More innovation originates from the US than in Europe, says Timo Löyttyniemi CEO of the €21.6 billion Finnish State Pension Fund (VER), and while Europe has made several attempts to respond to the dominance of US tech giants, the US venture capital market is stronger, and most IPOs take place in the US.
But although European innovation has not been as attractive an investments as US tech Löyttyniemi argues in a recent post on the fund’s website, that could change.
In the US most patents are registered by start-up companies, and fostering a European growth market for start-ups is one way of promoting innovation he says, suggesting a five-point plan to boost European innovation.
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For innovation and venture capital investments to be attractive, they must be profitable. According to the latest statistics from Invest Europe, European venture capital funds have outperformed US funds over the past 10 years, returning over 20 per cent per annum.
In the preceding period, it was the other way round.
“Sound profits attract investors. Information about healthy profits should be actively distributed and made readily available. The 2021 and 2022 venture funds are likely to prove disappointing, but if interest rates fall, the investment environment will offer improved opportunities for innovation and its financing.”
Investment products readily available
Löyttyniemi says that investing in venture capital funds is often a difficult decision for European investors.
“Newly established funds are initially small. For an institutional investor, analysing these funds is an arduous and time-consuming task.”
For this reason he advises creating fund of funds, allowing investors to be collectively involved in the start-up sector.
“In Finland, such a solution is offered by the Finnish Industry Investment’s fund of growth funds. Its counterpart at a European level is the European Investment Fund.”
He says that BlackRock’s purchase of Preqin could offer investors new opportunities. BlackRock has typically operated as an asset manager focused on the public equity and fixed income markets. Now it is making a foray into the illiquid markets where Preqin has been a leading information provider.
“Hopefully, the acquisition will generate easy and cost-efficient investment products for the unlisted market.”
A single strong technology exchange
Löyttyniemi argues that Europe needs a strong European ‘Nasdaq’ where growth companies can list. In a report published in June, McKinsey highlighted the wide gap that exists between US and European exchanges. The stock exchanges differ both in terms of the number of technology companies going public and valuation levels.
“We could create a perception of a single exchange even if it were a combination of many,” he says. “The important thing is to establish a highly visible and prominent marketplace whose star companies become the talk of the town.”
The challenge Europe faces is where to set up this exchange. Pre-Brexit, London would have been the obvious choice but the location is not obvious today.
A single strong technology index
A strong stock exchange creates a strong, easy-to-follow index that allows investors to make investment decisions based on that benchmark index.
“If there are too many indices, there will be no sufficiently strong benchmark that would generate sound investment products. A strong stock exchange equals a strong index. It is also possible to create a robust virtual index based on several technology exchanges and local ‘Nasdaq’ exchanges. This would be the second-best option if a single strong exchange fails to materialise.”
“Nasdaq is a household concept. So is Silicon Valley. Where are Europe’s innovations?” he asks.
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The efforts to create a European Capital Markets Union (CMU) is a long-standing project. The problem is that the proposed solutions are limited and isolated without an overriding idea of how the European capital market should be created.
One solution, he says, is the ‘innovation market.” Innovation market infrastructure is a chain of layers which consist of stock exchange, market, benchmark indices and investment products by which investors are attracted to invest.
Europe possesses huge potential in terms of knowledge and skills, he concludes.
“This fact can be used to create a roadmap for the kind of progress outlined above to increase the attractiveness of European growth companies from an institutional investor perspective at the various stages of development.
“When there is a good and functioning market for innovations, it will drive workers and researchers to innovate. A pre-condition for a sound market is a multi-tiered, highly functional capital market infrastructure.”
