Initial public offerings in Europe are gaining momentum, with three major IPOs set to launch before year-end and about $10 billion that could be raised in the next six months as volatile equity markets calm down.

But Europe's slower economic recovery coupled with more cautious investors, means the region is still likely to lag behind Asia and the United States.

European investors are traditionally more risk-averse, and the IPO market is the ultimate acid test for their risk appetite, said a global head of equity capital markets (ECM) at a European bank, who asked not to be named.

The euro area and the United Kingdom economies are set to shrink 3 to 4 percent in 2009, according to estimates from Morgan Stanley, while China is set to grow 9 percent, and India 6 percent.

At $741 million in the first three quarters, Europe's IPO volume was dwarfed by Asia's $35 billion and less than one-tenth of U.S. volumes, according to Thomson Reuters data.

The risk appetite in terms of IPOs has to do with the projections of where you see the growth opportunities and I don't think Europe sees very many strong growth opportunities, said Julie Teigland, a strategic growth markets leader at Ernst & Young.

Still, the gap is closing. In the first five weeks of this quarter, Europe hosted $4.1 billion of IPOs, compared with the United States's $5.4 billion and Asia's $8.1 billion

Polish utility PGE's $2.1 billion listing -- Europe's largest this year -- and insurer Delta Lloyd's $1.5 billion flotation this month provided a solid start for the market, after a drought of more than a year.

LBO BLUES

Higher debt levels in Europe, and the trouble this has caused for companies, have long made it hard for private equity firms to float assets, falling behind what has been a driving force behind IPOs in the United States.

Yet recovering capital markets are giving companies acquired in leveraged buy-outs (LBOs) -- such as travel reservations firm Amadeus IT Group, UK pet retailer Pets at Home and fashion house New Look -- more leeway to list.

Fund management firm Gartmore, French care-home group Medica and German cable firm Unity Media may be among the first to float, after lenders took a first necessary step by approving debt covenant amendments this year.

The Unity Media deal may come as early as December. Outside the private equity sector, French retail and luxury group PPR's

1 billion euro listing of its African distribution unit CFAO is also expected this year.

And German builder Hochtief's 800 million euro sale of its concessions unit is a third sizeable IPO expected for 2009. A success from the trio should augur well for a busy first two quarters of next year -- bankers say there could $10 billion of listings.

Fund managers will look for new issues to add weighting in equities without moving share prices in secondary markets, bankers said. But volatility remains key.

The recent pick-up in IPO activity in Europe happened as equity market volatility, measured by the VIX index, fell close to 20 in mid-October from 50 in January.

According to a RBS Hoare Govett survey, over 60 percent of investors believe equity market volatility needs to be less than 30 for the IPO market to reopen.

Delta Lloyd was forced to price its deal toward the bottom of an expected range when the VIX suddenly jumped above 30 in the last few days of the insurer's bookbuilding, showing how sensitive IPO investors are to market volatility.

For a graphic on IPOs globally click here

(Editing by Quentin Webb; Editing by Erica Billingham)

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