For investors craving that old Silicon Valley standby, harvesting fast money from an initial public offering in technology, the place to look right now is Europe. With companies from Paris to London and Berlin raising record money, newly listed stocks have rallied 20 per cent in the month following their IPO, eclipsing the 6.7 per cent gain for those in the US, based on weighted averages. A big reason: initial valuations are almost half those of their American counterparts. Incentives from governments and companies have led to a surge in startups in Europe this year. Firms such as French security-software provider Oberthur Technologies and UK money- transfer site TransferWise have attracted a combined $9.4 billion in 2015, and now Europe counts more professional mobile application developers than the US, according to venture- capital investor Atomico.
"The opportunities are abundant for investors and entrepreneurs," said Mark Tluszcz, chief executive officer of Mangrove Capital Partners, one of the first backers of Skype. "US companies are getting increasingly high valuations, but in the public market, where there's more scrutiny, investors will say: 'Hang on, that price doesn't really reflect the business you have.' Europe hasn't had that phenomenon."
A total of 11 European tech companies have announced and priced IPOs this year, raising a combined $1.8 billion, data compiled by Bloomberg show. That compares with 13 across the Atlantic that sold $4.3 billion of shares. In a recent example, CLX Communications AB, a Swedish mobile communications provider, jumped 49 per cent in the month following its initial sale, compared with a 3.7 per cent gain for cloud-services provider Pure Storage in the US.
The phenomenon is concentrated in technology. In other industries, first-month gains have been about the same. The data do not Square and Match Group, which are up more than 20 per cent since their US debut less than two weeks ago.
Since 2013, the hype around technology startups in America has produced almost three times more so-called unicorns, or billion-dollar companies, than Europe. But that’s also made them expensive. Those that went public this year had an average valuation of about 3.9 times estimates sales, according to nine of them for which the data were available. That compares with a multiple of 2.6 for the three with available figures in Europe. The reasons for the run-up in privately held U.S. tech valuations are well known: a scramble by hedge funds and mutual funds to pump money in hot startups before they’re public, owners waiting around for a takeover, and the advent of private share markets where insiders can sell stock.
In Europe, early investors tend to have longer time horizons, according to Fernando Chueca of Carlyle Group. “If you’re able to enter at a locked-in price on the IPO date, you don’t care if the stock trades down in one day,” said Chueca, director of Carlyle Europe Technology Partners in London. “In Europe, it tends to be the opposite. Investors want to get out in two, three years, so they’re less greedy when it comes to pricing a company.”
In Asian markets, 54 tech companies listed shares for the first time this year with a total value of $2.1 billion. Within a month, they had soared a weighted average of 189 per cent. That's because the biggest contributors are companies listed in China and Hong Kong, where retail investors are eager to enter a perceived "hot" market regardless of fundamentals and valuations, said Charlie Awdry, a London-based money manager at Henderson Global Investors, which oversees about $120 billion. Susan Anthony of Mirabaud Securities says it may pay to focus on a bigger and more developed tech market such as the US. "There are interesting companies in Europe, but you have to know the market and that comes with an extra layer of risk in a sector like tech, which is constantly evolving," said Anthony, an equity analyst with Mirabaud Securities. "If you have a smallish free-float and you want to get out when times are rough, you may have to take a big discount or not even be able to."
For investors daring enough, opportunities are looming. Oberthur, backed by Advent International, is looking to list shares in what it says will be this year's biggest European technology IPO. Sigfox, which makes low-cost wireless networks, is seeking at least $200 million in funding and is considering going public. German startups Delivery Hero Holding and SoundCloud are also looking into initial share sales. "When I started Mangrove, it was like a desert in Europe," Tluszcz said. "Fifteen years later, we have success stories in each country and capital is flowing. There has never been a better time for European tech."