PLUS Markets Group has embarked on an urgent mission to transform its act. The hard-pressed company wants to revert to its roots as the operator of a share market for young companies, start to make some real money and attract new entrants in the most thoroughgoing upheaval since its AIM flotation seven years ago.

PLUS has declared that it intends at the same time to move from annual losses of £8.2 million to break-even in two years. This will involve cutting costs 40 per cent to below £5 million in 2011 and PLUS argues that it can do all this without raising any more money from investors.

That is the message from Giles Vardey, the former stockbroking chief who became chairman of PLUS in a radical reshuffle in February. He is leading a far-reaching strategic review of the company’s operations and business model, with the help of Cyril Theret, its former business development chief who replaced the energetic and ambitious Simon Brickles as chief executive officer in the same reshuffle.

Sceptics note PLUS Markets’ own heavy losses and bombed-out AIM share price (despite recent heavy buying). They cite its core PLUS-quoted market’s illiquid trading conditions and perceived limited fundraising power, not to mention the latest upheavals at broker Astaire, parent of several PLUS corporate advisers, and the departure of its empire-building boss Edward Vandyk, even though PLUS matters were not involved.

But several City figures are keen to lead the shake-up at PLUS, notably maverick fund management star Peter Webb, whose Webb Capital vehicle is quoted on PLUS. Webb, who was ousted from the Unicorn fund management group two years ago, says Webb Capital and PLUS will provide ‘my comeback vehicle’.

He has teamed up with Stephen Hazell-Smith, former fund manager and chairman of PLUS before Vardey, and Alex Borelli, well known in the small company field. Webb has also spoken to Adam Wilson, formidable prime mover at broker Daniel Stewart, and others.

His recipe includes intensifying a present drive by PLUS among investors, private companies and those listed elsewhere. Webb, who sees roles for Webb Capital in fund management, corporate finance and advice, also wants a push on the quality of PLUS corporate advisers bringing companies to float.

He insists that hidden value abounds in PLUS-quoted, obscured by poor corporate advice and research, inadequate free floats of shares out in the market and not enough drum banging. ‘There is so much hanging fruit, I’m banging my head on it,’ he declares characteristically.

None of this comes a moment too soon for PLUS Markets, whose own shares have collapsed from nearly 40p four years ago to 1.88p recently. All was smiles and jovial banter at the Connaught Rooms in London the other day, when the PLUS Awards for 2010 were presented to a range of deserving winners, including Juliet Davenport of renewable electricity concern Good Energy, smoke alarm specialist Sprue Aegis and former market information chief Barry Hocken.

But, behind the repartee and wisecracks was an unmistakable feeling of a market confronting crucial questions about its future. This time PLUS must get it right.

The challenges

First, there is the perception that PLUS, which began life in the 1990s as the Ofex trading facility with hopes of helping to fill the funding gap for young companies, risks becoming irrelevant in that role. New money raised last year for new issues, which were of course tough in all markets, fell from a small £14.2 million to a paltry £5.1 million, while, together with secondary fundings, total money raised slid from £67.8 million to £21.2 million.

The PLUS All-Share Index, including companies as diverse as Quercus Publishing and Suffolk brewer Adnams, dropped 17 per cent to 608.5 last year. According to small company ginger group Enterprise Britain, the number of PLUS-quoted companies fell from 232 in March 2008 to 179 last April. Meanwhile, their combined market value, excluding two untypical market giants, Arsenal Football Club and Kuwaiti property group RAK, fell from £2 billion at the beginning of 2009 to less than £1.5 billion last March, representing some 181 companies, barely ahead of the figure for January 2006, though PLUS-quoted has received 11 applications so far this year, some in the £6 million to £7 million bracket.

RAK did indeed join PLUS-quoted through a £600 million reverse takeover, helped by the good offices of Brickles, who is now PLUS Markets’ vice chairman with oversight on the Middle East and other foreign markets. But that was far from a typical PLUS deal, unlike the more recent takeover of internet search engine marketing concern Netcallidus for up to £1 million in shares and cash by digital marketing agency dotDigital — which ironically now plans to move from PLUS to AIM.

Part of the Brickles legacy is a drive to attract floats from abroad, in particular the Gulf and the Far East, which are often seeking relatively chunky sums. Average float sizes have been on the increase for most domestic issues, but a contemplated £2 million launch float by potential PLUS candidate Simplexo, a mobile search engine innovator, might still be seen as fairly sizeable.

However, that is the amount that already PLUS-quoted, Midwest-focused and Dublin-based US Oil & Gas hopes to raise to start drilling. The company has prospects in Nevada and Utah and a novel method, ‘Passive Seismic’, which ‘listens’ for oil vibrations.

Elusive profits

The second problem has been how to make PLUS Markets Group itself a profitable business. Last year’s £8.2 million losses were down from 2008’s £10.2 million shortfall on somewhat lower turnover of just £3 million, and the company managed to end the year with £10.7 million cash, £2 million more than it required under the Financial Services Authority’s rules as a Recognised Investment Exchange (RIE), thanks to the injection of £5 million by Middle Eastern investment syndicate Amara Dhari.

Under Brickles, a former head of the London Stock Exchange’s junior AIM market, PLUS established rival trading platforms for shares on parts of the Full List and for all AIM shares, the latter facility secured after a costly lawsuit taking up much senior management time. As a result, PLUS saw share trades worth £53 billion last year, between 5 and 10 per cent of the whole London market, and built its share of AIM deals to between 20 and 30 per cent, but received no income from all this except from selling data to news agencies, which came nowhere near to covering its costs.

Key shareholders, including finance group Close Brothers (whose Winterflood Securities arm is a PLUS market-maker), were not particularly pleased, especially as they saw their PLUS Markets Group shares fall so drastically. Theret says one purpose of the strategic review is to ensure that PLUS capitalises more effectively on its licence as an RIE, which observers suggest must involve deal execution fees and a cheaper trading system among the steps under active consideration.

Competition and costs

There are also concerns over competition and costs. The London Stock Exchange has introduced its new ‘standard listing’ facility, enabling UK companies to trade their shares on the Full List with the same lax rules that have hitherto governed ‘secondary listings’ for non-UK European companies. Companies not concerned to offer investors the full protection of a ‘premium’ LSE listing need not show a three-year trading record or have a sponsor.

Introduced under pressure from Brussels, the standard listing has provoked concerns that it could undercut AIM without offering investors even the protection of a nominated adviser. PLUS-quoted players are even more concerned.

This change has coincided with new PLUS-quoted rules and fees, with a minimum £15,000 application fee for companies valued at up to £3 million, rising to £100,000 for the largest groups, with annual fees ranging from  £5,500 to £50,000, with concessions for ‘fast-track’ admissions from other qualifying markets. Critics claim that makes the combined first-year costs for PLUS higher than either the Full List or AIM, though some would challenge that, and practitioners point out that professional fees usually work out much higher for AIM and the Full List than for PLUS.

Liquidity and standards

Illiquidity and wide spreads between bid and offer prices of PLUS-quoted shares can be serious deterrents. PLUS itself argues, perhaps a touch unconcernedly, that ‘all small-cap companies can be illiquid and small company investors always worry about spreads’.

Not everyone is as optimistic as PLUS advisory panel member John French, who insists that PLUS-quoted companies need have no liquidity problem, provided they generate news flow. A serial small company backer, French has been grooming Armenian wind farm concern Armaec Energy for a PLUS quote and recently raised £217,000 for PLUS-quoted condoms-to-patient hygiene specialist Sutherland Health.

Further concerns relate to standards and regulation. A long-time member of the PLUS advisory panel, French agrees with Webb and declares that the market ‘needs to focus on the quality of its deals and [naming no names] its advisers, too’.

At present, PLUS advisers include a range of investment groups, accountants, brokers and others, with parts of the pervasive Astaire stable such as St Helen’s Capital and Ruegg potentially up for grabs, while share tipster Tom Winnifrith’s Rivington Street is similarly ubiquitous. Elsewhere, PLUS has suspended one of its busier advisers, Atlantic Law, after a tribunal upheld a permanent ban on Andrew Greystoke, its controversial boss, and fines of £200,000 each on him and the firm imposed by the Financial Services Authority over sanctioning a £3 million ‘boiler room’ share-peddling operation.

The boiler room exercise did not involve PLUS. Observers point out that the fines pale into insignificance compared with the £2.8 million fine imposed by the FSA recently on Simon Eagle, former head of broker SP Bell, over share manipulation on AIM.

The PLUS battle plan

Vardey, Theret and colleagues should have the final parts of their strategic review ready this summer, but some outlines have become clear and some measures are now already under way. There will be a renewed focus on PLUS-quoted, where the company can charge an exchange operator’s normal fees.

PLUS is taking several steps that Peter Webb would approve of. It is helping PLUS-quoted companies connect with retail investors in London and elsewhere after recent ‘well-received’ forays to Edinburgh and Manchester.

‘PLUS Markets can help PLUS-quoted companies market themselves and boost liquidity,’ says chief financial officer Nemone Wynn-Evans, who points out that the market’s RIE status should enable institutional investors formerly excluded from investing there to come in. PLUS-quoted’s drive in the Gulf and the Far East has borne fruit and it is hoped more will come.

At the same time, ways will be sought to extract profits from the parallel Full List and AIM platforms, such as charging execution fees and seeking cheaper technology to match bids and offers. PLUS sources say that amortising kit for the platforms has knocked profitability, but was over last year, while technological advance means that replacement will cost a fraction of the original equipment.

For many, PLUS is working well. Brian McDonnell, boss of US Oil and Gas, which raised £312,000 with a PLUS-quoted float in January and now wants nearly seven times that, maintains that ‘PLUS puts us in touch with the finance’.

PLUS Markets Group’s AIM price shows that there is widespread scepticism about its chances of turning the corner convincingly, especially in today’s austere climate. But, if the team really can pull it off, the shares could one day prove a snip for risk-friendly punters.