For some time a misplaced false dichotomy has been going around as part of the narrative of the ecosystem in capital markets. According to this, private equity fund managers should be in opposition to the well-functioning of the public markets. Nothing could be further from the truth!
Martin Bresson is the Public Affairs Director at Invest Europe.
It is true, that PE managers from time to time de-list some of the companies they have invested in and it is also true, that this appears to some as annoying bleeps on the statistics of how well-functioning (European) public markets are. But these rare examples of a company being voluntarily delisted as part of a move to create strategic value over the medium to long term as opposed to the short term focus of public markets, is hardly a broad point of opposition.
It is also true, that we at Invest Europe take a strong opposition to those who advocate for piling more administrative burdens on private companies, simply to create an imaginary “level playing field” with publicly traded companies. Shooting yourself in the right foot to create balance with your already wounded left foot, is probably the worst strategy for moving fast forward… much as it may “level things out”.
So on this basis, let’s straighten the record: For private equity fund managers, exit options are usually threefold. First, the company can be bought or acquired by another (usually bigger) private equity fund – this is especially true for venture capital funds that back start-ups which are bought as scale-ups by growth funds.
Secondly, the company can also be sold to another company through a trade sale – examples in the tech business, such as the sale of Skype to Microsoft, also abound.
And thirdly private equity backed companies have the possibility of becoming listed entities via Initial Public Offerings (IPOs).
In the past decade, the first two have been significantly more popular than the latter. IPOs for the past five years have always represented less than 15% of all exits in volume and less than 10% in number of companies. This is however not particular to private equity exits – it mirrors the broader decline of public markets, particularly in Europe.
A decline that is partly due to the comparatively better performance of alternative asset classes such as private equity, but also rooted in one undeniably big regulatory issue that needs to be addressed: The inherent costs and complexity of listing. Which recent review of the Prospectus framework and the SME Growth Markets initiative have simply not addressed in a sufficiently ambitious way.
So, even if we represent the private side of the equation we are part of the enthusiastically applauding recipients of the final report from the European Commission Technical Expert Stakeholder Group on SMEs (in spite of its somewhat corny title) “Empowering EU Capital Markets for SMEs: Making listing cool again”. Readjusting the focus and remobilising efforts to empower SMEs to go public is in their – and their shareholders’ – best interest and as such very, very laudable.
Other initiatives such as Scale-up Europe have also rightly highlighted the need to boost exit options and IPOs in order to contribute to the wider objectives of technology sovereignty and economic growth. On this initiative launched by the French President, Emmanuel Macron, ahead of the French presidency and in which Invest Europe has been actively involved, one of the 21 recommendations made is to “create a favourable ecosystem for the listing of tech companies on European stock markets”.
Taking stock (!) of these proposals and in order to secure that European companies have attractive exit options and that the number of IPOs grows in the upcoming years we believe certain policy measures and changes are still be needed and we are looking forward to working with the Commission and the French presidency on those. The below list is – definitely – not exhaustive, more like a starter for ten:
Amongst the policy changes to enhance IPOs we would like to see, is a simplification of listing rules and requirements that would make the European markets more attractive and economically interesting, especially when compared with the US ones. Another gap that has been identified by investors, Scale-up Europe and the Expert Group is the need for pre-listing support bringing in expertise and talent from other countries.
Furthermore, additional steps could be taken to ease the transition between the first steps of the exit process and the company’s final introduction on the public market, for example through the development of crossover funds thanks to the upcoming SME IPO Fund.
All actions combined will give a real push to IPOs for the ultimate benefit of the European economy. Such a push may give European public markets the impetus they need and reinforce the whole financing ecosystem by giving private markets an exit alternative that has long suffered by comparisons – and this would be to the mutual benefit of both private equity and public markets.