John Ball says while stock exchange in Wales would have to start from small beginnings, this has not proved a drawback in other countries.
Not so long ago anyone suggesting the establishment of a Wales Stock Exchange would probably have been regarded as eccentric at best, certifiable at worst.
Yet, the idea has now become the subject of sensible and reasonable discussion and developed a momentum of its own. A debate has been triggered in Wales, mainly due to the work of Rob Huggins at UWIC; academic reports have appeared, chapters have been published in books, a successful workshop was recently held under the auspices of Cardiff law firm, Darwin Gray and bta Consulting, (attended by a representative of the Irish Stock Exchange), and articles have been written in assorted newspapers and journals. The UK Coalition Government is also warming to the idea of regional stock exchanges, partly reflecting the views of the Liberal Democrats, though the view of the coalition in Wales is not known.
This has to be the most exciting business initiative in decades but three questions need to be asked – why establish an exchange at all, what is the likely demand from business, and of course, what will be the main problems?
So, why a stock exchange? The Welsh economy continues to decline in no small part, owing to the absence of a sound financial sector. Yet, there is strong evidence from many other parts of the world of a strong link between stock exchanges and economic growth. Countries on the fringes of Europe, Scandinavia, Iceland the Baltic States, all have strong and growing economies. Their exchanges (many of which did not exist just two decades ago) provide sources of finance that provide patient, intelligent and appropriate capital for new and established businesses.
In Wales, the exchange would be an investment market that addressed the needs of Welsh businesses while developing a business and financially literate community. In addition, it would encourage internal growth and ownership; investment by ordinary shareholders would promote different sources of personal wealth creation; stock options for local management would drive knowledge and commitment; and individual share holding employees would be given the opportunity to build their own pensions.
Uniquely, given the significant number of private limited companies in Wales, the exchange could develop expertise as a base for Tradable Unregistered Equity, a system in which shares are not sold in public offerings but through large investors. This type of trading benefits small, family owned companies that need capital but fear external takeover.
A corporate bond market would form an important part of the exchange’s activities. Such bonds are increasingly an important source of business finance and underpin equity trading in many of the world’s smaller exchanges. Short term lending, much preferred by the banks is often inappropriate. Growing businesses seeking to finance an expensive investment prefer to borrow over the long term through bond issues. There is no reason why the exchange could not in time develop a bonds market, allowing the Welsh Government to raise its own finance and additionally be a means by which government could invest directly in a business, a system common in Europe. Perhaps most importantly of all is simplicity. Listing would be straightforward, inexpensive and would allow potential investment of small amounts of funds.
The next question is of course the level of demand. The first thing to note is that size is not an issue; the Tallinn Stock Exchange was established in 1995 with 11 stocks and has grown strongly, the Iceland Exchange currently trades 25 stocks, marginally more than the Malta Exchange, established in 2003 which trades just 16.
Direct evidence of demand in Wales is difficult to come by but there are important pointers. A recent report by Rob Huggins noted that in 2006 venture capitalists invested in 48 companies in Wales. Since its inception Finance Wales has invested just over £50m in 186 equity injections. In 2009-10 a record £37 million was committed through 246 equity and debt investments. In his report Huggins identified more than 1,500 Wales based businesses that were potentially large enough to consider external funding; of the 169 that completed his questionnaire 8 per cent had already considered a flotation but had not proceeded for different reasons and more than one half saw potential benefit from having access to different corporate investors. In addition, there are some 70,000 private limited companies with registered offices in Wales so the market overall could be quite large.
There will, of course, be problems. The most obvious potentially is lack of liquidity – the degree to which stocks can be bought and sold without affecting the price. This is a function of the number of firms quoted and the level of activity. The evidence is that the number of firms may not be a problem. Clearly, there will be a time horizon before significant numbers of companies are drawn in. However, some 20 Welsh firms currently trade on the London Stock Exchange, including AIM, the Alternative Investment Market, and the 8 per cent noted by Rob Huggins amounts to 14 – more than the number that were there at the start of other European exchanges.
In addition, if the number of equity investments by venture capitalists and Finance Wales are included, coupled with just a small proportion of the 50 per cent of businesses surveyed by Rob Huggins that might be interested, the numbers start to work. Indeed, at the recent workshop, bta Consulting suggested that 50 firms on an exchange is sufficient to resolve the liquidity issue.
The mechanics of establishing an exchange could also be a problem but one advantage we have in Wales is an opportunity to use the Irish Stock Exchange as the platform providing the expertise and operational functions.
There are two wider issues. It has been suggested that there may be a lack of interest, expertise or numbers in Wales to make the exchange a success – tell that to the Maltese. The American writer Michael Porter has more than once pointed to an important non economic factor in national success – culture, and the pride a nation has in its successful achievements, and the Wales Stock Exchange would be just that.