Something is stirring in the world of small cap, high-tech Euro-stocks. Could it be that at last continental European investors are developing a taste for the riskier end of equity market investment? That the long-held hope of a true equity culture in those bastions of fixed-income investment is finally in evidence? To the extent that there is now a liquid market for start-up biotech stocks, the riskiest of all companies?
It’s a world in which anything might happen next but, for now at least, this really does seem to be the case. So what can have brought about such a dramatic culture change? Just a year or two ago, the very idea of a European equivalent of Nasdaq’s biotech list would have been unheard of.
The answer, at least in part, lies in good old continental European dirigisme. In France and Germany, interventionist moves by the respective governments have undoubtedly given a boost to the developments of their growth equity markets. And for once, the usually free market-oriented entrepreneurs and investors are not complaining.
In France, for example, part of the appeal of the Nouveau Marche derives from the substantial tax incentives made available by finance minister Dominique Strauss-Kahn to the new DSK funds which bear his initials. To qualify for the tax break, 5 percent of these funds must be invested either in Nouveau Marche stocks, Marche Libre stocks (the Marche Libre is the successor to the OTC market), or in unlisted companies. A further 45 percent must be in listed French stocks.
Following the introduction of this tax break, management groups have rushed to launch DSK funds and the result has been a virtuous circle in which the market’s popularity has led to higher stock prices, growing numbers of satisfied Nouveau Marche investors and queues of companies planning IPOs to raise capital for their big ideas.
Spoilt for choice
But the Nouveau Marche is far from the only option open to them. Indeed, issuers looking for an equity market on which to list and raise capital for their start-up, high-tech companies in Europe are spoilt for choice these days. In theory, at least, they can opt for Nasdaq, the UK’s Aim, Germany’s Neuer Markt, the pan-European Easdaq or France’s Nouveau Marche. Or a combination of two or more.
SCM Microsystems of Los Gatos, California, for example, went public in October last year, raising just under $50 mn in a dual listing on Nasdaq and Frankfurt’s Neuer Markt. Since its IPO, SCM has followed up with a secondary offering, which has now closed, and the company declares itself happy with the dual listing arrangement.
SCM, which was founded by Robert Schneider in Germany but has had dual headquarters, in the US and Germany for the last couple of years, felt the need for a European element in its IPO because the company derives more than half its $20 mn-a-year revenues from the continent. That meant it already had a profile in Europe and that it would benefit by increasing that profile. The company could have opted for the pan-European Easdaq rather than a domestic German listing. But Steven Humphreys, president and CEO, says SCM chose the Neuer Markt because of its stronger presence in Germany than elsewhere in Europe. ‘We got 80 percent of the benefit of going with the Neuer Markt,’ he says.
Nick Woolf, European biotech analyst at Robertson Stephens in London, notes that as a pan-European market Easdaq ‘offers everything’ in terms of desirable market features – satisfactory (Nasdaq-level) regulatory standards, accessibility, transparency and so on. But he acknowledges that for a French or German company, in particular, with their strong respective ‘new’ markets, a dual listing on a domestic exchange and on Nasdaq makes a good mix. ‘Dual listings may be a hassle but one of their advantages is that they help to flatten out volatility,’ he says. ‘We’ve seen that already. When there’s been heavy selling on Nasdaq in the US of a company that’s also listed on the Neuer Markt or the Nouveau Marche, it’s often been more than compensated for by buyers in France and Germany.’
Bernard Davitian, CFO of Transgene SA, the Strasbourg-headquartered gene therapy specialist, would second that. In March his company raised $57 mn in the biggest biotech IPO so far this year, which took the form of a simultaneous listing of ordinary shares and American Depositary Shares on Nasdaq and the Nouveau Marche.
Davitian says Transgene thought deeply about which markets it should list on. ‘For us Nasdaq was a natural choice,’ he says. ‘Most of our peers [in the biotech sector] are listed there and in the US Nasdaq would bring us high liquidity and a highly knowledgeable group of investors. But as a European company, and with the growing interest in the biotech sector in Europe, we felt we should have a listing in Europe as well. We thought European investors might react differently from American investors and it would be good to have a strong European base.’
Having come to that conclusion, Transgene then weighed up the pros and cons of a listing on Easdaq, the London Stock Exchange or the Nouveau Marche. It plumped eventually for the Paris market. ‘It seemed a natural choice for us, because we are French.’
Nick Woolf describes Transgene’s management as being of the highest caliber and he notes the appropriately international nature of its roadshow, which helped the company achieve its goal of a broad-based mix of shareholders. The split after the IPO, according to Davitian, was half US, half European. ‘Of the 50 percent in Europe, about a third were French, a third in the UK and a third in the rest of Europe,’ he reports. ‘That was at listing, but I assume it hasn’t changed much since then. There has been no significant flowback,’ he adds. That’s good news for Transgene; so is the level of liquidity in the stock. ‘I would say the trading level on Nasdaq and the Nouveau Marche is about equal,’ says Davitian. ‘The level of liquidity on both markets is very good.’
Paul Appermont, executive counsel at Flanders, Belgium-based Energetics NV, is just as enthusiastic about his company’s chosen market. In this case that’s Easdaq, where Energetics took the plunge to become one of the early listing pioneers some three years ago. ‘It’s been almost unbelievable,’ enthuses Appermont, ‘from every point of view – visibility, liquidity, price, trading volume, interest. Easdaq was a perfect match for us,’ he continues. ‘It’s a pan-European market for growth companies and we’re a pan-European growth company.’
Fab location
Whatever way you look at the development of these markets, it’s difficult to avoid the word globalization. And in the high-tech area, that’s hardly surprising. Of all people, those operating in the field of advanced technology are the least likely to feel constrained by geography. Fabmaster, which is due to list on the Nouveau Marche as this issue of Investor Relations goes to press, is a typical example. Sure, it’s headquartered in France, in Grenoble. But that’s less a reflection of the company’s nationality, more the result of senior management’s predilection to be close to the ski fields of the Alps – and because the area is la vallee silicone of France. Fabmaster’s president is British; its chairman is German; and only just over half its 45 staff are French.
The advent of Emu, with its implications for borderless trading, can only reinforce the growing internationalism of Europe’s equity markets. And given the range and success to date of the markets now available – on the domestic and pan-European fronts – it really does look as if the risk-averse tendency of continental European markets is on its way to becoming a thing of the past. The future is here and it’s an age of equities.
Perhaps the real test of that will come with a major market correction in the high-tech, high-growth sector. After all, everyone likes high risk while they’re actually enjoying the high rewards; the maturity of investor sentiment will be tested when the downside risk becomes reality.
