Brian Basham is no stranger to street fighting in the City of London. For the former journalist, PR man and chairman of research house Equity Development, nearly five decades of entrepreneurial success, high jinks and legal battles have only fuelled his affection for British business.
Basham first made a name for himself as an uncompromising PR adviser in the 1980s, at a time when mega-takeovers and corporate conflict were the order of the day. These days he tends to leave the high profile wrangles to others but the gloves are most definitely off in his efforts to get more cash flowing into growing companies.
Basham left school at 16 and went on to serve an apprenticeship as an electrician before starting work in the City as a journalist for the Daily Mail. He went on to work for the Daily Telegraph and the Times and later as an analyst at a stock broker until finally breaking in to public relations in the early 1970s. He later set up and floated his own PR firm, Broad Street Group, which earned a formidable reputation during the 1980s for advising blue chip clients involved in mergers and acquisitions. He is currently chairman of Equity Development, White Star Property plc and Global Pay and Purchase Ltd.
Ten years ago Basham produced a report entitled Tomorrow's Giants with the former Treasury official Craig Pickering, which took a close look at the state of the smaller quoted company market. Late last year he reprised that report, at the request of small company cheerleader the Quoted Companies Alliance. His conclusion is that the environment for small-cap investing in the UK needs a complete re-think.
In essence, Basham is calling for the government and market regulators to pull away the cotton wool rules designed to protect private investors from plunging cash into phoney investments. He thinks new technologies and new media in particular, offer a more even playing field for retail share buyers and that new rules should instead focus on policing a more open market.
Brian, given your assessment of the market do you think that enough is being done by the government and market regulators to encourage private investors to back smaller quoted companies?
No, I think that government is out of date in the treatment of private investors and in its understanding of how news can be disseminated. In its desire to protect investors, it is relying on regulation rather than policing. It is stifling investment in small quoted companies by relying on rules that are difficult to understand. What it should be doing is policing much more strongly to get rid of the very few, the very pervasive crooks and villains that there are but who seem to carry on year after year. Instead of burdening the market with a lot of regulation, the government should be focusing on creating a better understanding of what could be achieved through new media, the internet and recognised trading systems. That would allow people to invest in small quoted companies much more innovatively.
What do you think are the main regulatory obstacles that are causing this problem?
The main culprit is this idea of ‘suitability'. There is a myth that small companies are much more risky than the big companies. Now of course, individually, that's true but if you take them collectively they are much less risky. The fact is that when small companies fail they do very little damage but when you get something like Marconi, say, it wipes out one end of the market. Brokers can't be attacked if they tell investors to invest in big companies but they can be attacked if they recommend small companies and that is a major disadvantage to people recommending small companies. The other thing is this idea of allowing individual investors in some way to have direct access to the market as they do in Australia and New Zealand, so they can go straight into the market without huge charges. The government needs to bring itself up to speed with what's going on elsewhere in the world.
Where do you think the government should be looking in order to fix some of these problems?
A golden example, and it can all be adapted for the small company market, is GroupOn in the US – an amazing company. It has gone from a standing start to turning down a £6bn offer from Google and it is run by a 30 year old who has created fantastic value in no time at all. The government generally goes to all these to worthy people in the market, all of whom are senior in terms of age, and what it needs to do is bring in a couple of 25 year olds to tell it what could be done.
Investing in small companies should be first cousin to social media. If they went to Zynga or GroupOn those people could tell them precisely how to transform the market for small company shares – the mechanisms are all there. Vince Cable ought to bring a 25 year old in to tell him how the likes of Twitter, Facebook and LinkedIn can be used to encourage trade in small companies.
While technology has certainly changed since you wrote your last report, it remains the case that investment bankers encourage companies to focus on institutional funding rather than retail investors. Should we accept that situation as a fait accompli and look instead at addressing other areas?
No we shouldn't. One of the reasons that I've written the report at this time is because I think the timing is right. When I started out, one of the things I did was go back to my old report and it struck me that when I wrote it, companies like Google and Amazon were very small, Skype hadn't even been invented. I'm the chairman of an internet payment business which is remarkable because the technology guy sits in Michigan, we market in Penang, we do our web design out of Romania and we're working for a chap of Korean/Japanese ancestry who lives in Hawaii – and we can all talk for nothing on Skype. We can switch files instantaneously between us, we can do all our accounting for nothing, there are open source systems. The world has changed and we have got a fantastic opportunity for small companies to absolutely explode into life if only we can get the investment to them.
And how would you propose to do that?
The way to do that is to recognise the new mechanisms that will allow it, stop this nonsense of suitability, so the brokers can recommend small companies and even start ups too to private investors and recognise that there is a continuous chain of capital from the smaller quoted company market right down to start ups. I was talking to Ronnie Cohen [founder of Apax Partners] about this, and he said: ‘Look, when you've got a good AIM market we can raise money for VCTs to put into start ups but when AIM is flat we can't raise the money'. It is an absolute causal link and you can see why, so we need to make life a bit easier for small investors to invest in quoted companies and also to invest in start ups and non quoted companies. If you look at the fact that America is, pretty much by all measures six times the size of the UK you would reckon that with around $25bn per year going into start ups and angel companies in America it's reasonable to think that we could do about $4bn in the UK if we had the same incentives. That would feed through into the smaller quoted company market.
When I was on the Executive Committee of the Quoted Companies Alliance and chaired their Policy Committee and their Political Committee I got them to understand that this is one continuous chain. You have got to nurture the companies that are coming up into smaller quoted companies and look after the smaller quoted company market itself so it is reputable and so that money circulates all the time.
That is what I think we have got to do, we have got to understand that this money circulates and we have got to police the market better because there are people out there who professionally milk private investors who come into the market. Those people have got to be absolutely wiped out because investors come into the market, and I've seen it so many times, they get their fingers burnt and they don't come back again.
The other thing that government needs to understand is that investment is a hobby as well as a way of making money. They have got to recognise that there is nothing wrong with people having a punt on a small company. They don't need mollycoddling. What you do need to do is to make sure that the crooks are nailed because most people in the market are honest.
Looking ahead, how much confidence have you got that some of these issues will be resolved? If you could choose just one of your suggestions to be acted on, what would it be?
Well I suppose if I had to say one thing, I would bring back taper relief. Taper relief was only abandoned because some of the private equity boys abused it as a tax dodge. You have got the entrepreneurial relief, which is good, but taper relief really caused a terrific inflow of funds to the market. The second thing I'd do is probably get rid of stamp duty because all it does is drive people into the likes of Contracts for Difference and spread betting, which is nonsense. Stamp duty does raise about £3bn a year but I think there would be a lot more money coming in without it.
You have also got to find mechanisms that allow private investors in, particularly because the institutional funds have become too big. If you go along to an institution now to get £0.5m or £2m into a small company they are mostly not interested.
So you see individual investors as the answer for small cap funding?
It is all about private investors, high net worth individuals, angel investors. If you look at British Gas and the Tell Sid campaign, it was a missed opportunity because at one stage we had nearly 20 million private investors in the UK. The government needs to look at what can be stimulated through new media.
In the US there is a whole new political movement, The Tea Party, which has come up entirely through new media, Twitter and Facebook. That is what we have got to leverage so that businesses can state their investment propositions. If they are found to be dishonest, then you've got to have strong policing but you don't want to take a regulatory hammer to crack a walnut. Whenever somebody loses a bit of money they try to close their stable door but you cannot do that. What you have got to do is leave the stable door wide open but go and arrest the people who come in to steal the feed. Small companies right across the board, from the smallest up to the smaller quoted company market, employ about 60% of all the people in this country, they register 64% of all patents registered. They are the innovators at a time when innovation is what will save the global economy.
Brian, thank you so much for your time. For those that are interested, the full Soco report can be read or downloaded here.
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