Brexit, Covid-19, supply chain issues, inflation — for the past two years, political and macroeconomic events have been keeping equity capital markets actors on their toes. But as issuers, investors and bankers grapple with the impact of these big external events on sectors and markets, a more fundamental issue flies under the radar: The deepening divide between northern and southern Europe.
One would expect the new listing activity of a country to correlate somewhat with its economic power — Germany and the UK at the top, say, and smaller European countries further down the list.
Italy is the fourth largest economy in Europe. Spain is the sixth largest. Sweden is number 11 and Norway, Denmark and Finland take places 15 through 17.
However, the roles are reversed in the European ECM league tables, where Sweden is in fourth place, with €8.3bn raised across 95 IPOs, and Norway is just one rung behind, with €5.2bn from 53 IPOs. Both of them dwarf Spain with €1.65bn from four new listings. Italy has raised just €846m from 24.
The problem is not so much with the major deals that make the headlines and steal the show. It lies in the small and mid-cap transactions — the equity bread and butter.
Norway and Spain hosted only one deal each above €1bn this year, but Norway had more than 13 times as many IPOs as Spain.
“Smaller IPOs continue to be complicated in Europe, because there is a lack of liquidity in the secondary market compared to the US and Asia,” said an equity capital markets banker at a Swiss bank. “And I think there has never been a greater divergence between some markets in Europe versus others."
The gap between North and South has grown wider in recent years, especially after the pandemic. The number of IPOs in Sweden and Norway has shot up by 80% this year compared to 2020, and has more than tripled since 2019. In Italy, it dropped by a third between 2019 and 2020 an increased only marginally this year. Spain benefits from the growing interest in renewable energies, but with four IPOs in 2021, it is far from catching up to the Nordic countries.
This has nothing to do with Brexit, of course. Rather, it is down to the domestic institutional investor base.
That is not to say that domestic investors are the only buyers of mid-cap deals. But an active domestic market acts as a catalyst, drawing the attention of international accounts. Some investors these days use Sweden almost as a synonym for small and mid-cap public companies.
“We’re very routinely named as investors in Nordic IPOs, and I don’t see that changing,” said an equities investor who, although based in London, sometimes ends up being categorised as a regional specialist. “Small caps are a massive area of focus for us.”
In Scandinavia, the large pension funds create reliable demand and are quick to cornerstone promising deals. Italian institutional investors, in contrast, seem more hesitant to support new listings.
Meanwhile, on the supply side of the equation, family-owned companies with a lower affinity for foreign capital dominate the Italian business landscape.
This lack of connection has consequences. In July, the Italian vaccine vial maker Stevanato chose to list in New York, raising $672m and achieving a valuation of over $5bn.
IPOs mean liquidity, and liquidity means funds for growth and innovation. Sweden is known for disruptive fintechs, from Klarna to Spotify. With its population of just 10m, it is the classed as the second most innovative country in the world, after Switzerland, according to the Global Innovation Index 2021.
Italy and Spain occupy positions 29 and 30 in this list. The pattern is clear.
In the race against China and the US for dominance in a digital and highly competitive future, Europe can not afford to let some of its largest economies trail behind in stock market listings.