Scaling Europe's venture capital crucial for deeper equity markets

The European Union's economy heavily relies on bank funding, making the strengthening of equity markets a key policy priority under the Capital Markets Union agenda.

A new ECB Occasional Paper highlights a significant listing gap between the EU and the United States, characterized by smaller market sizes, differing market capitalizations, and lower initial public offering (IPO) activity in Europe.

Empirical analysis reveals that euro area companies experience increased profitability, employment, innovation capacity, and productivity after listing, indicating broader economic benefits.

However, this is associated with challenges for long-term investment strategies, such as potential short-termism.

A comparison with the US suggests that while the qualitative benefits and risks of listing are similar, euro area companies appear to benefit somewhat less from public listing than their US counterparts, underscoring a structural difference in market dynamics.

The paper further documents that pre-listing financing opportunities in the EU are less developed, with significant implications for firm growth and market depth.

This is particularly evident in the venture capital (VC) markets, which are crucial for nurturing young and innovative firms into potential IPO candidates.

The EU's financing ecosystem for such firms is less vibrant compared to the larger, more developed US VC markets.

Consequently, EU firms often rely on foreign, especially US, investors for larger funding rounds, which can influence where these firms ultimately choose to list.

Enhancing VC access and market size in Europe is therefore essential to support a robust pipeline of domestically listing companies, thereby deepening EU capital markets.