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The importance of a European stock market for growth companies

It has long been recognised that the lack of a liquid stock market for growth companies in Europe is stifling the development of the private equity industry, says Jonathan Blake of SJ Berwin. Historically, Europe has lacked sizeable public markets on which promising venture-backed companies could raise capital at attractive valuations.

In the eighties and early nineties European entrepreneurs watched NASDAQ power the US economy, while the European markets would only admit businesses with a track record. As a result, European entrepreneurs struggled to raise the level of finance necessary to support their growth. However, the picture changed in the late nineties with the opening of EASDAQ. This was swiftly followed in domestic markets with the launch of the UK’s AIM, France’s Nouveau Marché, Germany’s Neuer Markt and others.

The performance of European high-growth stock markets in the 1990s clearly illustrated that European entrepreneurs can create companies successful enough to be listed on the stock market, and that public funding for such high-growth businesses is a realistic goal. But, in recent years, many of the “new” European stock markets faced difficulties that clearly illustrated that developing a market to finance high growth companies is no simple task. Following the wave of markets created in the 1990s, the number of new market entrants fell well below expectations of market developers. As a result several markets, including NASDAQ Europe (previously EASDAQ) and the Neuer Markt, closed.

The failure of these markets highlighted the key issues which needed to be addressed. Problem areas included fragmentation, the structure of the markets and a failure to harmonise regulatory regimes across borders. Today the emergence of a market that will support European high-growth companies beyond venture capital remains imperative to European prosperity – and to the venture capital industry. Venture capital cannot fund most growth companies to profitability: they require a much higher and sustained level of investment that only a public market can offer.

Access to capital has helped the USA foster a vibrant venture capital industry, enabling them to take the lead in the creation of new economy technology businesses. We need to learn the lessons of the past two decades, and do the same here. What kind of market? European stock exchanges are primarily focused on large companies that have a track record. But there are markets focussed on smaller businesses. For example, AIM, the UK’s successful secondary market, plays an important role for certain types of company (and is increasingly attracting non-UK issuers).

But truly high growth businesses present a higher level of risk and a greater degree of uncertainty than investors in that market are typically willing to accept. Further work is needed.

The jury is still out on the extent to which a high growth market should be regulated. Perhaps a market which accepts the need for a higher degree of regulation – in order to ensure that investors have full confidence in the transparency and governance of issuers – is needed. Investors who are willing to accept a higher degree of business risk and volatility will be attracted to companies – and willing to offer acceptable valuations of them – if they feel comfortable that other risks inherent in small businesses are controlled.

On the other hand, the UK’s AIM may offer a better model. Despite its light touch regulation, there have been relatively few failures on that market which would have been prevented by greater regulation. Perhaps that is due to the fact that the market requires companies to be vetted and supervised by an established market professional, whose own reputation is therefore put at stake. That debate needs to be resolved – and other market structure issues addressed – as we search for a European alternative to NASDAQ.

The European Private Equity and Venture Capital Association (EVCA) has been promoting a high growth European stock market as one of its stated policy priorities in 2004. It is important that the private equity industry does all it can to support that initiative.

For more information on the material in this feature please email the author, Jonathan Blake (jonathan.blake@sjberwin.com)

SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on its services to the private equity industry please contact Jonathan Blake or Simon Witney in its London office +44 (0)20 7533 2222 or visit our website at www.sjberwin.com