How Europe’s bourses failed to challenge the US

In 2006 the London Stock Exchange scoffed at the overseas suitors casting eyes in its direction.

At the time, bourses in Europe were locked in a dizzying dance of potential marriages. Several of the biggest had already united to form Euronext. Germany was trying to position itself as a global leader. Supersized US rivals were circling, looking to snap up European markets and create transatlantic powerhouses for listings and trading.

Europe had a certain swagger, a confidence that its tie-ups could pose a serious challenge to Wall Street, which was still sitting in the shadow of the dotcom crash and a slew of corporate scandals. The LSE in particular, with its historic prestige, stood resolute, spiky and defensive. It had already deflected several potential partners, including Frankfurt’s Deutsche Börse, and would go on to rebuff more.

London had a “unique global position”, the LSE reasoned, built on the City’s deep investor base and top-notch financial services industry. That whole ecosystem, not merely scale, would be the foundation to keep attracting companies all over the world looking for a stock market home.

One financial crisis, a shock UK exit from the EU and a global pandemic later, and it is clear all sides got it wrong. US markets remain the undisputed home for listing and trading shares in the world’s most dynamic and fast-growing companies. London is failing to attract glitzy initial public offerings and is even losing some of its most reliable names. Other European markets are parochial and shallow and still bear a strong whiff of the old economy, dominated by banks and industrial companies.

Investors say the European dream of building an equity investment scene to rival the US remains distant and the path towards its creation is strewn with practical, political and cultural obstacles. Even if European exchanges tweak listing rules in an effort to draw in new companies, the US has a strong lead that could take decades to reel in as the world slowly adjusts to the end of the easy money era that pumped up America’s corporate champions.

“The US has had this very positive feedback loop in tech and with high-growth companies,” says Euan Munro, chief executive at the UK’s Newton Investment Management. “That created coverage and excitement, people got invested in it and there was no real short-term pressure . . . to show [corporate] profitability. People were happy to buy growth, it was its own reward.”

In Europe, by contrast, “there’s sometimes been a sniffiness about corporates making money, about people participating in growth, that the US does not see”.

Pandemonium, then pullback

After the Covid-19 outbreak, global central banks cut interest rates and propped up bond markets to support flailing economies. In response, 2021 smashed records for stock market listings as asset prices surged and companies jumped on to public markets. The enthusiasm was so pronounced that the US rediscovered a craze for special-purpose acquisition companies or Spacs — blank-cheque companies that list on exchanges essentially as a pot of cash, and then hunt down and gobble up other firms, providing those targets with an easy route to a listing.

But by 2022, the environment had changed dramatically. Global stocks fell about 20 per cent last year as central banks yanked up interest rates to tackle inflation, and dozens of Spacs imploded. Investors were no longer in the mood for speculative bets on companies yet to turn a profit. The unprecedented rush of initial public offerings hit a wall.

Europe and the UK also fared dismally. The value of European listings in 2022 dropped to its lowest point in a decade, according to Dealogic data. Just one deal — the €75bn listing of carmaker Porsche in Frankfurt — accounted for 60 per cent of the total amount raised. In the UK, newly listed companies raised 90 per cent less in 2022 than the heights of 2021, with just 45 companies listing in London, according to LSE data. Only six of those raised more than £100mn of new money.

The massive outperformance of the US in recent years — both in terms of listing numbers and in the valuations that companies there can command — was a product of the two factors: the technology scene in Silicon Valley, and the ultra-loose monetary policy that drove cash into riskier assets such as equities.

“There has always been a very developed tech investor base in the US,” says Valery Barrier, co-head of European equity capital markets at Citi in Paris. Particularly in the decade or so after the financial crisis, that was the sector most in demand.

In the early 2000s, the rapid growth and development of “mammoth companies” in the US, including Apple and Google, meant European investors and tech companies fell farther behind those across the Atlantic, Barrier says. “All this ecosystem goes hand in hand, more tech investors means more tech companies. All this creates a virtuous cycle.”

The result, according to bankers and other trading executives, was to starve European companies of much-needed capital to fuel their growth. “The fact that we don’t have enough pension money invested in Europe does not affect large-caps, it really affects mid-caps and small-caps,” says Anthony Attia, global head of primary markets and post trade at Euronext.

The UK in particular has suffered from a dearth of domestic investment in its stocks, with pension funds’ holdings of UK-listed equities plunging from 50 per cent of their asset allocation to just 4 per cent in two decades after changes to accounting rules incentivised them to buy government bonds instead. That compares with Australia and Canada, both of which also have stock markets dominated by “old economy” companies but have 22 per cent and 9 per cent, respectively, of their pension assets in equities.

Antoine de Guillenchmidt, co-head of European equity capital markets at Goldman Sachs, says European stock exchange executives regularly ask him what more they can do to attract high-quality companies to list.

“The one thing that you should be promoting that is not under your direct control is having an ecosystem of asset management firms that are European or local that want to invest with the same type of weight and forceful approach [as] their US counterparts,” he tells them. The IPOs that his bank runs tend to have “a very large proportion of US funds or the European arm of US funds taking part”.

Private equity has stepped into this void. The decade of easy money and record-low interest rates fuelled the expansion of private equity groups on both sides of the Atlantic, allowing them to scoop up companies at low valuations using cheap and readily available financing.

Ironically, the exits for private equity firms are slowly getting bricked up. The more public equity markets deteriorate, the harder it is for private equity firms to monetise their investments in companies through a listing, leaving them either holding businesses for longer periods or selling them to other private buyers. US and European private equity groups on average held companies for six-and-a-half years by 2022, compared with just over four years in 2000, according to PitchBook data. “We need to find the right moments to support these private investors in their exits,” says Attia.

The overall number of listed companies has been shrinking across the world in recent years, partly because easy money meant owners could easily finance their growth without going public. But again, Europe fared worse, with many of its most promising technology companies opting to float in the US; they include UK-based luxury clothing retailer Farfetch and Swedish music streamer Spotify in 2018 and Swiss trainers company On Running in 2021. Chip designer Arm, for years one of the LSE’s only significant tech companies before it was acquired by SoftBank in 2016, is also set to relist in New York.

Spacs also sucked in nascent European companies that local investors eyed with distrust, including the car retailer Cazoo and healthcare company Babylon. Europe even started losing existing companies; since 2000, 221 have headed to US exchanges to list, more than double the tally heading the other way, according to Dealogic. Those choosing the US have raised in total nearly four times the money of US companies that chose Europe.

Among the most notable was the €145bn German industrial giant Linde, which delisted from Frankfurt last month, leaving its sole listing in New York and depriving Deutsche Börse of its most valuable company.

“I don’t think you can hope to replicate the US in Europe or vice versa,” says Barrier at Citi. “We have global champions in Europe but they grow on a smaller domestic base before they can have international ambitions.”

US exchanges have spotted the weakness and are courting European companies, enticing them to list by highlighting the vastly bigger pool of capital and breadth of investors available across the Atlantic.

Cassandra Seier, head of international capital markets at the New York Stock Exchange, says the NYSE undertakes a lot of outreach. “We have members located on the ground in various regions,” she says. “We want companies that are trying to attract US capital to be listed here, it doesn’t matter which country you originate from, it doesn’t matter what size you are.”

Europe down, not out

Attia, of Euronext, says Europe’s biggest exchange operator has shifted its competitive focus. “Before Brexit we were pitching against the LSE. Now we don’t pitch against LSE at all — we pitch against Nasdaq,” he says, adding that over the past two years the European exchange has not lost a battle against its tech-focused US rival.

Euronext has grown in recent years through a series of acquisitions. It now provides a single platform for the exchanges of Amsterdam, Paris, Milan and others, as well as a clearing house.

But even after decades of talk about a pan-European capital market, the region remains fragmented, with numerous exchanges, clearing houses and settlement venues, as well as a patchwork of national securities laws. All of this is a stark contrast with the simpler environment in the US, where there is a one main regulator for securities and one clearing house, the Depository Trust & Clearing Corporation, handles all clearing and settlement.

Andreas Bernstorff, head of equity capital markets at BNP Paribas, says the disjointed nature of listing venues across Europe remains a big impediment. “The problem Europe has is the fact that it has [so many] exchanges. Liquidity concentration is a problem for European capital markets . . . London has been downgraded as a neutral place to go and Amsterdam is an alternative.”

The EU has proposed a series of changes to make it less costly and cumbersome for small and medium-sized companies to go public in Europe, including shortening the IPO offer period from six to three days and standardising offering prospectuses across the bloc.

British officials are also seeking to make changes, including consulting on the role of British pension funds in the domestic equity market. “Real change requires both financial and an ongoing sustained commitment from all parts of the ecosystem,” says Nikhil Rathi, chief executive of the UK’s Financial Conduct Authority.

Some investors say the fragmented environment in Europe suits their needs. The US may be more fast-paced, with more trading and a deeper pool of investors, but what it gains in quantity it may also lose in quality. There is an indulgence of lavish executive pay that would be societally more problematic in Europe, along with two-tier ownership structures that often confer more rights on founders at the expense of other shareholders.

The US is also prone to manias. Luc Mouzon, head of equity capital markets at Amundi, Europe’s biggest investment house, describes the Spac boom as “a crazy market, a clown show”, while Bernstorff says it marked “the peak of silliness” in the low interest rate age.

Mouzon adds that in 2022, “our view on valuations [in Europe] was heard. It was more rational. There were fewer IPOs, I agree, but from our point of view it was much better.” He adds that a successful listing “is one where five to eight years later, we’re still there . . . It doesn’t have to be a splash and you don’t have to capitalise on it in a couple of months.”

Two things could help Europe to develop some momentum. One is the macroeconomic environment; the re-emergence of inflation and the resulting sharp rises in interest rates mean investors are no longer so willing to speculate on companies that promise to make a profit sometime in the future. Instead, they increasingly covet the more staid and steady dividend-paying companies that Europe has in abundance.

“[Inflation] has profound consequences for how you structure a portfolio,” says Munro, at Newton. It hits bond prices and stings speculative bets on stocks, he explains. “Now even older people are thinking about investing in equities with income.”

The other factor, perhaps ironically, is Brexit. The UK, looking for deregulation opportunities following its departure from the EU, is imbued with a new determination to revamp its still-formidable financial services industry. If it succeeds, and manages to rejuvenate London’s stock market in the process, that would intensify the pressure on the EU to respond in kind.

“I don’t think it’s a lost cause at all,” says Nathalia Barazal, co-head of Lombard Odier Investment Managers. “When you feel the cold wind of being irrelevant it’s a catalyst, a kick in the butt. Either you do something, or you lose”.

Data visualisation by Patrick Mathurin