This little piggy went to market

Thinking of investing in a new arrival on the Stock Exchange? The returns could be huge - and so could the losses. James Bethell weighs up the risks
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There is something peculiarly exciting about the arrival of a new company on the Stock Exchange. First there are the enthusiastic, freshly scrubbed entrepreneurs who arrive in the City wearing their new suits and carefully chosen ties. Inevitably they tell a compelling story, carefully honed by expensive stockbrokers and public relations advisers: their track- record is impeccable, the market is on the cusp of massive expansion, the company is perfectly positioned to take advantage of the opportunities.

The story is repeated over innumerable servings of chicken to the smiling grey men of the financial institutions. Journalists are wheeled in to run their eyes over the latest talent on the block.

Then the budding directors of public companies take the train back home while their advisers haggle with the money men over how much they will pay for a slice of the action.

Despite the risks, the whole process offers wonderful opportunities for the private investor, who often stands as good a chance as the professionals of spotting the next Glaxo or the budding Hanson.

Despite the valiant efforts of corporate advisers, companies are frequently sold at bargain prices. The financial institutions rarely have time to run anything more than a cursory glance over potential investments and rarely understand the business fully. In addition, the brokers often offer shares at a discount to their full value to be sure of getting the issue away.

The potential for profit was detailed in a recent survey by the City stockbroker James Capel of new issues over the past two years. It found that they frequently out-performed the market by more than 10 per cent.

Richard Hickinbotham, smaller companies analyst at SG Warburg, sees flotations as a chance to invest in the business world's winners as the economy naturally renews itself. "They give us a chance to invest in emerging sectors such as computing and telecommunications, the new companies should outperform other companies in their sectors, and the profits should rise more quickly," he said.

However, the risks are considerable. Some entrepreneurs have questionable motives for bringing their businesses to market. Some are trying to re- finance or sell rotten businesses before they fall to pieces, others are keen to retire with a nest-egg, taking their skills and contacts with them. Even the City, with all its expensive analysts and expertise, sometimes finds itself legged over by a clever operator.

It is virtually impossible for the private investor to conduct the detailed "due diligence" needed to be sure the accounts do not contain unexplained black holes. There is also a peculiar tendency for perfectly well-run companies to crash into problems soon after flotation, possibly because the managers have spent too much time swanning around the City.

Last year, new issues developed a bad reputation. This was partly caused by a few well-publicised share price failures. Four companies - McDonnell Information Systems, Coda, DRS and Drew Scientific - lost more than 50 per cent of their value soon after reaching the market, for various reasons, some not of their own making. It was also caused by the belated appearance of a recovery which led to hundreds of businesses, many weather-beaten by the recession, desperately rushing to the City while the sun shone.

The result was that the flow of companies dried up, with companies like Oasis, Century Inns and Ushers pulling out of flotation attempts at the last minute. In the first half of 1995 only pounds 700m was raised by new issues, compared to pounds 10bn in 1993 and pounds 5bn in 1994. More recent new issues are equally mixed. The successes include Meconic, which makes controlled drugs, issued at 135p and trading now a touch below its peak at 163p, and Kingsbury, a furniture retailer launched at 27p and now riding high at 110p.

But there are also some disappointments, including the gas distribution company International Energy, launched at 112p and now trading at 108p, and the copper and gold mining group Brancote Holdings, floated at 61p and now trundling along on the Alternative Investment Market at 58p.

There are half a dozen more in the pipeline at the moment, including JKX Oil & Gas, chaired by the former BP boss Bob Horton, which is in the oil business in Ukraine and Georgia, and is sponsored by Henderson Crosthwaite. The pub operator Century Inns is contemplating a second shot at a flotation, with the help of NM Rothschild, along with Consolidated Coal (Shaw & Co), the household detergent maker McBride (Warburg), the MultiMedia Corporation, a producer of educational aids (Shore Capital), the California-based port operator Benecia Ports (Hill Samuel), and BTG, which licenses new technology (Kleinwort Benson).

There are signs that the flow of new issues may pick up this autumn, City analysts say. If it does, new opportunities may arrive for investors.

Following last year's disasters, there will be a greater concentration on due diligence and only the best companies will make it to the market, Tim Rowntree, director of equity capital markets at James Capel, said.

Also prices are falling as institutional investors are becoming much tougher at bargaining because they feel stockbrokers have taken advantage of them in the past.

JKX Oil & Gas is raising money to finance its oil exploration and development business in Russia, Ukraine and Georgia. The brokers are Henderson Crosthwaite. The pub operator century Inns is hoping to be second time lucky this summer with the help of NM Rothschild. Shaw & Co are brokers to Consolidated Coal, Warburg is bringing forward the household detergent maker McBride and Multimedia Corporation is being advised by Shore Capital.

Meconic, which makes controlled drugs, issued at 135p and trading now a touch below its best at 163p; Kingsbury, a furniture retailer launched at 27p and now riding high at 110p; Silk Industries, maker of silk fabrics, which started out at 125p and is now 134p; and Gus Carter, the bookmaker, which stands at a modest premium of 7p to the issue price of 80p.

The gas distribution company International Energy, now 4p off the pace at 108p; the copper and gold mining group Brancote Holdings, floated at 61p and now trading at 58p on the Alternative Investment Market; Country Gardens, floated at 68p and now down 5p at 63p; and Norhomes, a company providing homes for rent as assured tenancies, which was listed at 66p and is now 63p.

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