Recent trends in the US have highlighted a decline in the number of IPOs, especially amongst small caps, and a preference amongst venture capital investors to exit via a trade sale. This is argued to be detrimental to both the company and the economy, reducing the likelihood that companies based on breakthrough technologies will emerge, and having a negative impact on the quality and quantity of available jobs. Similar concerns are now being voiced in Europe. This paper summarises some underpinning causes of the IPO decline in the US and examines recent trends in IPOs in Europe, taking into account the cyclical variations that post-2000 trends in European IPOs have demonstrated.
The decline in US IPO listings since 2001 is illustrated by the drop from an average of 539 IPOs per annum in the 1996 – 2000 period, compared with just 61 in 2009. Possible explanations have looked at regulatory changes and differences in patterns of funding provision. The data considered for Europe starts in 2001, when there were 309 IPOs across European exchanges. Numbers dropped in 2002 and 2003, but recovered strongly between 2004 and 2007, reaching over 800, before falling back sharply in 2008 and 2009. Indeed, the number of IPOs in 2009 – just 126 - was by far the lowest of the decade. However, both 2010 and the first half of 2011 have seen a big increase, although both the number and value remain well below the levels of the mid-2000s. Thus, the trend in IPOs in Europe since the start of the millennium has been volatile, meaning it is hard to tell whether there is an underlying structural decline.
However, this IPO activity includes listings by international companies, particularly on the London markets and private equity backed investments. These obscure the true health of the IPO market and its use by growth-oriented EU-based companies. In Europe, IPOs are concentrated in a small number of markets, with the top three accounting for approximately half of all IPOs. Well over half of all IPOs have been on Exchange Regulated Markets. For most of the 2000s, London, primarily AIM, has dominated the IPO market in Europe, accounting for more than half of the total between 2002 and 2007 inclusive. However, since 2008 the Warsaw Stock Exchange has also become a major market for European IPOs, largely through its New Connect Market.
The European experience has therefore been rather different from that of the US. The volume of IPOs in Europe has been twice that of the US throughout the 2000s. However, drilling down reveals three reasons for being concerned about the health of European markets. First, some of this activity reflects international IPOs. Second, current IPO activity remains well below that of the mid-2000s. Third, the experience of individual stock markets is variable: some are thriving, whereas others are struggling.
Given the importance of IPOs by smaller firms for the economy, ways to ameliorate any decline in listings should be considered. Policies for achieving an increase in the number of IPOs in Europe need to look beyond the stock market itself to consider the IPO-pipeline and to consider how investor demand for small caps can be raised in order to address liquidity issues.
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