Times are hard for new businesses at the moment, particularly anything e-business or technology related. There has been a raft of highly public failures and a number of the surviving companies operating in this sector are struggling.
Not the ideal environment for new companies on the look-out for funding; skittish venture capitalists are now more interested in making good on earlier investments than bank-rolling new projects, and the public markets are looking increasingly volatile.
There are, of course, many other routes to secure funding, but most young companies need more than just money. They also need to send a message to the world to say: ‘Here we are; we are solid and established, and you cannot afford to ignore us'.
This is one of the major reasons why most companies want to secure a listing on an internationally recognised exchange, as it increases visibility and imparts a corporate feel. But public markets can be very unforgiving, especially to fledgling companies that are still developing fast and undergoing rapid changes.
Bermuda's mezzanine market has been created to solve this issue and meets the needs of businesses that want to make the step up to a listing, but are not quite ready to make the huge transition from private to public company.
Marketed specifically at the e-business sector, but open to other new companies, Bermuda's mezzanine market acts as an intermediary step for companies that eventually want to ‘go public' but do not want to rush into it. The market works by giving companies the opportunity to raise capital on an exchange that is only open to institutional and ‘qualified investors'. As a direct result, the listing requirements are much lighter than those associated with a public exchange (such as the LSE or NASDAQ), because there is no need to protect the interests of the unsophisticated retail investor.
There are, however, some requirements which serve to reassure institutional investors as well as prepare the companies themselves for the rigours of a full listing by giving them a taste of the discipline that this entails in a much less volatile environment.
For instance, a prospective mezzanine market member needs to be sponsored by a Bermuda Stock Exchange trading member, which will be responsible for ensuring that the company carries out due diligence. The company itself then takes responsibility for producing regular external audited financial reports when it joins the market.
Once it has listed on the exchange, the company becomes a recognised listed security and its stock can be traded by institutional and qualified investors in much the same way as any global exchange operates.
The advantages for the company are that it is able to market itself and raise capital on an exchange that is less volatile and less regulated than a public exchange. It can be seen as a ‘lite' float that gives the company the kudos and visibility of a listing (and a ‘ticker' on Bloomberg and Reuters) without all the red tape, time and expense associated with a full initial public offering.
We envisage that most companies that list with us will eventually move onto a full listing, treating our mezzanine market as a considered step along their evolutionary path. Since it was established in 1999, 13 securities had listed on the Bermuda mezzanine market by the end of last year. Of these, two have already gone to list on public exchanges – NASDAQ and AIM – and we are sure more will follow, as market conditions improve and the companies feel they themselves can handle the pressures of becoming a publicly listed company.