Could a return to regional stock exchanges throw a lifeline to struggling businesses?

FROM ancient texts some fresh wisdom: "What has been is what will be, and what has been done is what will be done; there is nothing new under the sun."

• Two businessmen outside the old Edinburgh stock Exchange

Last week, the government published a paper outlining possible solutions to the continuing dearth of funding for UK companies under the auspices of the coalition government's most difficult marriage, that of Vince Cable and George Osborne.

The Department of Business, Innovation and Skills (BIS) paper, Financing a private sector recovery, seemed to give up on the idea of pressuring banks to lend more to businesses. With European banks - and UK banks in particular - skating perilously close to a massive black hole as they seek to refinance billions in iffy corporate loans over the next two years, the possibilities that they will be in any position to the rescue of faltering firms are thin.

BIS estimates $250bn (163bn) of corporate bank lending across Europe and the Middle East will come due in 2012 alone. And while large firms have access to bond markets and other alternative forms of lending, small and medium sized businesses - and still some large ones - seeking either growth funding or refinancing are in danger of being sucked dry of debt.

So instead, an old idea was floated - regional stock exchanges. In a carefully worded paragraph, the paper suggests that the establishment of these might "help develop regionally-focused sources of business finance".

But will they? And how?

Nostalgia for the regional stock exchanges particularly in Scotland, where the Glasgow Stock exchange merged with the LSE in the 1970s, is strong. But even the most romantic of financiers and business leaders dismiss the idea of a rival as flawed.

Jamie Matheson, chairman of stockbroker Brewin Dolphin, recalls fondly his days when, he says, he was a runner or trainee, known as a blue button, on the floor of the old Glasgow Stock Exchange.

"Part of me would love to see it happen, but that is the heart not the head," says Matheson. He argues that the regional stock exchanges were there because they were needed. In the days before the 1986 deregulation known as big bang and even before widespread telephone use, it was the sole mechanism through which investors could buy shares in local companies, as well as national ones. "I can't see the need for a physical market floor. Electronic trading exists now. So what will they provide that is different?" he muses.

But the main issue is liquidity - where would the money to buy and sell shares in local companies come from? Not the business angels, who are often the first level of private equity for most small companies after they have tapped friends and family for start up cash. Most point out that angels, thanks to the structure of tax incentives such as the Enterprise Investment Scheme (EIS), often don't want or need a mechanism to trade their share of small companies, preferring to wait to exit when the company floats, finds a trade buyer or a bigger investor.

Geoffrey Thomson, chief executive of investment management firm Braveheart, says the firm runs an informal trading platform for its angel investor network which is hardly used. He is sceptical of the need for a regional stock exchange to offer the same service.

"Regional stock exchanges is a dead duck," says Thomson. "It is something that comes up with boring regularity. Loads of people have tried it; we have talked to lots of people about it and I don't think it works. The problem is the liquidity. It is difficult enough on AIM and Plus."

The London Stock Exchange (LSE), which encompasses 1.6 trillion worth of investor funds, already has its own problems with liquidity, particularly for small companies on the Alternative Investment Market (AIM) and even some of the darker corners of the main market. Nor does the LSE welcome the prospect of rivals.

Patrick Humphris, head of communications at LSE says: "Even in a pool that size it is difficult for some firms to get liquidity. The challenge is to do it on a scale that makes it meaningful."

The trouble with smaller firms as investments is that - even compared with the devastated fortunes of investors in bank shares and BP - they are even riskier bets.

Mark Powell, chairman of Rathbone Investment Management, also fondly recalls walking the floor of the Edinburgh and Glasgow Stock exchanges. He believes it is unlikely regional stock exchanges would attract the bulk of cash that come with institutional investors, but nor would he recommend them for private investors.

"The idea that there should be sources of capital and that they shouldn't be so expensive and so bureaucratic, with so many professionals getting their nose in the trough is completely understandable.

"But I would rather have exposure to small companies through something like the Aberforth Smaller Companies trust, run by people with a good track record, rather than trying to identify three or four smaller companies."

But there is at least one example of a regional stock exchange in the UK, the InvestBX, aimed at small firms in the West Midlands and backed by the regional development agency, Advantage West Midlands. Since its launch in 2007, only three firms have joined and with little effect. The exchange also allocates a small pot of local authority funding for local firms. But uncertainty now surrounds its main backer, the regional development agency, which has been put on the scrap-heap by the coalition government in favour of a 1bn regional growth fund.

The Birmingham-based exchange is not dissimilar to the idea behind ScotX, an exchange which never quite launched in 2001. Stephen Robertson and Glasgow-based retail stockbroker Direct Sharedeal were behind the project. Robertson, who left his job as the LSE's regional contact for Scotland to launch the exchange, said ScotX had recruited at least a few companies to join but timing could not have been worse. The firm launched just weeks after the 9/11 terrorist attacks and the potential "flotations" got cold feet.

ScotX was not a regulated market, rather a mechanism by which private companies could offer shares, matching buyers and sellers evenly.

But, although Robertson still sees scope for a rethink on ScotX, even he doubts that it would serve as a way of raising funds. "These exchanges are a great idea for creating visibility and a platform for potentially going onto a full listing later and getting access to deep pools of liquidity and investor funds that exist in proper stock markets.

"I still think there's mileage in it but you need a good number of companies committed at launch. And they have got to understand this is not a regulated market, but a window to allow companies to actually communicate how well the company was doing, where the value was and present an opportunity to people to potentially buy shares in them."

But while the idea of a regional stock exchange strikes many as being parochial, others suggest that there is scope for different types of exchanges focusing on technology.

Nelson Gray, a serial entrepreneur and angel investor in private firms, argues for the establishment of a UK Nasdaq, the New York-based electronic trading platform that in the 1990s focused on fast growing tech firms

"Would a regional stock exchange be of interest to me as an investor? Probably not," says Gray. "If the issue is that AIM, which we already have, is not attractive to companies, why don't they fix AIM?

"A technology marketplace might be interesting. Business angels would build it up and put companies on the tech marketplace to allow a wider amount of capital to come in. But a trade buyer could still buy it out of the technology marketplace. But there are still all sorts of regulatory issues. I would be more interested in a national UK if not European technology market."

There is a sense that if the government were to fund new stock exchanges, the money would be better spent on incentives that encourage investors in small firms such as venture capital trusts and EIS. "If there is public money available, it would be better off directed to schemes that invest in companies," said one market adviser.

Thomson agrees: "EIS is right where people should be in terms of helping innovative companies go places."

Gray will be writing to Cable advocating added flexibility to EIS, allowing US-style conversion of debt to equity for early stage companies that is currently banned in the UK. "There are some easy tweaks to be made to EIS that could improve the situation quite a lot. That and other things could improve the marketplace more easily and far more cheaply," he says.

Humphris says government efforts to galvanise regional markets has prompted LSE to consider bringing back Landmark, part of the LSE website which breaks firms down into regional areas. Although this was discontinued a few years through lack of interest, LSE could use it as the basis to form a tradeable index in Scottish firms - there are 60 currently listed on AIM and the main market - which could attract investors.

"Reviving landmark would enable interested investors to invest in regional companies," says Humphris.

The only issue with creating an index, which the firm does in partnership with Pearson, is "it has to have sufficient companies in it. Scotland may have critical mass," he adds.