Saturday 24 February 2018

Irish firms should look to stock market to fuel growth

With bank finance hard to come by, IG Ireland boss Declan Bourke says the ISE has a key role in raising capital

It's the markets, dummy: The Government’s recent ‘A Strategy for Growth’ barely touches on the need for increased levels of direct funding from the capital markets
It's the markets, dummy: The Government’s recent ‘A Strategy for Growth’ barely touches on the need for increased levels of direct funding from the capital markets

Declan Bourke

IF our Government is serious about creating sustainable jobs, not just ahead of the next election but into the future, it must focus its attention on the mechanisms which allow us to scale SMEs to allow them take their place on a world stage.

The key to turning successful small Irish companies into successful large Irish companies is capital, and while we figure out how to get the banking system fit for purpose again the key to capital should be the Irish Stock Exchange.

When it comes to job creation, much of the discussion typically centres on inward investment -- but this is an area which can tick along nicely by itself without political interference.

Only last month it emerged that Ireland is ranked first in the world in terms of the quality of inward-investment jobs and second in the world in terms of the number of inward-investment jobs per capita. IDA Ireland is doing a great job, so let's leave it alone to get on with it. When it comes to promoting start-ups, Irish entrepreneurs are spoilt. There are few if any national agencies in the world which can hold a candle to Enterprise Ireland, which is regularly held up as a role model for other countries to follow.

Our rate of entrepreneurship may have waned since the financial meltdown but all the signs are that we remain at heart one of the most entrepreneurial countries in the world.

We are, as a nation, very good at incubating small companies and excellent at attracting multinationals, but when it comes to helping companies to grow, we are not even at the races. The obvious answer is to incorporate a role for the Irish Stock Exchange into the Government's strategic thinking.

It is surprising that the Government seems to have a blind spot when it comes to scaling companies in general and on a role for the ISE in particular.

Consider the Government's paper 'A Strategy for Growth' which was published last month to herald our exit from the bailout. That document recognises that Irish SMEs are "overly reliant on bank lending" and are "disproportionately exposed due to their reliance on Irish banks facing balance sheet constraints, foreign banks focusing on their home markets and a lack of alternative sources of financing".

Yet the same paper's policy response to the disproportionate over-reliance on the banks is "strengthening the role of the banking sector in supporting enterprise" while looking at alternative sourcing of debt.

'We remain at heart one of the most entrepreneurial countries in the world'

The paper does recognise the need for "increased levels of direct funding by capital markets" -- but far from having a detailed analysis of how the Irish Stock Exchange can fit into such a strategy, the ISE is not even mentioned in the Government's paper.

This absence is all-the-more remarkable when we consider that only a month earlier at its own 'Funding for Growth' conference, the ISE itself outlined a number of eminently sensible suggestions on how the exchange could be used to scale small Irish companies. Among the most straight-forward was the proposal that we review how we tax capital, share options and exits.

Irish SMEs are potentially a very good investment and there is no reason to believe that the right companies would not receive the support of the markets, not to mention small Irish investors.

What greater endorsement do Irish SMEs need than Angela Merkel's pre-Christmas decision to instruct the German state-owned bank KFW to give loans to Irish SMEs at half the rate charged by our domestic banks?

It would be naive to consider this seasonal largesse on the part of the German chancellor when it is almost definitely the result of a careful analysis of the Irish market and how the German state can profit from contributing to the development of our SME sector.

Arguably the key reason for an exchange in the first instance is to provide a mechanism for companies to raise capital, so attracting new listings is an important issue.

The interest from IG's Irish client base in the high-profile listings of 2013 including Twitter and the Royal Mail suggests a considerable untapped appetite.

The Government's policy paper proposes a strong role for venture capital in growing Irish SMEs but such an approach risks moving our successes offshore while ignoring the reality that venture capital wants to know it has an exit mechanism, which in most countries is provided by having a vibrant stock exchange.

Discussion about the policies required to achieve this end should focus not on the needs of the exchange, which is big enough and bold enough to fend for itself, but on how that exchange can make a sustainable and impactful contribution to growing Irish business and in doing so to fostering Irish employment.

Declan Bourke is managing director of financial derivative trading firm IG in Ireland

Irish Independent

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