The Renaissance of EU Capital Markets

The main goal of the recently published Technical Expert Stakeholder Group (TESG) Report is to start to set free EU Capital Markets from the cage of regulations suffocating them.

As noted by the TESG EU, the attractiveness of equity and debt public capital markets for SMEs is negatively affected in EU by a steady downturn of IPOs, which limits considerably public capital markets’ ability to be a robust funding source for SMEs. Public equity markets provide substantial social benefits, offering an effective way to share risk and allocate capital efficiently between public savings and issuers. Within this framework, initial public offerings (IPOs) enable SMEs to raise funds as they grow, and offer an exit route for early-stage investors. However, recent analyses have shown that EU public equity markets ‘have fallen behind in global terms’. EU public equity markets are indeed much smaller than those in the USA, despite having a similar-sized economy. They are also smaller than Asia’s markets when measured by market capitalisation relative to GDP, and much smaller than the market in the UK as percentage of GDP.

The OECD recently noted that stock markets play a key role in providing companies with equity capital that gives them the financial resilience to overcome temporary downturns, while meeting their obligations to employees, creditors and suppliers. At the same time, since 2005, more than 30,000 companies have delisted from stock markets globally, notably in the United States and EU. These delistings have not been matched by IPOs, which has resulted in a considerable net loss of publicly listed companies. This drying up of SMEs access to public markets affects a fundamental source of funding to support the growth of EU companies which need to have long-term capital investments, beside bank credit, to sustain their growth plans.

Feedback from market participants clearly indicates that the initial and ongoing costs of becoming a public company have risen considerably in recent decades, thus widening the gap between public and private equity funding. This is even more true for SMEs, which have to deal with particularly burdensome regulatory costs associated with listing.

The downsizing of EU public capital markets can be addressed only by adopting a holistic approach addressing the issues of relevance for all players in the EU capital markets landscape. The TESG’s twelve recommendations contain specific proposals for legal amendments to EU legislation in order to achieve these objectives, starting with the inclusion in the EU financial sector legislation of a broad SME definition to capture all listed companies with a market capitalization of less than 1 billion Euro (Small and Medium Capitalization Companies or ‘SMCs’).

The reforms that the TESG suggested will ensure that EU capital markets, and in particular public equity markets, are available for the deployment of risk capital into SMCs as well as the innovation-driven sectors of the EU economy. The proposals include suggestions on how to reduce the initial and ongoing costs of listing and the ensuing administrative burdens and recommend extending availability of dual class shares, using pre-listing sandboxes, providing additional research coverage as well as empowering retail investors. Together, the TESG proposals will deliver proportionate listing requirements for SMCs, supportive tax policies, increased investor access, and higher profile for the many EU SMCs, which are key generators of economic growth.

The TESG recommendations shall hopefully inspire the implementation of the Capital Markets Union (CMU) Action Plan 2020 and help the EU Commission solve the different issues identified in the Action Plan 2020 as discouraging SMEs from accessing public markets, such as a high administrative burden and the high costs of listing and compliance with listing rules.

Advancing the CMU is not just about capital markets and financial institutions. It will also benefit entrepreneurs, employees and private investors. SMEs are the backbone to the EU economy. They are the key drivers of economic growth, jobs creation, innovation and tax revenue in Europe. The COVID-19 pandemic and Brexit have re-emphasised the importance of the CMU project and the need to make rapid progress to speed up the EU recovery and increase the growth potential of SMEs. Most importantly, the CMU could facilitate the structural changes that have become unavoidable as a result of the pandemic and support the transition to a low-carbon and digitalised economy. The COVID-19 crisis is thus a wake-up call to strengthen the CMU and make the EU economy more robust and resilient.

Lukas Plattner is a Partner at Nctm, member of the scientific committee of AssoAIM and a Member of the Technical Expert Stakeholder Group (TESG) on SMEs.

Andrea Vismara is Chief Executive Officer, Equita Group and a Member of the Technical Expert Stakeholder Group (TESG) on SMEs.