In the City
Small is beautiful
The City is full of personalities but none- theless few of them are remembered once retired. There are exceptions, like Montagu Norman. Another such is John Kinross, whose book of reminiscences Fifty Years in the City (John Murray, £12.50) has recently been published. Sub-titled 'Financ- ing Small Business', it tells not only the fascinating commercial life of the man himself but chronicles the development of one of the most important areas of activity in the City, namely the finding of money for new small companies. In the case of John Kinross this work culminated in his key part in the foundation of the ICFC, the Industrial and Financial Corporation to give it its full and original title, which is now part of Finance for Industry. His also was the vital role of seeing the ICFC through its early years, and its development adds a unique and most powerful institu- tion specialising throughout the country in the provision of funds for small enterprises. It is absolutely no exaggeration to say that the ICFC is the most important creation in the financial infrastructure of this country since the war. A large part of the credit Must go to `JK' as his friends know him.
However, in reading his book it is not Possible to conclude that everything has im- proved since the days when he was running his own issuing house in the mid-Thirties. Respite the creation of the ICFC there is still a problem for the small company. In many ways, judging by the lively account given here of the new issue market in the Thirties, things were better than today. One Trust, for instance how the Cheviot !rust, which opened its doors for business in the early Thirties under John Kinross, Would have flourished today. To start with, the costs of doing an issue for a small business today are so appallingly high as compared with the expenses in the Thirties. This is not just a matter of com- parisons on a pound for pound basis but on a Percentage comparison costs are often so much higher today than they used to be. Perhaps part of the reason is that most issu- ing houses are afraid to use the services of flY but the largest professional firms, who inevitably are the most expensive. `JK', by
contrast, always went to small professional firms where he got personal attention, which is today an extremely rare commodi- ty. Secondly, he could move with such speed; by all accounts it didn't take him fif- teen drafting meetings with at least ten peo- ple present at each before he got an accep- table proof of a prospectus; he worked with a small and dedicated team. Perhaps another reason for the simplicity of those days was that the rules weren't so com- plicated. In the Thirties it would seem that the Stock Exchange went through a proof in a matter of days and if they found nothing on which to comment they just said so. That's a far cry from today, when the quotations department of the Stock Ex- change will expect to comment on proof after proof.
Apart from the business of actually put- ting new issues of capital together technical- ly, `JK' was a master of the art of selling the product of his labours. As anybody knows who has had anything to do with the issue business, the most difficult part can be the selling. Of course this depends upon timing.. There are periods, as there was for instance in 1928, when the public suddenly develops such an appetite for new issues that anything can be and is (unfortunately) sold. The answer that the Cheviot Trust provided was to have its own carefully nurtured list of clients who developed into a following for the house. Keeping them depended upon maintaining the quality of the issues. And this was something at which `JK' was a master. Thus the circle was established.
But it must be said that the system did help him. In those days small was still beautiful. Investors liked buying their own shares in small and new companies. They hadn't become institutionalised as they have today. In the Thirties the insurance companies' pension funds and the like only accounted for a small proportion of the total savings pool, probably not more than a quArter of it, if that. Today they account for over two thirds. Then, the structure of the market itself favoured individual invest- ment. The provincial exchanges still existed (the greatest mistake the Stock Exchange ever made was to eliminate them). They were genuine markets specialising in the shares of local companies. These in turn had a local following. People on the spot knew whether such and such an en- trepreneur could be trusted because he most probably lived amongst them.
There is no doubt that the regulation which now governs the machinery of the new issue market is largely necessary and welcome in so far as it protects investors from being exploited by unscrupulous and unprincipled promoters. On the other hand it does seem a pity that to a large extent we seem to have thrown the baby out with the bath water. Was it absolutely necessary in order to improve regulation to centralise everything so much?
This thought is particularly relevant to the development of the so-called unlisted share market, the USM. Designed as a mechanism for the raising of money for newish companies, it stands nonetheless in the full glare of publicity in the very centre of the London market. What a pity we can't go back to genuine local markets where local brokers could provide a ge- nuine market in the shares of small regional businesses. But then this kind of develop- ment would only work if the appalling trend towards the institutionalisation of that market, which, if nothing is done about it, will end up with the insurance companies and pension funds owning all the shares in existence, is reversed and for that to happen we need a fundamental tax reform on savings. It always gets back to that point.
In the meantime anybody considering these matters should go straight to John Kinross's fascinating book; as well as being a rivetingly good read it is by far the best thing yet written upon the development of an important segment of London's capital market.