Comment: Learning from the USM's demise

The Unlisted Securities Market has been a long time dying, but its demise is now certain. While yesterday's document from the Stock Exchange recommending that it should close is technically a consultative one, it would be astounding were it not accepted. End of USM.

There is a great temptation to suggest that this is one more marker for the end of the 1980s enterprise culture, the failure of a social and economic experiment. Since the USM was officially opened in November 1980, only 18 months after the Conservative election victory, and has been pretty well dormant since Lady Thatcher was deposed, it has become a symbol for the Thatcher years, with the achievements and excesses of that period. So it raised more than pounds 4bn of funds that were channelled into industry and commerce; so a fair number of the companies launched on it folded. That was life in the 1980s, wasn't it?

That is a convenient shorthand, but a rather misleading one. The real lessons of the USM experience are much more subtle and interesting. The USM was started in the first place, not because the Stock Exchange, in its entrepreneurial wisdom, suddenly spotted a new business opportunity, but because its restrictive practices, and in particular the charges it

made for seeking a listing, were driving companies outside the Exchange altogether. Small companies seeking funds from investors were going to 'over-the- counter' issuers who were not members, and would do the job cheaper. They would then make a market in the shares themselves.

IMPLICIT SEAL

The activities of these OTC houses date back well before the election of the Tory government. The Exchange did not want to cut its charges on full listings, and to be fair, felt it did not want to weaken the implicit seal of approval that listing gave. So it created the USM as a way round its own rules; a way of protecting its de facto monopoly of issuing and trading in UK shares. This was, of course, long before Big Bang.

It is worth remembering all this, because it underlines the point that the market was demand-led. There was a demand from investors for shares in companies too small or too new to qualify for a full listing; and there was demand for

funds from companies that similarly did not qualify. If there is now no demand for the USM's services, one has to ask why.

One reason is that getting a listing on the full market has been made much easier. For example, the three-year trading rule has been relaxed. In other words, the restrictive practices that made the USM necessary are no longer so restrictive, so that from the companies' point of view there is no need to become a member of the USM before graduating to the full market.

Any small companies can have their shares traded on a matched-bargain basis without anyone having to make a market in their shares, or without the company going through the palaver of getting a quote. So companies no longer need the

USM; what about investors? There is still money about for new, even spivvy, investment opportunities, but investors are perhaps a little more cautious than they were five or 10 years ago.

Then, the branding of the USM signalled a new and potentially exciting investment, but one that carried a larger- than-usual element of risk. Now all professional investors, and many amateurs, are aware that new issues on the full market carry large health warnings without the additional, and somewhat tarnished, USM brand.

Look at what happened to Virgin, Amstrad, and Mirror Group Newspapers. These were all substantial companies, all with good trading records, all led by powerful personalities.

Yet in their very different ways, the experience of each as quoted companies was unhappy. In the first, the main shareholder succeeded in buying back the shares; in the second, he has sought to do so, but so far failed; in the third, he would probably have tried to do so had his financial circumstances turned out differently.

The very different experience of these should tell investors that there is no need for the health warning of the USM: buyers of new issues on the full market should always be cautious, however large the company, however grand the names of the issuing merchant banks, however skilful the associated public relations. IRKSOME RULES

In reality, the USM ought never to have been necessary. Had, in 1980, the London market been more open and competitive, it would have been able to accommodate companies seeking to raise capital and have their shares traded without creating a new market to do so. Now, post-Big Bang, it is more open and competitive, and this will keep it sweet. If companies find its rules on listing irksome, they can seek listings in Luxembourg, Amsterdam or Vancouver. If investors want excitment they can invest in a host of emerging markets. The natural monopoly of the old London market no longer exists.

Looking ahead, there are two main

dangers. One is that the high costs of the securities business will inhibit companies from having their shares traded. Anyone who has seen at close range the complexity of getting a quote will know that the process is far more bureaucratic than it needs to be. Faced with the legal and other costs of a public issue, they will keep the business at a size that does not require outside equity funds. It would be worrying if British investors were denied the possibility of investing in small UK companies, or if British companies found it difficult to raise money from their home market because it has been in nobody's interest to simplify the process.

The other danger is that entrepreneurship itself will get a bad name. Jobs will come from new businesses; they certainly will not come from the present generation of large quoted companies, virtually all of which are seeking to cut back their workforce. One could argue that someone like Robert Maxwell has done more damage to the reputation of the business community than any company that got a USM quote and then subsequently folded.

But it would be really worrying if the spirit that led to the over-the-counter market back in the mid-1970s could not be accommodated: the really risky investments need backers because it is they who will provide the jobs of the future.