Tough times for the stock exchange

ONCE again, the Irish stock market had a good run in the last 12 per cent - but once again, not a single new company came to the market. Admittedly, listed companies used the market to raise new capital - nearly £400 million of it - mostly to finance takeover activity. But the dearth of new issues leads to frequent comment about the long term demise of the market.

There is a number of factors at work here. First, most companies financial performances have been strong. Hence, unless they planned major expansion, they have not needed to raise capital. Second, money has been cheap and competition between the banks for corporate lending has never been keener, with a consequent squeeze on their margins.

For smaller companies needing equity, there has been plenty of money available for venture capital funds and no great appetite from institutional investors for smaller market capitalisation companies. Combine these factors with the publicity associated with going public and one can see why there has not been a stampede to the market.

Will this change? I think there is some hope that it will. In part, this will depend on the political complexion of the next government. A Fianna Fail/PD coalition seems much more likely toe adopt a positive attitude to privatisation. It may also have a more positive approach to capital taxation and may consequently encourage the private investor back into the market and to focus his or her investment decisions more on long term returns and less on short term tax considerations.

Another positive factor is the build up in recent years of investments by BES funds and the Irish venture capital funds. At some stage, these vehicles will want to realise their investments and a listing might be an option if it achieved value for the vendor. If at the same time, the long awaited Developing Companies Market (DCM) is launched one could see a pick up in new listings.

However, there is no certainty that this will happen in Dublin. The Irish Stock Exchange and the DCM, if it comes about, will increasingly have to compete with other markets for new listings. NASDAQ in the US, its recently introduced European sister exchange EASAQ, not to mention the London exchange itself and its offspring, the Alternative Investment Market, are all competing for new Irish issues as well as ones from their domestic market.

The criteria by which a new issuer will assess the markets include, obviously, the rating he is likely to achieve, the costs of an issue, the liquidity of the shares on the market and the relevant disclosure requirements.

NASDAQ, for example, has a lot of attractions for high tech companies because of the high ratings it affords these businesses which, in turn, are based on the level of research by members of NASDAQ, who, because of their investment in research, can convince institutions to invest their money at higher earnings per share. Many of the recent venture capital investments in Ireland have been in high tech companies. Consequently, these companies may be more a source of new business to NASDAQ than to the Irish market.

Another factor weighing against the Irish market, in the medium term, is the likely arrival of EMU. Irish institutions have steadily reduced their weighting in Irish stocks in recent years, partly due to lack of suitable opportunities. With the arrival of EMU, there will not be any technical reason why they should hold Irish stocks. EMU denominated shares will suffice to match EMU denominated liabilities. So the trend away from Irish stocks may accelerate.

This will probably be achieved not by selling Irish shares but by investing the roll up of new monies in non Irish stocks. Hence, they are more likely to fund any investment in new issues by adjusting their portfolio of Irish shares.

If all this is correct, there are implications for both new issuers and those marketing their shares. The former will need to be very conscious of how their performance stands up not only against Irish competitors but also against other (probably London listed) competitors.

The latter will need to extend their efforts in broadening the base of non Irish institutions investing in Irish stocks. They already have had considerable success in this regard. If they want the higher tech companies to list here, they will also have to increase significantly their investment in research in this area.

Finally, the top management of any company of consequence coming to the market will have to reconcile themselves to the task of spending three or four weeks a year repeating their "stories" to institutions here, in London, on the Continent and in the USA. After a while, it must get very boring but nowadays it is all part of the way of life for a public company.