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The stock exchange connects people, markets and opportunities

06 Mar 2019

The stock exchange connects people, markets and opportunitiesHauke Stars, member of the Executive Board of Deutsche Börse AG

Making the link between the financial and the real economy more visible - IPOs must become more attractive - Tax policy is an important lever

With 18 IPOs totalling an issue volume of some €12 billion, 2018 was the best year for IPOs in the financial centre Frankfurt since the turn of the millennium. Two of these were even among the top 10 worldwide: Siemens Healthineers (€4.2 billion volume) and Knorr-Bremse (€3.8 billion volume).

Success generally has many forms, with the attractiveness of issuer business models and the market environment certainly being among the most important. And yet it is not presumptuous to mention the ecosystem for growth in this regard too, in the expansion of which Deutsche Börse has played a major role. The aim is to interact with many political and business players to create an environment in which companies can gain access to capital to finance their growth ambitions. Already four years ago, we created the Deutsche Börse Venture Network, whose internationalisation we are currently pushing. In the meantime, more than 500 companies and investors have joined this pre-IPO platform. In our Investor Talks, start-ups meet selected investors in an intimate setting – not only in the financial centre Frankfurt, but also in New York, London, Paris and Palo Alto, the heart of Silicon Valley. They have raised in excess of €2 billion in more than 80 financing rounds. Of course, this also includes preparations for a potential IPO, with seven Frankfurt-based IPOs already emerging from this network: for va-Q-tec, Delivery Hero, Hello Fresh, NAGA, NFON, home24 and Creditshelf.

The second pillar of our strategy is the launch of the Scale segment, which celebrated its second anniversary on 1 March. The new criteria, services and indices introduced through Scale have significantly increased the liquidity and visibility of the companies. The number of shares listed in Scale has now risen to over 50. On average, the shares listed there have posted positive performance, with the Scale All Share Index rising by around ten per cent since March 2017. Launched in February 2018, the Scale 30 Selection Index, which measures the performance of the 30 most liquid equities in the segment, was unable to break away entirely from the European equity markets for a small year-on-year decline.

With the ecosystem for growth, Deutsche Börse has continuously developed its range of services and is now more than ever before involved in the pre-IPO area. In this way, we are addressing issues that come up time and again with regard to the weak culture of equity financing by global standards and the less favourable start-up environment. However, the healthy figures from our Scale segment and the success of our pre-IPO initiatives should not blind us to the fact that the stock market culture in Europe's largest economy is lagging behind other national economies. While we celebrate 18 IPOs in Germany as a success, there were 82 in London, 313 throughout Europe and 1,177 worldwide.

The reason why corporate financing is so strongly geared to debt capital in Germany – much more so than in the USA or other European countries – has often been analysed and perhaps ultimately is a cultural phenomenon. This preference can become an obstacle, however, when the major challenges of today create an ever-increasing need for capital. One example is “Industry 4.0”, the intelligent networking of people, machines and processes, which is regarded as a fundamental change in the economy and influences more than just work processes and business procedures. Technologies such as artificial intelligence, virtual reality and cloud computing, lead to the creation of new products and services. German small and medium-sized enterprises (SMEs)– traditionally family-owned – in particular will need external financing in addition to a long-term strategy and strong internal resources to implement these capital-intensive transformation projects. IPOs enable these new development opportunities, as they are more sustainable than loans and offer the recurring option of a capital increase.

Stronger perception

A second challenge facing SMEs in particular is the shortage of skilled workers. SMEs, often located outside metropolitan areas, are often not sufficiently anchored in people's minds to attract highly qualified employees. In an IPO, companies are perceived more strongly by the public and at the same time appeal to employees who value direct involvement in the success of the business through shares.

Even the IPO of a division also offers large corporations new development opportunities and more room to manoeuvre. A good example of this is the IPO of Siemens Healthineers, the largest on the Frankfurt Stock Exchange in 2018. This corporate spin-off has made Siemens' medical division more visible in the market and has better positioned it in the specific competitive environment.

Thanks to its own history and many years of experience with the most diverse range of issuers, Deutsche Börse knows and understands the needs of companies of all sizes and sectors and, as one of the leading global exchange organisations, can provide them with access to an almost inexhaustible pool of capital and liquidity.

Something that politicians could still contribute to the ecosystem for growth is a better framework. IPOs must become more attractive – also from an investor's point of view. In this respect, tax policy is a key form of leverage. Interest on debt capital is currently tax-deductible as a profit-reducing expense. However, there is no comparable instrument for equity capital – unlike in neighbouring Belgium, for example, where a notional interest expense on equity capital can be deducted from the calculation basis. Equal taxation of equity and debt capital would be an incentive to increase the equity ratio in companies in Germany too.

Tax incentives could also make long-term ownership of shares more attractive and thereby promote an equity culture in Germany. Italy is leading the way; individual savings plans known as PIRs do not require investors to pay tax on their profits if they invest the money for at least five years.

We welcome the Federal Government's support for the EU's regulatory easing measures for SMEs. The obligation to publish a prospectus has been waived for the past six months for public offers of securities up to €8 million. And as of July this year, a simplified EU growth prospectus will suffice.

The list of suggestions for improvement could be continued. However, it is important to note that anything that positively influences the IPO market serves the growth of the German economy. What superficially look like the technical internal affairs of a financial centre are in reality existential matters of the real economy. Even a slight shift in corporate financing in favour of equity capital would create additional growth potential for Germany. Deutsche Börse offers the platform where people, markets and opportunities come together.

Making this connection between the financial and the real economy more visible for everyone is the idea behind the expansion of the historic stock exchange building in Frankfurt's city centre. Frankfurt is the leading stock exchange of the largest European economy; the trading floor, which is incidentally the only remaining one of its kind in Europe, is its trademark. We plan to expand it into a new centre for IPOs. Using this famous backdrop to present individual success stories is a communicative opportunity particularly for lesser-known SMEs. The “Listed in Frankfurt” seal of approval and the stock exchange bell enable companies to draw attention to their messages to the capital market.

Our plan, for which we received planning permission in January, also includes a conference centre and a new two-storey reception area in the rooms behind the DAX board. These can be used for IPOs as well as other events in the heart of Frankfurt. Dealing with debates and controversies here fits just as well with our claim to connect people, markets and opportunities.

Focusing on young people

We ultimately aim to also make a contribution to “financial literacy” as part of the restructuring. Some 35,000 people from all over the world already visit the Frankfurt Stock Exchange every year. With a modern, interactive visitor center, we will be able to bring even more young people closer to the stock market and the functions of the financial markets. Because financial knowledge is the key to a better equity culture. And ultimately, more private investors should be interested in success stories on the stock market.

The original German version of this article was first published in Börsen-Zeitung on 6 March 2019.

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