LETTERS TO THE EDITOR

Summer 2007

by Javier Echarri

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Sir,
The article by Leif Beck Fallesen in the Spring issue of Europe’s World was a welcome contribution to the debate about the funding of Europe’s high-growth businesses.

Fallesen is absolutely right in seeing young, innovative companies as the lifeblood of the European economy of the future. These companies create not just jobs, but high value jobs. I would also make the point that higher up the food chain, mid-market and even large companies that have been through private equity ownership are generally more productive than their peers – in terms of both employment and profits – as a result of the disciplines imposed by this ownership, including governance, accounting and IT systems, strategic focus and the ability to attract world class managers that all this tends to bring.

The question of secondary markets in Europe is important because these public markets complement private equity in providing finance for high growth businesses, as well as providing exit for the private equity backers, and thus allowing them to raise further funds to back more companies. The substantial growth of the London Stock Exchange’s Alternative Investment Market (AIM) aided by light regulation, and of Euronext, has enabled numerous high potential businesses to build on early growth. The question today is whether AIM and Euronext can provide sufficient critical mass for investors and liquidity for small cap, high growth European companies, and further how the market in Europe can compete with the traditionally more venture capital friendly market in the US.

As to the liquidity of junior markets, I would emphasise that liquidity doesn’t just happen – small cap companies have to work hard to get their shares traded, with corporate activity, new contracts, new customers, new hires, and plenty of PR and − as always − contending with the issue of how to increase the limited level of analyst coverage for small companies. A report produced in 2006 by the British Venture Capital Association and the London Stock Exchange showed that in 2005, annual turnover of shares on AIM was 74% of a company’s market cap, as against 139% on the main market. The continued growth and success of these key secondary markets to provide an exit − are fundamental to a healthy market for private equity, and here we need to enhance visibility for investors and attract investor interest.

Europe’s young companies need the support of efficient and lightly regulated stock markets, but they also have to deliver continued growth to maintain that support. Research shows that listed private equity-backed companies outperform their peers over the course of a year following flotation, underlining the view that private equity does indeed prepare companies well for the public arena.

Last year’s preliminary activity figures made one thing very clear: In Europe, venture capitalists raised more money in 2006 than in any previous year bar the boom year of 2000. And we are seeing more money invested in VC, good news for a segment of private equity that has struggled recently.

There are some extremely encouraging factors currently in place that speak for the favourable evolution of venture in Europe. At the EVCA’s Investors’ Forum in Geneva this Spring, Paul Deninger of Broadview Securities painted a radically changing – and highly positive − picture for growth companies in Europe, and for tech companies in particular. The number of transactions in Europe is reaching parity with US, driven by what compared to the US are positive structural factors. There is strong investor interest in the tech sector again, with a healthier market than ever before for IPOs, served by European advisory boutiques. In Europe it has always been harder to be successful than in US, but maybe this is changing.