European Finance: The Big Thaw

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"There's cautious optimism about an IPO market recovery," says Richard Weaver, a partner in PwC's capital markets group. "We continue to believe there will be a substantial pickup in activity in the first half of 2010."

A Return of the Bulls

That optimism is already reflected in European stock market performance. After abysmal results in 2008—the FTSE 100, for instance, fell 31%—the past six months have brought back the bulls. The FTSE 100 hit a 12-month high of 5,261 on Oct. 14, while most other European indexes have posted double-digit gains since the start of the year. Under the circumstances, says Brewin Dolphin's Lenhoff, "no one wants to be left out." He adds European company valuations have, on average, returned to pre-credit-crunch levels.

But while some buyers are jumping back into equities, memories of the downturn remain fresh—especially among institutional investors. For them, risk management is the name of the game. David McCourt, senior policy adviser at the London-based National Association of Pension Funds, a trade body, says corporate bonds from investment-grade companies offer lucrative yields and, more important, less volatility than the equity markets. "They generate solid returns with a less risky downside," he says.

Not everyone is benefiting from the recovery in the capital markets, though. Analysts note that small and medium-size firms, particularly domestically focused manufacturers, are still having trouble raising money. With European unemployment rising and consumer spending at a 10-year low, investors view many of these firms as risky propositions. As a result, many such companies are forced to tap cash-rich hedge funds for financing—but the opacity of such deals could expose their other shareholders to increased risk. Says Simon Gleeson, a partner at law firm Clifford Chance: "That type of corporate financing is nontransparent and is happening in a major way."

Scott is a correspondent in BusinessWeek's London bureau.

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