IPOs, Venture Capital and High- Growth Start-ups European Commission DG Enterprise and Industry Workshop IPOs exits on high-growth stock markets in the EU Improving opportunities for IPOs Dr. Jürgen Schaaf Brussels, May 24, 2005
1 The Rationale: IPOs crucial for VC markets 2 The Markets: fragmentation and buy-out boom 3 The Challenges: time for a new start
1 The Rationale: IPOs crucial for VC markets 2 The Markets: fragmentation and buy-out boom 3 The Challenges: time for a new start
Innovative start-ups drive structural change and growth Technology-oriented start-ups make a significant contribution to economic growth (in addition to many other factors). are instrumental in creating new jobs. drive technological change.
High-tech start-ups need venture capital and advice Company founders as innovators require capital. They depend largely on outside funding since they normally have little money of their own when starting out. Owing to a lack of collateral, high probability of default and pronounced information asymmetries, they are often unable to secure sufficient funds in the form of bank loans. The issuance of shares or debt securities does not emerge as an option until very much later. Inventors often excel in their subjects but lack business and market knowledge. Venture capital is a crucial financing market for start-ups.
Exit option crucial to VCs VC company EUR 1 m Investor 3 EUR 32 m Investor 2 EUR 34 m Investor 1 EUR 33 m F u n d r a i s i n g Phases of VC finance are inextricably linked EUR 100 m venture capital I n v e s t m e n t Stake in Company A Stake in Company B Stake in Company C etc. E x i t Trade sale IPO Buyback Failure
IPOs: Silver bullet for VC financed start-ups Special quality of the IPO as exit Successful IPOs compensate for the high failure rates of VC portfolios. VC companies build up reputation by repeatedly executing successful IPOs. The cost of capital for acquisitions falls when the companies are listed. Owners and founders remain at the wheel. The bookbuilding procedure and the market price of listed companies may function as benchmark for a company s valuation. Stock options can only be exercised if companies are listed on the market.
1 The Rationale: IPOs crucial for VC markets 2 The Markets: fragmentation and buy-out boom 3 The Challenges: time for a new start
PE in Europe: Buy-outs driving growth; start-up financing drying up Boom in buy-out markets leads to stable growth in overall European PE markets hides the weakness of early stage financing and diverts attention from structural problems of financing high-growth startups. Buy-outs dominate PE investment in Europe 13.3 Buy-outs 14.4 Replacement Capital Seed 10.9 16.9 18.4 20.9 Start-up EUR bn Expansion 1999 2000 2001 2002 2003 2004 40 35 30 25 20 15 10 5 0
European IPO markets vary from country to country IPOs on Europe's fragmented stock markets: LSE is the runaway leader 8 3 London Stock Exchange Euronext Deutsche Börse Stockholm IPOs 15 3 22 10 44 13 39 65 88 10 10 12 113 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2 0 0 3 2 0 0 4 16 120 100 80 60 40 20 0
Success story - AIM Main differences to main market 1,200 1,127 No minimum shares to be in public hands (vs. minimum 25%) 1,000 800 600 400 Number of listed com panies 252 308 321 347 524 629 704 754 1,021 No trading record requirement (vs. 3 year trading) No prior shareholder approval for transactions No minimum market capitalisation 200 121 0 95 96 97 98 99 00 01 02 03 04 05* *March
1 The Rationale: IPOs crucial for VC markets 2 The Markets: fragmentation and buy-out boom 3 The Challenges: time for a new start
Regaining private investors trust 9,000 8,000 7,000 6,000 Nem ax Dot-com crash caused wealth destruction. mistrust of high-growth stocks. 5,000 4,000 3,000 2,000 1,000 0 Nouveau Marche 98 99 00 01 02 03 04 05
Time for a new start Establishment of low-regulation stock exchanges attractive to highgrowth firms To-dos: Sufficient liquidity Provision of research Harmonisation of rules Local knowledge necessary Commitment of institutional investors No-goes: Simple relaunch of closed high growth exchanges Too strict investor protection One solution for all countries Exclusion of traditional sectors High market capitalisation barriers
CONTACT Dr. Jürgen Schaaf DB Research +49 69 910 46830 juergen.schaaf@db.com Download publication Private equity in Europe: buy-outs driving growth; start-up financing drying up
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Where the liquidity is Stockholm 3% Italy, 7% Spain, 9% Sw itzerland 6% other, 5% London 39% Euronext 19% Deutsche Börse, 12% 2004