A version of this article first appeared in Sifted’s Daily newsletter, sign up here
Ask IPO-ready startups in Europe where they’d consider listing their company, and chances are they’ll name New York as their city of choice. It’s by no means a new trend, but lately the London Stock Exchange, one of Europe’s preeminent exchanges, has looked particularly unappealing — and it’s kicked off a fresh debate about Europe’s competitiveness with the US.
A Financial Times piece published over the weekend painted a bleak picture: ‘88 companies have delisted or transferred their primary listing from London’s main market this year with only 18 taking their place, according to the London Stock Exchange Group. This marks the biggest net outflow of companies from the main market since 2009, while the number of new listings is also on course to be the lowest in 15 years as initial public offerings remain scarce and bidders target London-listed groups.’
Ouch. That’s even after the UK’s Financial Conduct Authority (FCA) relaxed listing rules for companies earlier this year (though this may take some time to actually work its way through the ecosystem). Its most recent blow: Swedish BNPL titan Klarna opting for a New York debut over a London Stock Exchange listing.
The story didn’t go unnoticed by Europe’s VC set, who are funding that next set of IPO candidates. And some didn’t hold back. As outspoken Paris-based VC Michael Jackson put it: “Friends don’t let friends list in Europe. European public markets desperately need an overhaul. They’re the minor leagues.”
The arguments at this point are well-trodden, but they include regulatory hurdles and lower liquidity in Europe, and better valuations for US-listed companies.
“We’d like for the UK and Europe to become the go-to choice, but capital markets and regulators need to ensure the right incentives are in place,” Peter Specht, London-based general partner at Creandum, tells me when asked what he makes of the FT piece.
But how could the LSE — or any other European exchange, for that matter — lure more of Europe’s scaleups now?
For one, “the UK’s stamp duty on the purchase of UK shares is holding back the market and hampering liquidity. In a side-by-side comparison this simply makes listing in the UK more expensive than the US,” Specht says.
According to Nirwan Tajik, a growth investor at French firm Revaia, a proposed capital markets union, which could help simplify things like tax structures and regulatory requirements across different EU countries, could make Europe a more appealing venue. “Cross-border listing and investments have high barriers due to different regulatory requirements” — which include know-your-customer (KYC) and investment thresholds, withholding tax on dividends and market infrastructure, Tajik says. “Harmonising these, obviously, would encourage the free flow of capital.” (This, of course, wouldn’t help the UK post-Brexit.)
Tajik also points to initiatives like exchange Euronext’s Tech Leaders index aimed at highlighting high-growth tech companies as “a step in the right direction”, although it’s “crucial” to have a single European tech exchange — like a European Nasdaq, as many have called for. “Special listing incentives (for example reduced fees or fast-tracked processes for high-growth sectors) could further differentiate it,” he suggests.
But I’ve also wondered: for entrepreneurs and VCs, does it really matter where a startup lists? They’re still getting their returns, after all.
“Let’s face it: in the short term the people directly affected [by] European tech companies listing in the US are mostly local bankers and exchanges,” Specht says. However, longer term, as many VCs argue, Europe risks losing potentially billions in revenues as well as losing talent to the US, tax money on public companies and the feedback loop of employees or angel investors giving back to the local ecosystem.
From Specht’s point of view, startups should of course make the best choice for themselves: “Companies are optimising for the best financial markets ‘product’, which is a mix of liquidity and attractive regulation,” he says. Going public stateside comes with requirements like minimum size, which might disqualify some startups, he adds; for others “it may be the better option.”
“I do not believe that all roads lead to Nasdaq or NYSE,” Tajik adds.
I’m curious to hear from you, VCs: what are you advising your startups when it comes to where to go public? Do you think it’s actually a problem that most opt for New York? What could the LSE (or other European exchanges) do to improve their competitiveness? What are the ramifications of most of Europe’s startups flocking to the US? Send me a note.
Read the orginal article: https://sifted.eu/articles/europe-ipo-exchanges-not-competitive/
