Tuesday, July 14, 2009

The Triumph Of Wishful Thinking

I have spent most of my life, in one way or another, dealing with the capital markets. When you read all these stories of the excesses of bankers and their ilk, I am amongst the guys on the other side who have been paying dearly for these excesses.

The money that is made by the players in the financial markets doesn’t mysteriously appear from nowhere. It’s funded by coffee growers in the fields on Brazil, by entrepreneurs who are making a go of it - and especially by larger companies and their employees and shareholders.

Of course, the financial markets have had huge benefits and have made life easier for farmers, start-ups and corporations, but the price paid may well have been, and remain, excessive.

The real failure has been one of regulation, as my experience of Sarbanes-Oxley demonstrated. In particular the SEC became a triumph of wishful thinking over resource and will. Not surprisingly the financial sector ran away from itself (and not just in the narrow corporate finance and investment banking sector I am referring to here).

But, where do we go from here? Reports from the US show that the VC community raised less money than since the dot com bust last quarter, with only $1.7bn added to their coffers. Venture Capital clearly needs to rethink itself; I’m already seeing this manifest itself as more VCs lower their expectations and their investment levels.

Perhaps more worrying is the way the main capital markets are going underground with the creation of ‘dark pools’ – or off-market markets where the big players can swap trades ‘under the radar’. I can think of nothing more likely to cause future problems in the markets, including a decline in liquidity and a resulting shying away from IPOs.

Two years ago entrepreneurs looking for a public exit were robbed blind by the advisers forced upon them by stupid levels of regulation; now, there is a danger that they will have nowhere to go.

There is a need and an opportunity to rethink the way micro and small caps are supported by the various vehicles available in the capital markets, and this needs to go way beyond the billions that the UK Government is pouring into VCs through regional investment funds.

Putting money in at an early stage to promote enterprise is to be lauded, but the path to exit needs to be clear if commercial investors are to have faith in what can only be described as a failed system.

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