Much has been made of the general uplift in IPO activity, which really got under way during Q2 this year, across a number of European stock exchanges. PricewaterhouseCoopers’ IPO Watch notes that in Q2 this year there were a total of 95 companies floated across European stock exchanges raising around E8.7bn, compared to just 23 companies raising €1.6bn in Q2 last year. As would be expected, the majority of these took place on Europe’s most active stock exchange: London. Some 65 of the 95 companies floated in Q2 this year raised E2.5bn, compared to 15 of the 23 floated in Q2 last year, which raised E767m. Lisa Bushrod reports.
In a sense though, the actual amounts are of limited interest since what really catches the attention of venture capitalists is the ability to access these markets on a routine basis, and especially to be able to go back and sell further stock once lock-in periods have lapsed. Given that the phenomenon of the accelerated IPO (there have been three this year already on the London Stock Exchange’s Alternative Investment Market (AIM); Centaur Holdings, Torex Retail and PE Ports) is purported to have been invented to enable institutional investors to bypass private equity investors and partake in the type of returns they enjoy on an investment, it’s interesting to note that without the participation of venture capital backed companies on the London Stock Exchange’s main list, new listings would have presented fairly slim pickings so far this year. Some 10 of the 23 listings from January to July inclusive were backed by venture capital companies. (See EVCJ March & May 2004 issue for full explanation of accelerated IPOs and their rationale.)
Venture capital backed companies have been less predominant on AIM in the first half of this year, in total registering just nine IPOs against a total of 144, a ratio of one in nine.
These figures probably say more about the state of European stock markets than venture capital backed companies’ potential exit routes, since the IPO route is lengthy, expensive and often embarked upon merely to galvanise strategic trade buyers into action. European Venture Capital & Private Equity Association figures bear this out – see table which notes the small amount of companies that do leave their European venture capital backers for life in the public markets.
However, time will tell whether or not AIM starts to attract and sustain more venture capital-backed IPOs. Although it’s this market that has facilitated the accelerated IPO phenomenon, it’s more down to regulatory logistics which inhibit such a process from occurring in a timely fashion on the main list. Plus there is considerable overlap between the institutional investors on the main list and those on AIM, meaning that investors on AIM couldn’t really be described as having an anti-venture capital bias.
In fact if the change in the tax regime governing UK Venture Capital Trusts unleashes the flood of funds expected into this space, some of that will inevitably be raised for AIM-invested VCTs and AIM may find it has a far deeper pool of money that is seeking to invest and appreciates the venture capital mindset. (See EVCJ May 2004 issue for feature on VCT tax changes and their likely impact on fund raising.)
A recent survey undertaken by Baker Tilly and Faegre Benson Hobson Audley found that AIM is now seen as a market in its own right rather than as a stepping stone onto the main market. In fact, the traffic has been the other way. The survey found, for example, that 47 companies joined AIM from the main list in 2003, but just three companies moved from AIM onto the main list. Sixty per cent of those that moved to AIM from the main market cited their rationale for doing so was down to AIM being a cheaper option and 40% because it entails less of a regulatory burden. Having celebrated its tenth birthday this year, AIM is showing signs of maturity. Whether that translates into a more viable exit route for venture capitalists, especially in light of the upsurge in AIM-investing VCT fund raisings, remains to be seen.