Opening the research fund gates

How can an investor assess whether a new technology company is worth backing if there isn’t a long enough track record?

New rules which will make it easier for companies in the high-tech sector to list on the stock exchange came into force this week.

The changes, for strategic investment companies (SICs) and scientific research based companies, were drawn up by the Financial Services Authority.

The move is designed to attract more capital to those investment houses which target the technology ‘incubators’.

Many SICs were only established in the past three years. Because they do not have long track records investors have found it difficult to judge their performance. This meant another method of assessment was needed.

The new rules therefore require detailed disclosure of SICs’ activities. With scientific research-based companies, the pace of change can be rapid. This means the usual listing criteria are not necessarily good indicators of development. Here again, the FSA has introduced specific disclosure requirements.

The FSA published its proposals in January. It was the first set of amendments to stock exchange listings since the UK Listing Authority came under its wing. A consultation period until mid-March took in a wide range of views, but there have been very few changes to the original proposals.

The FSA now requires that SICs have a market capitalisation of £100m, including new money of at least £20m, raised at the time of admission to the stock exchange. SICs seeking a listing will need to provide information about their directors and senior management, and pass ‘quantitative tests’ to show they are a ‘significant size’ and have an adequate spread of risk.

When introducing concessions ‘it is important to ensure that access to equity funding is balanced with appropriate levels of investor protection,’ said Richard Emery, a member of the FSA listing policy group and author of the consultation paper. Among the disclosure requirements are a detailed description of investments, details of management experience and any ‘lock-in’ arrangements.

Significantly, unlike other companies, SICs will have to report on their activities each quarter of the financial year. Financial data and results for the period must be filed.The concessions to SICs reflect the FSA’s desire to provide access to equity and capital markets. But in the wake of the dotcom and high-tech sector collapses, confidence has been severely dented.

‘We have created a framework to allow the admission of SICs and will have a more flexible approach for scientific research based companies,’ Emery said. ‘Whether companies take advantage of the provisions depends on the market in those sectors.’At the moment, there are few technology investment funds around, so little response is expected in the short term. But now that the FSA has created the environment to enable SICs to list, the timing is in their hands.

Scientific research based companies have a different set of listing rules. In the past, these firms had to satisfy at least one of four ‘milestones’. The new rules allow them to demonstrate the maturity of their business by ‘explaining the milestones that are appropriate to their particular areas of research, through detailed disclosures in listing documents’, the new rules say.

However, there is a wider question of how to evaluate company performance to attract investors, according to John Garside at the University of Warwick.

‘Yardsticks that usually work for large companies do not work for incubators,’ he said. ‘Incubators not only have to attract money early on, but also need a strategy for sustainability.’

Garside believes that for their performance to be evaluated, companies need to be better at defining and understanding the processes they are engaged in.

‘For example the track record in takeovers is not good, so we need to re-examine how we value companies. Where incubators are concerned, they have to go from a good idea to a viable business. The question is what processes are put in place,’ Garside said.