Initial Public Offerings and Venture Capital in Germany

Abstract

Abstract:We present a survey on the role of initial public offerings (IPOs) and venture capital (VC) in Germany after the Second World War. Between 1945 and1983 IPOs hardly played a role at all and only a minor role thereafter. In addition, companies that chose an IPO were much older and larger than the average companies going public for the first time in the US or the UK. The level of IPO underpricing in Germany, in contrast, has not been fundamentally different from that in other countries. The picture for venture capital financing is not much different from that provided by IPOs in Germany. For a long time venture capital financing was hardly significant, particularly as a source of early stage financing. The unprecedented boom on the Neuer Markt between 1997 and 2000, when many small venture capital financed firms entered the market, provides a striking contrast to the preceding era. However, by US standards, the levels of both IPO and venture capital activities remained rather low even in this boom phase. The extent to which recent developments will have a lasting impact on the financing of German firms, the level of IPO activity, and venture capital financing, remains to be seen. At the time of writing, activity has come to a near stand still and the Neuer Markt has just been dissolved. The low number of IPOs and the fairly low volume of VC financing in Germany before the introduction of the Neuer Markt are a striking and much debated phenomenon. Understanding the reasons for these apparent peculiarities is vital to understanding the German financial system. The potential explanations that have been put forward range from differences in mentality to legal and institutional impediments and the availability of alternative sources of financing. Moreover the recent literature discusses how interest groups may have benefited and influenced the situation. These groups include politicians, unions/ workers, managers/controlling-owners of established firms as well as banks.JEL Classification: G10, G24, G14

Long-Run Performance of Penny Stock IPOs

“…Aggarwal and Kunz [1994] report a 35.8% first-day return in Switzerland, but the three-year cumulative abnormal returns remain well above 30%; Finn and Higham [1988] found 29.2% first-day marketadjusted returns negative but insignificant in Australia; Uhlir [1989] and Franzke et al [2003] document 21.5% underpricing and -7.41% long-run return in Germany; Dawson and Hiraki [1985] find 13.8% and -9.3% respectively in Hong Kong and Japan; and Aggarwal et al [1993] find 78.5%, 16.7%, and 2.8% first-day returns and -47%, -23.7%, and -19.6% three-year returns for Brazil, Chile, and Mexico, respectively.…”

Evolutionary interpretation of venture capital policy in Israel, Germany, UK and Scotland

“…Often, their investments were in the form of a 'silent partnership' (type of debt), and ideally the entrepreneur would buy back the KBGs' share after five to ten years. KBGs invested primarily in established, medium-sized companies and the total number of investments was very low (Franzke et al, 2003). In addition, in the early 1970s states in Germany started to create the MBGs -a specific form of public PE in which investments are restricted to the specific state -in co-operation with local banks and local industry representatives.…”

“…Moreover, during this period leveraged buyouts (LBOs), management buyins (MBIs), and turnarounds financing dominated the PE industry, with approximately only 10% devoted to VC financing. In 1984, the number of IPOs started to increase gradually, reaching an annual average of 19 IPOs between 1984 and 1996 (Franzke et al, 2003).…”

“…While SUs that participated in the program failed less frequently than the average SU, the investors still experienced losses (Adelberger, 1999). In 1987, the German Parliament also passed the UBGs law, which provided considerable tax advantages for non-institutional investments in SUs through traded equity companies (Franzke et al, 2003).…”

Post-Dotcom IPOs In Germany: After Crisis Developments In Underpricing

“…German IPO activity traditionally is less distinct in comparison to the US or the UK, regarding the number of flotations and volume raised (Black and Gilson 1998). Between 1984 and 1996 the average number of IPOs had been 19.5 per year (Franzke et al 2003), a remarkably low figure for one of the world's leading economies. This case changed fundamentally in 1997 with the implementation of the Neuer Markt (New Market), a market segment for technology and growth companies.…”