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Stock market shrinkage exacerbated by Europe IPOs at decade low


IF THE lament over a shrinking equity market has been momentarily drowned out in the US by the opening bells rung by red-hot debutantes, it's only gotten louder on this side of the Atlantic.

Eighty-four companies have listed in Europe this year, the fewest in a decade by a mile, according to data compiled by Bloomberg. By deal value, it's the lowest since 2013. Among those that debuted, Airtel Africa Plc and Finablr Plc flopped. Among those that almost debuted, Swiss Re AG last month pulled the IPO of its ReAssure Group Plc unit hours before its planned listing. Among those oft-rumoured to be close to an initial public offering - anyone craving some Deliveroo?

Blame it on investor jitters amid an escalating trade war. But structural changes are also causing both the supply of and demand for new equities to shrink: Cash-rich funds are nursing startups for longer without taking them public, and actively managed portfolios - the kind that will buy into an IPO - are seeing outflows to the benefit of index-tracking funds.

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For the stock-picking investors who do have cash to invest, that means fewer quality, high-growth companies to choose from. The equity market, at least in theory, helps spread wealth by growing savings. The fear is that as it shrivels and fast-growing companies delay their listings, mom-and-pop portfolios will be stuffed with less attractive investments.

Along with buyouts and mergers, dwindling new listings have led to a 29 per cent drop in the number of publicly traded companies in developed Europe between 2000 and 2018, data compiled by Schroders Plc show.

"If we take this to the extreme and all of the high-quality, attractive businesses decide they don't want to go public and that they're just going to fund themselves with private money, then for the investors on the public market, they basically get a rump of lower-quality, lower-growth companies," said Duncan Lamont, head of research and analytics at Schroders.

While similar gripes were once in vogue on Wall Street, they've been quietened for now by a boom in technology IPOs; even Sweden's erstwhile unicorn, Spotify Technology SA, listed in New York. In Europe, there's a more troubling vicious cycle: Its lack of cool tech stocks has contributed to chronic underperformance and fund outflows, which in turn weaken demand for new listings.

Europe's below-zero yields also mean credit is ridiculously cheap, which - to some extent - further substitutes the need for fundraising via equities.

To be sure, the concern about shrinking equity markets isn't new. Citigroup strategist Robert Buckland has been pounding the table on the theme for more than a decade. And the case can be made that it's bullish for investors who already own stocks: A shortage of new, high-quality listed companies should mean investors will value existing ones more highly.

And bankers stress that the downturn could end quickly. Here's the just-wait-for-it case: Eventually pri-vate equity will need exits. Eventually companies will list, if markets stabilise. Float the right stock now and the buyers will still come - just look at Trainline Plc and Network International Holdings Plc, both up more than 20 per cent since their debuts this year.

But if it's structural, if high-return investments are increasingly the domain of private investors, the role of equity markets as a conduit for spreading wealth may be weakening.

"The ordinary saver gets the unattractive part and those who already have capital and wealth can invest in all these exciting companies," said Mr Lamont at Schroders. "You end up with potential for increased inequality." BLOOMBERG