Despite the periodic upswings, the annual average number of IPOs across the OECD countries has decreased from about 1,170 in 1990s to 670 in 2010-2011, while the average amount of capital raised has decreased from USD 132.7 billion to USD 69.9 billion a year. The EU IPO Task Force has been looking for the underlying reasons behind the upsetting statistics in their report published at the end of March (the full report is available here).

The wider social benefits of capital markets warrant a separate discussion but there is a much more direct role that the capital markets play for their primary stakeholders – the issuers and the investors.

From the point of view of companies the public markets offer fresh capital at a reasonable price to finance growth and expansion. The attractiveness of equity capital lies in the fact that it does not require any fixed returns. Or, in other words, it is the only type of capital that is prepared to accept the entrepreneurial risk. With public listing come all the other benefits for the issuer, including better brand recognition, higher prestige, and, most importantly, lower costs for any subsequent equity or other forms of financing.

For investors the markets provide an opportunity to earn a higher level of return than on other, less risky investments, achieve better diversification of their investment, or, just the opposite, allow to target specific sectors, segments, industries, geographies or entities.

The Task Force does not come forward with a robust single theory explaining this trend. Instead, it pinpoints a number of factors that they believe are at work here. What is known as the “economies of scope“ hypothesis might be one of the reasons. It suggests that smaller firms in general have difficulties remaining profitable and, as a result, tend to underperform and are more likely to be acquired by larger firms, thus making an IPO not as viable an option today as it used to be.

The available alternatives in the form of venture capital, private equity and private placements are often considered to be another reason behind the IPO decline. The Task Force does not believe this and argues that, on the contrary, exit via IPO is an essential element to make the venture capital and private equity ecosystem sustainable. In addition, venture capital usually fills the funding gap for the companies which have not yet reached the maturity required for an IPO.

And, finally, the factor that could be of particular importance for the continental Europe, including the Baltics - the well-established preference for debt financing. The companies, especially the smaller ones, have very little inducement to seek alternative equity financing when the bank debt is available and at a reasonable cost. In addition to bank debt being cheaper in general, in many countries its attractiveness is further boosted by offering tax incentives in the form of interest deductibility. This has contributed to building a “culture of indebtedness” where, as economic research has demonstrated, the company enters a vicious circle of borrowing to finance investment, then using profits to repay the debt, and have to borrow once again to finance further investment.

Building an equity culture where equity becomes an available and attractive option for the European companies, notwithstanding their respective size or country of origin, appears as one of the central elements in putting the economy on a sustainable growth path. This might actually become the life raft that everyone is looking for.


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