Europes broken public markets

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News broke this week that fintech giant, Revolut, has reached the 50 million customer mark on their way to becoming the world's first truly global bank. It's an incredible feat and milestone for Europe's most valuable private technology company. And it begs the question - When will Revolut IPO? While we have no doubt their stakeholders - founders, employees and investors, are all eagerly awaiting the day, here at Shuttle/The Unsophisticated Investor, we’re more interested in WHERE they IPO. Not that we have much doubt. Its founder, Nikolay Storonsky, last year ruled out a London IPO, so it's surely to be the US…and for fair reason. The US public markets have the liquidity Revolut needs while Europe's markets are lagging far behind.

And that’s what we want to focus on today. Europe’s public markets, their struggles, can they be revived, and what would it mean if they were?

In the European region, there are multiple stock exchanges among which five are considered “major” (as having a market cap of over US$1 trillion):

• Euronext, which is a pan-European, Dutch-domiciled and France-headquartered stock exchange composed of seven marketplaces in Belgium, France, Ireland, the Netherlands, Italy, Norway, and Portugal.

• London Stock Exchange Group, which is a global stock exchange composed of the London Stock Exchange.

• Deutsche Börse, which operates Europe's third largest stock exchange, the Frankfurt Stock Exchange/Xetra.

• SIX Group, which operates Switzerland's major stock exchange, SIX Swiss Exchange, and Spain's major stock exchanges, Bolsas y Mercados Españoles.

• Nasdaq Nordic, which is composed of Scandinavian and Baltic stock exchanges; including Sweden, Denmark, Finland, Iceland, Estonia, Latvia, and Lithuania, with activity in Norway and the Faroe Islands.

With so many options, why are European companies opting for the US? Hint - the list above points to the first of a number of issues.

• Fragmented Capital Markets: Europe's capital markets are fragmented across multiple countries, each with its own regulations, tax systems, and market practices. This fragmentation causes increased complexity and costs for companies seeking to go public. A burden that can be avoided by listing in the US.

• Limited Access to Growth Capital: European markets often lack the depth of capital available in the U.S., particularly for later-stage funding, and this limitation can hinder the growth prospects of tech startups. As I mentioned earlier, the 5 exchanges above are considered “major”, meaning they have a market cap over $1 trillion. The largest, Euronext, has a market cap of roughly $6.3 trillion while the New York Stock Exchange has nearly 5 times that at $28 trillion and the NASDAQ sits at $19 trillion.

• Investor Appetite: There is a perception that European investors are more risk-averse, with a preference for established industries over high-growth tech sectors. This conservative approach can result in lower valuations and less enthusiasm for tech IPOs.

• Regulatory Hurdles: The regulatory environment in Europe can be more stringent and less flexible, posing additional challenges for tech companies with innovative or disruptive business models.

Why are European companies opting for the US?

It's pretty clear from the list above that there’s ample reason for tech scaleups to list in the US, but let's go a bit deeper. The main allure of US exchanges is higher valuations, as well as much larger markets to tap into. When it comes to European tech companies, a listing on the NASDAQ is seen as a mine of opportunities, especially to lay the groundwork to receive more investments in the future. Not to mention these companies are highly likely to all have some US venture capital/private equity investors behind them who will be pushing for a US listing.

The US exchanges also benefit from outsized earnings from a number of big companies, such as Nvidia and Apple which have multiplied their revenues several times in recent years as well as the US’ economic growth which has been faster than the UK or Europe’s. This has allowed US exchanges such as the S&P 500 to almost triple in value since the global financial crisis, whereas European exchanges have seen much slower growth.

These companies need their IPO to be successful. They need to raise money and have their share price grow. The U.S. offers the largest and most liquid capital markets globally, with access to a vast pool of investors and substantial capital - far more than Europe. This liquidity not only enables companies to raise significant funds but also supports higher valuations. Add to this, the U.S. investor base is both deep and diverse, with a strong appetite for tech stocks, offering companies a big, broad audience that can foster stability. European investors just don’t seem to have the same appetite. And importantly, the regulatory environment is also appealing as it is often viewed as more accommodating for high-growth tech firms. And with European regulation a popular topic in the media lately, and not for good reasons, there is even more incentive for Europe's great companies to jump to the US.

A stronger Europe

Without the right capital and potential exit markets, Europe will never reach its full potential!

EU leaders have been discussing the importance of strengthening the competitiveness of the European Union and its Single Market. In her speech at a recent European Council meeting, President von der Leyen extensively discussed how the new European Commission will aim to reduce burdens for startups. In this context, she proposed the introduction of a new EU-wide harmonised legal status for companies, in the form of a 28th regime - a single rule book for innovative start-ups in the whole European Union, which would immensely help startups scale within the EU once, instead of 27 times. This measure is vital for startups and innovation in Europe, as it enables startups to scale their operations more efficiently and effectively within the EU. A measure which might delay or even halt European startups from moving to the US.

She also promised the EU will “step up our investment in the next wave of frontier technologies, in particular supercomputing, semiconductors, the Internet of Things, genomics, quantum computing, spacetech and beyond”. And that the Commission will increase research spending “on strategic priorities, on groundbreaking fundamental research and disruptive innovation, and on scientific excellence” and will expand the activity of the European Innovation Council, the EU’s venture arm.

Talk of moving the work forward on the European Savings and Investments Union was also discussed. The European Savings and Investments Union is a strategic initiative by the European Union aimed at creating a single, integrated market for capital across its member states which would have significant implications for its public markets, including:

• Increased Market Integration: A unified capital market would reduce fragmentation, allowing for seamless cross-border investments and enhancing the efficiency of capital allocation.

• Improved Access to Capital: Companies, particularly SMEs, would benefit from easier access to diverse funding sources, including equity and debt markets, helping to facilitate growth and innovation.

• Enhanced Competitiveness: A more integrated and liquid capital market would make European public markets more attractive to both domestic and international investors, potentially reversing the trend of European companies seeking listings in the U.S.

• Strengthened Financial Stability: Diversification of funding sources and improved risk-sharing mechanisms would contribute to the overall stability and resilience of the EU's financial system.

We have a long way to go and much is yet to be seen but this is a great first step, and will hopefully lay the groundwork for a more competitive market. A market that incentivises European companies to remain in Europe!

This is a topic that would need multiple episodes to cover completely but the above should give you a better understanding of European and US public markets and the reasons why European companies choose to IPO in the US. Let's just hope Europe has truly woken up and is ready to compete!

What we’ve been working on at Shuttle

• Making more improvements to the onboarding flow 🫡

• Finalising our first two investments - very exciting 🤗

• Expanded our private launch by 50 members 🤜🤛

The Unsophisticated Investor is brought to you by Scott & Rob, the founders of Shuttle. We’re both sick of private markets being a playground exclusive to the ultra-wealthy so we started a company to challenge the status-quo. Shuttle’s singular focus is to unlock private markets for Millennial and Gen Z retail investors and help them build wealth through the highest performing private market opportunities.

Scott & Rob
Shuttle Co-Founders