PRINT THIS PAGE Europe's stock markets21/06/2004. Source: SJ Berwin.
There are a number of factors, which drive the success of entrepreneurship and venture capital in an economy and there are a number of reasons why Europe has largely failed to succeed at this end of the market. But most significantly, the lack of a European growth market is of very deep concern, according to SJ Berwin. Sir Ronald Cohen addressed an audience of alumni from Oxford University and
the Said Business School this week. And although his subject was entrepreneurship
and private equity, he devoted a large part of his lecture to the public markets.
His clear view is that the fortunes of private equity and venture capital are
inextricably linked to the regulation and development of stock markets, and
that trends in those markets are indicators of the opportunities for the private
asset class.
At one end of the spectrum, Sir Ronald pointed to a clear transfer from the
public markets to private ownership: companies with an aggregate market capitalisation
of between £3bn and £7bn are leaving the public markets each year,
driven by (among other factors) unacceptable volatility, short term shareholder
pressures and increased regulation, particularly on matters of corporate governance.
Public companies are finding it increasingly hard to compete with their private
counterparts for the most talented managers, and are hampered in their ability
to make fast and tough decisions. As those (and other) pressures continue to
mount, the business case for private ownership grows, and funding from institutional
investors will continue to be diverted to the asset class.
But if that is an opportunity, at the other end of the spectrum private equity
has a problem. There are a number of factors which drive the success of entrepreneurship
and venture capital in an economy, and Europe owes its relative lack of success
at this end of the market (in comparison to the US) to failings on a number
of counts. But the lack of a European growth market, like NASDAQ, is - in Sir
Ronald's view - of very deep concern. Venture capital cannot fund most technology
businesses to profitability - the required investment is too high - so there
has to be a public market where high-growth companies can raise substantial
sums while they are still loss-making.
The European Private Equity and Venture Capital Association (EVCA) agrees,
and the establishment of such a market is one of its stated policy priorities
for 2004. Earlier this year, it supported those lobbying efforts by publishing
a research paper analysing the European "New Markets" experience,
and identifying some prescriptions for change.
Fortunately, there is some hope. The clear message is that, despite the failure
of most of the new markets which emerged in Europe in the last decade, the performance
of those markets demonstrates that "European entrepreneurs can create companies
successful enough to be listed on the stock market, and European saving is capable
of funding high-growth companies". The paper identifies a number of causes
for the failures of the past - including fragmentation (at one stage there were
around 20 high growth markets), the structure of the markets, and a failure
to harmonise the regulatory environment across borders.
Regulatory harmonisation is on its way, slowly but surely. Europe's financial
services action plan is making real strides in the right direction. A more harmonised
legal framework will enable a market to grow to achieve critical mass, and establish
itself as a natural monopoly. The EVCA paper argues that so long as that market
is properly structured (with market-makers, rather than being order-driven,
to encourage liquidity), appropriately regulated (and many think that more regulation
is better than less), and there are incentives to encourage the development
of a financial industry dedicated to small-caps, there is a real opportunity
for such a new market to develop in Europe. That would provide a much needed
pump for Europe's entrepreneurs and venture investors.
SJ Berwin is a pan-European law firm with a particular focus on
private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid,
Paris and Brussels. If you would like further information on our services to
the private equity industry please contact Jonathan Blake or Simon Witney in
our London office 020 7533 2222 or visit our website at www.sjberwin.com
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