Hi-tech comes to Europe

New venture capital raised in Europe € (m)
	1995	1996	Growth  (%)
European total	4,398	7,970	81.2
UK	1,841	3,738	103.1
Netherlands	257	1,402	444.5
France	793	1,081	33.8
Italy	264	727	175.3
Germany	210	340	61.9
Belgium	160	185	15.7
Switzerland	48	156	225.9
Norway	46	94	105.8
Spain	142	55	-60.9
Sweden	438	50	-88.5
Finland	53	47	-10.2
Portugal	86	36	-57.8
Austria	1	25	1,839.9
Greece	15	24	61.7
Ireland	12	20	58.1
Iceland	4	7	70.9
Denmark	28	1	-96.6
Source: European Venture Capital Association

"There's never been so much interest in the hi-tech sector, and the driving forces behind that interest are not going to go away. It's as if we've broken open a wall and water is flooding through it." Easdaq vice-chairman Jos Peeters believes that Europe is rushing to follow the US into hi-tech investing - and figures from venture capitalists and bankers bear him out.

The British Venture Capital Association says funds invested by its members in UK hi-tech companies grew almost tenfold between 1984 and 1996 and are now almost one-sixth of their total new investment. Figures from the European Venture Capital Association show that venture-capital investment in computer-related, electronics-related, biotechnology and health-related fields almost doubled over the five years from 1992 to 1996. By the end of that period, these sectors accounted for just over 15% of total new investment.

Stanislas Yassukovich, the chairman of Easdaq, says: "Venture capital is spreading across continental Europe and the range of providers is widening. We've not had the marriage of innovation and capital in Europe that the US had years ago, but we're beginning to see it now."

However, the most exciting development for banks in the sector has been the shift from venture-capital financing of hi-tech companies to public-equity financing. "The biggest trend in the past 12 months has been the readiness of public markets to take on risk that was previously the realm of venture capitalists," says Scott Ryles, managing director and head of global technology at Merrill Lynch in Palo Alto, California. "This appetite that the public has shown for higher-risk situations means two things," he continues, speaking from the perspective of a major underwriter of hi-tech IPOs. "One, venture capitalists and mezzanine equity investors see much quicker exits by IPO; two, the dollar amount needed to nurture and support a company is much reduced. Increasingly, the restriction is not the availability of finance but whether there is a cultural acceptance of risk."

At least part of investors' motivation is the need to play catch-up. "For some time now investors across Europe have been buying heavily after missing the upside of the previous few years in the sector," says Marc Odendall, managing director of Deutsche Morgan Grenfell's European technology group. Illustrating the level of demand, he points to the DMG-arranged offer for Singulus Technologies, a world leader in the replication of compact discs and digital video discs. At Dm360 million ($637 million), the sale is the biggest German hi-tech IPO to date. Offered at Dm82, the shares were trading at Dm200 by mid-April this year. He also recalls the clamour for stock in Beta Systems, a German software company for which a $64 million issue was launched in mid-1997. "The issue was 105 times oversubscribed."

Investors also feel that the fundamentals are good. "We've seen a big spike in hi-tech stocks in Europe's domestic markets over the last two years as investors reallocate funds and new money flows in," says Dhiren Shah, managing director in charge of hi-tech investment banking in Europe for Morgan Stanley. "Some quite spectacular fundamental growth rates can be found. Once venture capitalists are convinced that they can clearly see an exit, you will see more of them focusing on the sector. The public market is embracing these stocks, which will lead to more private capital; it's a virtuous circle."

He points to the early success of Morgan Stanley's most recent transaction, the IPO of Arm Holdings. This microprocessor-design company based in Cambridge, UK, floated at £5.75 ($9.40) and finished the first day of trading at £8.40. Morgan Stanley acted as bookrunner and global coordinator for the IPO, which was done through a simultaneous dual listing of shares on the London Stock Exchange and ADRs on Nasdaq, a first for a UK technology company. Morgan Stanley, which recently created its own European hi-tech index to complement its US hi-tech basket of 35 stocks, estimates Europe's hi-tech market is worth between $250 billion and $300 billion.

Smaller stock exchanges hope to benefit from the hi-tech boom. Several European exchanges dedicated to growth companies, notably Easdaq, Aim and the EuroNM network (which links the alternative markets in Amsterdam, Frankfurt and Paris), are all scrambling to attract new listings. All greedily eye US exchange Nasdaq's 5,500 companies. They have some way to go.

EuroNM enthusiasm

The number of companies listed on EuroNM markets is around 70, with a total market capitalization of just over $15 billion. Of these, seven are listed dually with Nasdaq, two with AIM, one with the Swiss Stock Exchange and one with the Toronto Stock Exchange. The Neuer Markt in Frankfurt, which celebrated its first anniversary in March, has been especially successful recently in capturing the imagination of both institutional and retail investors. By mid-April there were 20 companies listed in Frankfurt and the index had risen by 137% since the start of the year. "Investor interest has been greater than we thought possible," says Clive Pedder, the EuroNM network's marketing director. "Where you have such an imbalance of supply and demand you will see rapid upward price movements. But these companies are sound, and have an exciting story to tell."

Unlike EuroNM, which is an alliance of national markets, Easdaq models itself on Nasdaq and has no physical location. But with its 26 listings does Easdaq have any realistic chance to compete with its more established US rival? Most market participants believe that Nasdaq will remain the natural exchange for hi-tech companies for the foreseeable future. Nowhere else are investors prepared to take the time to understand complex stories. If a high-growth company wants to be taken seriously, it simply has to be listed on Nasdaq.

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