Nelly Davies, Fund Manager, LFDE.
While the stock market is a key driver of funding and growth for European companies, the initial public offering (IPO) market has experienced a historical contraction in recent years – one that has been particularly pronounced for small and medium-sized enterprises. However, a shift in momentum appears to be emerging, supported by European regulatory developments and investor support.
Today, the number of small and mid-cap IPOs in Europe is roughly half that seen prior to the 2008-2009 financial crisis. At the same time, private funding has captured a larger share of growth-stage companies. This scarcity of new listings has gradually reduced the listed investment universe and contributed to the discount observed on many small and mid-cap stocks. Yet a dynamic stock market is vital: it promotes market renewal, enhances visibility for investors and helps nurture future European leaders from the earliest stages of their development. Without this renewal, public markets risk losing their capacity to fund innovation and growth.
Shift in momentum
Corporate investors for 35 years, we are currently observing a shift in momentum that could mark a turning point for European small and mid-cap stocks. In our view, European initiatives stemming from the Listing Act [1] – the latest developments of which came into force last June – represent a major step forward in restoring the appeal of financial markets. By streamlining listing procedures, reducing administrative burdens and facilitating the transition from growth markets to regulated markets, these measures help make going public attractive once again for small and medium-sized enterprises. These developments – which could generate nearly €100 million in annual cost savings for listed companies through regulatory simplification [2] alone – are particularly important in the current context: European economic sovereignty hinges on our ability to finance our growth companies, whether in technology, industry, cybersecurity, healthcare or energy transition. Small and medium-sized enterprises constitute precisely the primary reservoir of innovation and represent future European champions.
For investors, this is also a major strategic priority. Historically, periods when the primary market has reopened have often coincided with renewed interest in smaller caps. Following several years of neglect, European small and mid-caps still trade at historically attractive valuation levels relative to large caps, with the valuation gap reaching its widest point in 20 years, [3] even as their earnings outlook is underpinned by powerful structural themes. Situated at the heart of major growth themes linked to reindustrialisation, energy transition, defence and technological sovereignty, the small and mid-cap segment supports the real economy and represents a formidable source of opportunities for conviction-based management.
While active management provides companies with sustainable access to funding, it enables investors to participate in long-term value creation. The return of a more dynamic primary market would have a positive effect in two ways: it would allow companies to finance their expansion while refocusing investor attention on an asset class that has often been overlooked in recent years. We are convinced that investing in European small and medium-sized enterprises contributes to Europe’s economic momentum by building a robust industrial ecosystem capable of fostering the European champions of tomorrow.
[1] Published in the Official Journal of the European Union in November 2024 and finalised in June 2026, the Listing Act aims to ensure European companies, particularly small and mid-caps, have access to funding via capital markets.
[2] European Commission, 2024
[3] MSCI 2025, gap between the MSCI Europe SMID Cap Index and the MSCI Europe Large Cap Index
