The City’s protection racket

The USM’s successor, the Alternative Investment Market, will be kept firmly in the grip of the City. But technology frees it to work anywhere in the UK.

The Stock Exchange has long been adopting brand names that have more in common with fast-moving consumer goods than with high, or even low, finance. AIM could be a washing powder: “Hit the stain target hard with fresh formula AIM!”

Meanwhile, Crest did not attract a passing-off action from the toothpaste people, largely because it is a system of automated dealing, possibly incorporating rolling settlement, which would effectively abolish the old Exchange’s account periods. No mention of fluoride, you see.

Crest replaced Taurus, which wasn’t a new competitor for Bovril. Trouble was, it wasn’t a system of automated dealing either. All we could be sure of was that Taurus made teeth crumble at the Stock Exchange Tower. Which is perhaps why Crest was introduced.

It is all a small, but significant, symptom of the London – though it prefers to be called International – Stock Exchange’s efforts to join the real world since the Big Bang of deregulation nearly a decade ago. Perhaps, as that anniversary approaches, it is worth examining what the product it is offering consists of and whether it is what the market wants.

Take AIM (as a thousand headlines will have it) as an example of the product range. It has launched this week as a replacement for the outdated Eighties model, the Unlisted Securities Market, and the 4.2 Rule market for matched bargains.

Ostensibly, AIM, which stands for Alternative Investment Market, is a sound idea, properly constructed and, if publicity and anecdotal awareness is anything to go by, well marketed.

I gather that the Stock Exchange has so far, in the finest tradition of City flotations, held 29 roadshows throughout Britain, attended by some 1,900 delegates. It claims that about 700 companies have expressed an interest in joining the new equities market.

What the new market aims to do is to provide a capital market for small to medium-sized companies, with a cheaper point of entry than that offered by the main market. A full listing these days can be expected to cost as much as 1m. Only a fraction of this is actually accounted for by Stock Exchange membership fees, the vast bulk of the cost being to employ the serried ranks of men and women in suits from firms of accountants, lawyers, merchant bankers, stockbrokers and PR firms who guard the gates to a public quotation and have to be bought off.

The trouble with the old, supposedly trouble-free, USM was that it grew up to be virtually indistinguishable from the main market. Regulatory changes from Brussels swept away the more relaxed qualification criteria of the USM and for a substantial company capitalised at, say, 50m, the cost of entry was little less than that to the main market, since they had to go through the rigmarole of a full prospectus in any case.

Now, AIM has succeeded in producing a market that meets European Union standards and in which there are no restrictions on company size or on the proportion of shares that are available to the market. The central quality control is that applicants have to be brought to market by an approved adviser.

This would seem to be the City looking after its own again, until one inspects the list of “nominated advisers” and discovers that most of the usual merchant banking leeches are missing. The cynic might suggest that, when your cost base has become accustomed to the fees charged for entry to the full listings, you are unlikely to start competing for the narrower margins in the junior market. There are those promising to bring clients to AIM for a straight 50,000, excluding underwriting costs.

The market, in its entirety, must wait to see whether AIM follows an ineluctable road to oversubscription, and whether it bears such a resemblance to the junior markets preceding it that, like them, it will implode. That is a matter for the Stock Exchange and its coterie of nominated advisers.

But I wonder whether, in our anxiety to see the old Stock Exchange come up with a solution for the middle-ground of corporate capitalisation, we are missing other, more exciting capital markets that are more appropriate to the millenium.

The first point to be made is geographical. There is no reason why British, European or – as Throgmorton Street would have it – even international equity markets should have their base in the City. Technology has liberated such geographical protectionism – that, in a sense, was the whole point of what happened ten years ago.

More importantly, there is greater urgency for effective capital markets elsewhere. Scotland, for example, has more companies per square mile that fit the potential entry criteria of the likes of AIM than any other part of the UK. Conventional wisdom has it that, under 500,000, companies can finance themselves through the banks; beyond 50m they can (and probably should) go to the senior markets.

It is precisely this sort of FT-SE 200-300 that Scottish industry offers in spades. It also has a long-established and renowned financial community, as well as office, staff and administration costs that are a fraction of those of the City, offering far more flexible fee structures. Little wonder some of the more imaginative brokerships have moved dealing operations there.

But as for a full-blown effort to move the operation of capital markets out of the City? Forget it. The City is still a powerful centre of vested interests and, it has to be said, there is little political incentive for this Government to defend its economic position in Scotland – it has already blown it.

The next point concerns those technological advances. Nasdaq created a federation of capital markets across the US, which should have opened our minds to the possibilities.

Today, it should be perfectly possible to quote and deal shares through the Internet, subject to localised standards of regulation. If that is the case, then logically, capital markets on the Internet must follow. Such moves are afoot and offer considerably longer term prospects for the capital markets than AIM, or any other son of USM, at a fraction of the cost.

Longer term prospects for everyone, that is, other than merchant bankers and stockbrokers, for whom there will cease to be the fees to which they are accustomed or, for many, much of a job left to do. Sadly for growing companies, that’s why the City, the Stock Exchange and AIM will be defended to the last.

George Pitcher is joint managing director of media consultancy Luther Pendragon.

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