ecosystem lacks the momentum necessary for sustaining competitiveness in the medium to long term. Urgent action from investors and policymakers is needed to redirect the trajectory before Europe’s position becomes irrecoverable in the global landscape.

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