PLANS by the Irish Stock Exchange to establish a Developing Companies Market for small and developing companies have been given a boost by a survey compiled by KPMG Corporate Finance which indicates strong demand for such a market.
KPMG notes that with the exception of exploration companies, there have been just two flotations in Ireland in the past five years. In London, there are two new listings a week while the Nasdaq market has on average one new listing a day for the past five years. "The Irish Stock Exchange is not growing. In total there are only 93 companies quoted today compared with over 100 only five years ago," the KPMG survey notes.
Of 132 Irish companies - specifically targeted as potential DCM candidates - which responded to the survey, 20 companies said that they would be "very interested" in pursuing the DCM option when it emerges.
According to KPMG, the calibre of these potential DCM companies is very high: the typical profile of the company responding to the survey is one that:
. has an established track record.
. is achieving either now - or in the near future - profits in excess of £1 million.
. employs over 100 people.
"In short, we are dealing with the strongest and best from within the Irish indigenous corporate sector," he said, adding "the aim of the selected sample was to capture the Elans and Kerrys of tomorrow, said KPMG Corporate Finance director Paul Finnerty. Of the firms which responded, almost 30 per cent came from the high tech sector - a sector notably absent (with the exception of Elan and to a much lesser extent, Reflex) from the Irish Stock Exchange, as it is currently constituted.
But while small to medium sized companies are enthusiastic about the imminent arrival of the DCM, Mr Finnerty warned that the tax treatment of Special Portfolio Investment Accounts (SPIA) and BES companies needs to be defined. "If the DCM is launched without the necessary incentives to attract significant investment interest, the DCM will most likely fall," he states.
Stock Exchange chief executive Tom Healy said that the exchange is currently in discussions with the Department of Finance about the extension of SPIAs - tax efficient equity funds launched to compete with Special Savings Accounts - to the Developing Companies Market. Discussions are also taking place on a mechanism that would allow BES companies to move to a DCM listing while the BES investors could retain their tax benefits.
Extending SPIAs and BES companies to the Developing Companies Market will give the new market a kick start, but Mr Finnerty believes that the DCM will have to attract institutional support if is to have a long term future.
Mr Finnerty believes that there are lessons to be learned from the success of the Alternative Investment Market in Britain where a reclassification of the BES has allowed investors to place up to £100,000 with the Enterprise Investment Scheme in AIM companies. The success of the AIM has also seen the emergence of venture capital trusts set up specifically to invest in AIM companies.
Those considerations notwithstanding, the KPMG survey shows a degree of support for the DCM which has surprised both KPMG and the Irish Stock Exchange. Of the 132 respondent companies, 20 said that they would be "very interested" in pursuing the DCM option.
And 63 per cent of the respondent companies said that they expect to raise close to £200 million in equity finance over the next three years. "This substantial requirement drives the attractiveness of the DCM given its likely fund raining potential."
According to the survey, this £200 million equity will mostly come from private investors (30 per cent) with BES and Venture capital investors each contributing a quarter of the required equity. Many of the companies surveyed expressed their disappointment with the venture capital market as a source of risk finance, the survey notes.
Almost half of the 132 respondents said that they plan to raise between £1 million and £5 million, 12 per cent said that they intend to raise in excess of £5 million, 16 per cent said that the intend to raise between £500,000 and £1 million while a quarter of the respondents said that they intend to raise less than £500,000 over the period.
