More innovation originates in the US than in Europe, says Timo Löyttyniemi, CEO of the €21.6 billion Finnish state pension fund (VER), and while Europe has made some attempts to counter the dominance of US tech giants, the US venture capital market is. stronger, and most IPOs take place in the United States.
But while European innovation has not been as attractive an investment as American technology Löyttyniemi claims in a recent post on the fund’s website, that could change.
In the US, most patents are registered by start-ups, and fostering a European growth market for start-ups is one way to boost innovation, he says, proposing a five-point plan to boost innovation in Europe.
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For innovation and risk 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 percent per year.
In the previous season, it was the opposite.
“Reasonable profits attract investors. Information on healthy profits should be actively disseminated and made accessible. It is likely that the venture funds in 2021 and 2022 will turn out to be disappointing, but if interest rates fall, the investment environment will offer improved opportunities for innovation and its financing.”
Investment products accessible
Löyttyniemi says that investing in venture funds is often a difficult decision for European investors.
“Newly established funds are initially small. For institutional investors, it is a difficult and time-consuming task to analyze these funds.”
For this reason, he advises the creation of a fund, which allows investors to jointly participate in the startup sector.
“In Finland, such a solution is offered by Finnish Industry Investment’s growth funds. Its counterpart at the European level is the European Investment Fund.”
He says BlackRock’s acquisition of Preqin could offer investors new opportunities. BlackRock has traditionally operated as an asset manager with a focus on the general equity and bond markets. Now it is making forays into illiquid markets where Preqin has been a leading information provider.
“Hopefully, the acquisition will create easy and affordable investment products for the unlisted market.”
One strong technical 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 between US and European exchanges. The exchanges differ both in terms of the number of technology companies going public and valuation levels.
“We could create a single perception even if it was a combination of many,” he says. “The important thing is to establish a very prominent and prominent marketplace where the star companies will be significant.”
The challenge facing Europe is where to set up these exchanges. Before Brexit, London would have been an obvious choice, but the location is not obvious today.
One strong technical index
A strong stock market 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 not be a strong enough benchmark that would create sound investment products.” A strong stock market equals a strong index. It is also possible to create a powerful virtual index based on several technical exchanges and local “Nasdaq” exchanges. This would be the next best option if one strong trade doesn’t work out.”
“Nasdaq is a household concept. So is Silicon Valley. Where are Europe’s innovations?” he asks.
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The effort to create a European Capital Markets Union (CMU) is a long-term project. The problem is that the proposed solutions are limited and isolated without an overarching idea of how to create a European capital market.
One solution, he says, is the “innovation market.” The infrastructure of an innovative market is a chain of laws consisting of an exchange, a market, benchmarks and investment products that attract investors to invest.
Europe has great potential in terms of knowledge and skills, he concludes.
“This fact can be used to create a roadmap for progress of the kind described above to increase the attractiveness of European growth companies from the perspective of institutional investors at the various stages of development.”
“When there is a good and active market for innovations, it will drive workers and researchers to innovate.” A prerequisite for sound markets is a multi-level, highly functional capital market infrastructure.”
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