The Structural Weakness of European Capital Markets: A Barrier to AI Ambitions

Introduction

On February 9, 2025, French President Emmanuel Macron unveiled a €109 billion investment strategy at the AI Action Summit in Paris, aimed at bolstering France’s AI capabilities. The goal is to enhance Europe’s competitiveness in the AI sector, currently dominated by the U.S. and China. While this financial commitment signals Europe's intent to participate in the AI Race in AI, there’s a major obstacle standing in the way: Europe’s capital markets. Without critical reforms in liquidity and investment infrastructure, Europe’s tech and AI companies may struggle to scale effectively and compete on the global stage.

The State of European Tech IPOs and Investment

Declining Activity in Public Markets

Tech IPOs in Europe have significantly slowed in recent years, driven by a combination of factors:

• Economic uncertainty: Market volatility has reduced investors’ appetite for risk.

• Regulatory complexity: The process for listing on European exchanges remains fragmented and inconsistent.

• Private funding dominance: Venture capital and private equity are increasingly seen as more attractive alternatives, allowing companies to delay public offerings indefinitely.

Challenges in Accessing Growth Capital

European venture funding saw a steep decline in 2024, dropping to $45 billion, down from $101 billion in 2021. Late-stage funding, in particular, has dried up, leaving many companies struggling to secure the capital they need to scale. In contrast, the U.S. attracted over $130 billion in tech startup investments during the same period, underscoring the relative strength of its funding landscape.

Structural Barriers in European Capital Markets

Market Fragmentation and Low Liquidity

Unlike the U.S., where platforms like Nasdaq and the NYSE offer centralized and liquid markets, Europe’s capital markets are spread across various national exchanges, including Euronext, the London Stock Exchange, and Deutsche Börse. This fragmentation leads to reduced liquidity, greater volatility, and ultimately lower investor confidence. The result? Fewer high-growth companies are choosing to go public within Europe.

The Shift Toward Private Funding

European tech firms are increasingly opting for private financing, which offers substantial capital without the scrutiny and transparency that comes with public markets. While this may provide short-term flexibility, it has some long-term consequences:

• Limited opportunities for retail investors: High-growth tech investments remain largely out of reach for everyday investors.

• Delayed emergence of large tech players: Many firms either stay private for longer or seek listings on U.S. exchanges, bypassing European markets.

Regulatory Disparities

The IPO process across European exchanges can vary significantly, creating unnecessary hurdles for companies looking to go public. In contrast to the streamlined procedures offered by the U.S. Securities and Exchange Commission (SEC), European firms must navigate a labyrinth of national regulations, making the process more cumbersome and less attractive. A more cohesive and unified regulatory framework is crucial for creating a level playing field for tech companies.

Reforming European Public Markets

Improving Market Liquidity

For European exchanges to regain their attractiveness, we need to focus on:

• Reducing market fragmentation: Encouraging collaboration between major exchanges across Europe can help improve liquidity.

• Attracting more investors: Simplifying the investment process and offering tax incentives can help draw in retail investors.

• Increasing institutional participation: Adjusting regulations to make it easier for institutional investors, such as pension funds and sovereign wealth funds, to participate in European markets.

Encouraging IPOs

To make public markets a viable option for tech companies, Europe could consider:

• Streamlining listing procedures: Aligning regulatory processes across EU member states would reduce complexity and make going public more appealing.

• Introducing financial incentives: Tax breaks or grants for companies pursuing IPOs could help offset the costs of going public.

• Stabilizing post-IPO markets: Ensuring liquidity and providing institutional backing can help maintain investor confidence after IPOs.

Case Studies: European Tech IPOs

Raspberry Pi’s London Listing (June 2024)

• Initial Share Price: 280p

• Market Capitalization at IPO: £542 million

• Stock Performance: Increased by 33% to 379p by September 2024

• Revenue Growth: $144 million in the first half of 2024

Raspberry Pi’s IPO was a success, underscoring the potential of London’s stock market. However, concerns about broader liquidity challenges remain, and there are doubts about the long-term viability of similar listings in Europe.

LightOn’s Paris IPO (November 2024)

• Europe’s first generative AI company to go public

• Specializes in Optical Processing Units (OPUs) for AI

• Clients include Safran and CNES (French Space Agency)

LightOn’s IPO marked a significant achievement for Europe’s AI sector, but its relatively low trading volumes highlight the ongoing liquidity issues on European exchanges, particularly Euronext Growth® Paris.

HBX IPO in Spain (February 2025)

• Parent company of Hotelbeds

• Share Price: €11.5

• Valuation: €2.84 billion

• Funds Raised: €725 million

HBX’s IPO was one of the largest in the Eurozone in 2025, reflecting renewed interest in the technology and travel sectors. However, success stories like this one alone don’t signify a systemic improvement in the overall European capital markets.

Conclusion: Overcoming Market Challenges as a Strategic Necessity

Macron’s AI investment plan is an important step in positioning Europe as a player in AI. However, the success of this initiative will depend largely on reforms in Europe’s capital markets. Without steps to improve liquidity, simplify regulatory processes, and foster a more dynamic IPO environment, Europe’s tech firms will continue to face significant challenges in scaling and competing globally. Strengthening public markets is not just critical for AI growth, but also for ensuring Europe’s broader economic resilience and maintaining its global influence.

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Sources: European Commission (ec.europa.eu), European Central Bank (ecb.europa.eu), Euronext (euronext.com), Deutsche Börse (deutsche-boerse.com), London Stock Exchange (londonstockexchange.com), PitchBook (pitchbook.com), McKinsey & Company (mckinsey.com), CB Insights (cbinsights.com), Reuters (reuters.com), TechCrunch (techcrunch.com), Financial Times (ft.com), World Economic Forum (weforum.org), OECD (oecd.org).