A Public-Private Fund to Support the EU IPO Market for SMEs Final Report Centre for Strategy & Evaluation Services LLP October – 2020 EUROPEAN COMMISSION Directorate-General for Economic and Financial Affairs DDG2.L — InvestEU and financial institutions Contact: Pierfederico Asdrubali E-mail: [email protected] European Commission L-1882 Luxembourg EUROPEAN COMMISSION A Public-Private Fund to Support the EU IPO Market for SMEs Final Report Directorate-General for Economic and Financial Affairs InvestEU and financial institutions 2021 EUR [number] EN LEGAL NOTICE The information and views set out in this study are those of the author(s) and do not necessarily reflect the official opinion of the Commission. The Commission does not guarantee the accuracy of the data included in this study. Neither the Commission nor any person acting on the Commission’s behalf may be held responsible for the use which may be made of the information contained therein. 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Except otherwise noted, the reuse of this document is authorised under a Creative Commons Attribution 4.0 International (CC-BY 4.0) licence (https://creativecommons.org/licenses/by/4.0/). This means that reuse is allowed provided appropriate credit is given and any changes are indicated. For any use or reproduction of elements that are not owned by the European Union, permission may need to be sought directly from the respective rightholders. A PUBLIC-PRIVATE FUND TO SUPPORT THE EU IPO MARKET FOR SMES Abstract The assignment ‘A Public-Private Fund to support the EU IPO Market for SMEs’ was carried out for the European Commission by the Centre for Strategy & Evaluation Services (CSES) during 2020. The backdrop to the study are the market failures preventing SMEs from fully exploiting the potential to raise capital on EU stock markets to support their growth. Overall, and after consultations with stock markets, financial institutions and others, the study concludes that there is strong support for an EU fund to promote SME IPOs. The study argues that it should be established as a crossover fund that invests in SME shares at different stages of the IPO process (pre-IPO, IPO and post-IPO). The target group should be SMEs and small mid-caps from any sector with up to 500 employees but also other firms with up to 3,000 employees if they are innovative. The proposed Fund should operate on an EU-wide basis. Various options with regard to the Fund’s structure are evaluated (intermediated equity investment, fund-of-funds, special purpose vehicle). The study makes a number of recommendations with regard to the design and size of the fund, leverage of private sector investment, and also examines possible costs and benefits. Résumé L’étude intitulée « Un fonds public-privé pour soutenir le marché européen des introductions en bourse pour les PME » a été réalisée en faveur de la Commission européenne par le Centre pour les services de stratégie et d'évaluation (CSES) en 2020. L'étude a pour toile de fond les défaillances du marché empêchant les PME d’exploiter pleinement le potentiel de mobilisation de capitaux sur les marchés boursiers de l'Union Européenne afin de soutenir leur croissance. Après consultation avec les marchés boursiers, les institutions financières et autres parties prenantes, l'étude est arrivée à la conclusion qu'il existe dans l’ensemble un fort soutien en faveur d'un fonds européen destiné à promouvoir les introductions des PME en bourse. Cette étude soutient que ce fonds devrait être établi en tant que fonds croisé (crossover fund) qui investirait dans des actions de PME à différentes étapes du processus d'introduction en bourse (pré-OPI, OPI et post-OPI). Les groupes cible du fonds devraient être les PME et les entreprises à capitalisation moyenne ‘mid-caps’ de tout secteur économique comptant jusqu'à 500 employés, mais également d'autres entreprises comptant jusqu'à 3000 employés si elles sont innovantes. Le futur fonds devrait également être mis en œuvre à l'échelle européenne. Diverses options concernant la structure du fonds sont évaluées (investissement en actions intermédiées, fonds de fonds, véhicules à usage spécial). Cette étude formule un certain nombre de recommandations concernant la conception et la taille du fonds, l'effet levier des investissements du secteur privé et examine également ses coûts et ses possibles avantages. A PUBLIC-PRIVATE FUND TO SUPPORT THE EU IPO MARKET FOR SMES TABLE OF CONTENTS PRINTED BY [XXX] IN [COUNTRY] 4 EXECUTIVE SUMMARY I 1 INTRODUCTION 1 1.1 Resume – Study objectives and scope .................................................................. 1 1.2 Research Plan ................................................................................................... 1 1.3 Final Report ...................................................................................................... 3 2 PROBLEM DEFINITION & EU FUND INTERVENTION LOGIC 6 2.1 Baselines for SME IPOs....................................................................................... 6 2.2 Factors Influencing the Trends in SME IPOs ........................................................ 10 2.3 IPO Process and Market Failures ........................................................................ 14 2.4 Current Developments and Proposals ................................................................. 19 2.5 InvestEU and Existing EU Equity Instruments ...................................................... 23 2.6 Conclusions – Problem Definition and Intervention Logic ...................................... 25 3 DEFINITION OF EU FUND OPTIONS 26 3.1 Role of the EU Fund ......................................................................................... 27 3.2 Fund Structure and Governance ........................................................................ 37 3.3 Geographical Scope of the Fund ........................................................................ 46 3.4 Private and Public Sector Engagement ............................................................... 49 3.5 Size of the Fund and Cost Benefit Assessment..................................................... 59 3.6 Investment Guidelines and Scoreboard .............................................................. 75 3.7 Strengthening the Wider SME IPO Ecosystem ...................................................... 77 3.8 Macroeconomic Context and the Fund’s Operations .............................................. 78 4 GOOD PRACTICE ASSESSMENT 86 4.1 Overview ........................................................................................................ 86 4.2 Good Practice Cases......................................................................................... 88 4.3 Other Initiatives .............................................................................................. 94 5 SUMMARY AND RECOMMENDATIONS 100 5.1 Key conclusions and Recommendations ............................................................ 100 APPENDIX A: LIST OF INTERVIEWS 105 APPENDIX B: LIST OF SECONDARY SOURCES 108 A PUBLIC-PRIVATE FUND TO SUPPORT THE EU IPO MARKET FOR SMES Executive Summary Below we provide a summary of the main findings of the assignment ‘A Public-Private Fund to support the EU IPO Market for SMEs’. The assignment was carried out for the European Commission by the Centre for Strategy & Evaluation Services (CSES) during 2020. 1. Study Objectives According to the European Commission’s terms of reference, the study’s objectives were to: Review existing best practices and lessons learned on the implementation of public-private funds in the EU IPO segment. Model different EU SME IPO Fund option. Assess how the proposed features of the EU Fund can address the market failures at the different stages of the IPO process. The various deliverables to be produced were an inception report, an interim report and a (draft) final report. The assignment was carried out over a period of six months although some adjustments to the original timescales within this overall period were agreed. The research involved a combination of desk research to examine IPO statistics and the factors explaining recent IPO trends, an interview programme involving 60 key stakeholders, focus groups with a total of 33 participants, and a survey implemented by a number of European associations that elicited 65 responses. We worked with an external expert who undertook modelling aspects of the assignment. Because of COVID-19, video-conferencing technology was used for the research involving discussions with stakeholders. 2. Problem Definition The number of SME IPOs on EU-27 stock exchanges increased in