"Three things conspire to make Germany one of the most attractive markets in Europe for on-line banks," noted a recent report published by Credit Suisse First Boston (CSFB). These are "a high level of internet penetration, a tradition of electronic payments and a fragmented market dominated by the public sector."
Germans have taken to the internet with enthusiasm, and to internet banking and broking with equal alacrity. According to figures published by Forrester Research and Jupiter Communications, there are estimated to be some 770,000 on-line brokerage accounts in Germany in 2000, far more than in the UK (220,000), France (190,000) and internet-savvy Sweden (190,000). Although this means the growth rate in Germany will inevitably be lower than in other Euroland economies that have been slower to embrace on-line broking, Forrester still sees the German market growing at a compound annual growth rate (CAGR) of 45% between now and 2004. By 2004 that will mean there will be more than 3.5m on-line accounts in Germany, still almost double the 1.8m predicted for the UK in the same year.
The high level of expected growth bodes well for Germany's leading quoted on-line banks, ConSors, Entrium, Direkt Analage Bank (DAB) and Comdirect, all of which are already profitable - something of a novelty within the dotcom world.
"If levels of equity retail ownership in Germany go to anywhere near the levels experienced in the US, the effect on the brokerage industry will be huge," noted CSFB's report. "Suppose the proportion of the population owning shares increases to 45% (the US level), and that each new shareholder builds up a portfolio of $45,000, new equity investment will amount to $1,042bn. Using a commission rate of 0.3%, this could be worth $3.1bn for the brokerage industry in terms of revenues. If the internet brokers get only 20% of this - in line with the share of transactions enjoyed by internet brokers in the US today - then the pickings will be rich."
Increased participation by retail investors in the German and more generally in the European equity markets will also provide increasingly rich pickings for one of the most inventive and innovative financial services firms to have capitalised on the advent of the internet - net.IPO. Founded in September 1998 and operational since March 1999, the Frankfurt-based internet investment bank has made its mark in the German equity market (and, more recently, in the broader European market) by taking the institutional model for allocating new issues and transferring this, as far as possible, to retail distribution.
In simple terms, this has meant fostering a much closer exchange between issuing companies and their potential investor base - giving retail subscribers the chance to talk interactively using the net to companies preparing IPOs.
net.IPO has established net-based "chats" between issuers' CEO and CFOs and individual subscribers to new issues, which in theory ought to make for much better informed investors.
"Creating informed investors: that is our target," says Patrik Zeigherman, executive managing director of investment banking, who joined net.IPO in April 2000 after seven years as an investment banker at Morgan Grenfell/Deutsche Bank and Merrill Lynch in Frankfurt, London and New York.
In return for putting in the time and effort to address individual investors interactively, issuing companies can rest assured that their retail investors have a good understanding of what their company actually does - which in the feeding frenzy of Neuer Markt IPOs has not always been the case. To that end, net.IPO operates a qualitative allocation system, in which would-be subscribers to a new issue need to answer a series of questions on-line about an issuer. Those that fail to answer all these questions correctly miss out on stock allocations altogether.
Sceptics of this system say that it does not necessarily create the "good", long term investors that net.IPO says it does, and argue that the more sophisticated investors with the wherewithal to jump through all the necessary web-based hoops to secure stock are probably more likely than others to stag individual issues. But net.IPO's track record to date suggests this is probably a churlish interpretation of the company's initiative.
By September 2000, it had co-managed 32 new issues with a placement volume in excess of Eu100m and had attracted more than 115,000 registered "netMembers" in Germany alone. Furthermore, Zeigherman insists net.IPO's track record to date is testimony to the fact that it has not and does not intend to compromise on the quality of the companies it brings to the market in pursuit of market share.
By September, new issues co-managed by the bank were up by an average of 57% since IPO, comfortably outperforming the Nemax index. "In May, June and July we declined a lot of issues where we could have made money," Zeigherman says. "Our long term strategy has to be to focus on quality which is why we have recently expanded our investment banking team adding individuals who can decide on whether or not an investment case is something we can sell to our investor base."
In its formative months, net.IPO's focus was confined purely to the Neuer Markt, exclusively to Germany and solely to the retail investor base. That mandate is changing, as shown by net.IPO's recent role in the sale of the third tranche of Deutsche Telekom.
"We were the first internet investment bank to place an issue in three countries - Germany, France and Italy," says Zeigherman.
net.IPO's strategy today is to position itself increasingly as the focal point for retail internet equity participation across much of Europe. To this end, it has opened offices in France (in 1999) as well as in Italy, Spain and Belgium (all in 2000). "Our aim is absolutely clear," says Zeigherman. "We are not just a messenger for net.IPO or for the Neuer Markt, but for all the growth stock markets in Europe. We want to be offering French investors Neuer Markt issues and German investors Nouveau Marché stocks."
What net.IPO has no intention of doing, for the foreseeable future in any case, is muscling in on the territory of the larger investment banks by attempting to distribute equities to institutions. This seems to be a prudent strategy, given that it has been able to work very successfully alongside investment banks targeting the institutional market.
"We do not compete with the existing investment banks," says Zeigherman. "We are complementary to them because we focus purely on the retail side. Deutsche was the first of the big banks that we co-operated with, but since then we have worked with all the main investment banks, and with the US houses we are clearly 100% complementary because they have not really addressed the issue of retail distribution in Europe yet." *