Investors answer cash calls: Despite the warning signs, money continues to pour in for flotations and rights issues

BJ CUNNINGHAM, the man behind the Enlightened Tobacco Company, will tomorrow learn whether he has successfully raised pounds 1.5m from private investors. The 29-year-old entrepreneur wants to build a national retail distribution network for his Death brand of cigarettes and launch a milder version, Death Lights, to be marketed under the slogan Slow Death.

With the help of stockbroker Williams de Broe, Mr Cunningham is confident the money can be raised. 'We know we've got a great product. Our customers love our brands, and we're confident the City will be sophisticated enough to see the potential.'

Death cigarettes have found an eager market among young people who like the honesty of the advertising and the two fingers Mr Cunningham is sticking up at conventional tobacco companies.

But to others, he and his unquoted ETC are proof of an investment community gone mad - evidence that people will invest in anything at the moment, even in a company that boasts how its products kill, that gleefully warns on every packet: 'After all, it's your funeral.'

Rarely has it been so easy to raise fresh equity investment. The flood of high-risk minnows and corporate stretcher-cases successfully issuing paper this autumn is the response to unprecedented appetite from institutional investors and small punters.

In the 10 months to October 1993, 116 new issues raised pounds 3.24bn - already exceeding the 82 issues raising pounds 2.9bn for the whole of 1992. Rights issues this year are running at more than double last year - 144 raising pounds 10.4bn in the first 10 months, compared with 74 raising pounds 4.1bn last year.

Still they keep coming. New issues coming up or just having closed include Badgerline, the bus operator, Lilliput Lane, the knick-knack maker, and Telspec, the telephone equipment company. Even the uncertainty of the Budget has not stemmed the flow: the planned float of Celltech, a pounds 180m biotechnology company that has never turned a penny of profit but has some promising products, will actually straddle the Budget.

There are faint signs, however, that the new issue boom may be about to fizzle out. On Friday, two stock market virgins fell below their issue price on the first day of dealings. Canadian Pizza closed at 199p, compared with an issue price of 200p. CLM Insurance ended the day 1.5p beneath its 100p issue price.

CLM was one of many trusts set up to invest corporate capital in the Lloyd's insurance market. After great initial enthusiasm, many have fallen by the wayside or forced to scale back their plans. Less than pounds 1bn will be raised in total, compared to initial hopes of between pounds 1.5bn and pounds 2bn.

Earlier in the week, DFS, the northern-based furniture retailer, was only 1.3 times subscribed - respectable, but hardly a runaway success after 30,000 people registered an interest.

Although the majority of new issues are trading comfortably above their issue price, there have been some flops. Investors in Shield Diagnostics, which makes diagnostic products for genito-urinary infections, are sitting on a 30 per cent loss. Shares in British School of Motoring and the car- dealer Sidney Charles are also below the issue price.

There have been rights issue flops this month, too. Costain's second rights issue in two years, a call for pounds 84m, was taken up by just 28 per cent of the builder's shareholders. And fewer than one third of shareholders in Budgens, the supermarket group, took up its offer of pounds 30m of unsecured loan stock.

A sharp collapse in the stock market - perhaps triggered by bad inflation news in the US or the failure of the Gatt talks - could put the brakes on the new issue juggernaut. Alternatively, a few high-profile flops could dampen enthusiasm.

Andrew Beeson, chief executive of stockbroker Beeson Gregory, said: 'Almost certainly we're going to have something go horribly wrong. For instance, it wouldn't be surprising if one of the biotechnology companies now coming to the market - which have no earnings record - came a cropper.'

Adrian Beecroft, a director of Apax, the venture capital group that has floated several unquoted investments in recent weeks, believes the appetite for conventional new issues will continue for some time, but that demand for riskier new issues is bound to tail off once a few of them fail.

'Remember Nimslo,' he said, referring to the infamous three-dimensional camera company floated in the early 1980s. Nimslo generated enormous shareholder interest and hopes but eventually came to nothing, causing many small investors to lose their shirts.

But for the moment the impetus remains, according to Mr Beeson, who advised on the recent flotations of Hamlet International, the clothing distributor, and Virtuality, the virtual reality technology company that has rocketed to a 50 per cent premium to the issue price.

'There are still plenty of candidates planning to come to the market in the next six months,' he said.

Beeson Gregory alone is grooming a computer business, a record distributor, a restaurant chain, a clothing business, a loss adjuster, a book publisher and an agricultural business.

There is tremendous pent- up demand from small companies unable to float in the 1990- 1992 period because of an unreceptive stock market. Venture capitalists are impatient to exploit what they see as a wonderful window of opportunity. Mr Beeson said there were around 8,000 venture capital backed businesses in the UK, many looking to give an exit to their backers.

Apax will shortly unveil a pounds 50m-plus flotation, which it hopes to get away before the end of the year. Mr Beecroft said the stage of the economic cycle favoured new issues. 'Institutions are trying to outperform the Footsie. The best way to do that when the market is on the up is to invest in smaller companies.'

So attractive is flotation that large corporations are now looking at it as an exit route for unwanted subsidiaries, in preference to the normal trade sale. Forte plans to float its airport services division; Tarmac its roofing business, Ruberoid. Next year, the Fayeds are scheduled to float the House of Fraser department store chain. Normally trade buyers are prepared to pay a higher price than an asset would fetch floated on the stock market, happily forking out a premium for control. But not now.

Perhaps the most telling indication that the boom may be coming to an end is the huge interest shown in new issues by small investors - often the moment when institutional investors start baling out.

David Jones, chief executive of ShareLink, the Birmingham-based stockbroker that offers a cut-price service to small investors, said demand for new issues was very strong. ShareLink recently launched a newsletter - New Issues Bulletin - specifically to provide information on the subject.

'We've had thousands of subscriptions for it. People are clamouring for information on new issues. And they get very excited about certain sectors - technology, pharmaceuticals, anything that has got growth potential.'

The shortage of new privatisations may partly explain the small investor interest. There has been nothing to invest in since BT3 in the summer and there is nothing to come until the sale of more shares in the electricity generators - possibly next summer.

Low interest rates have also prompted small investors to find a more rewarding home for their money.

Mr Jones, who believes the new issue boom will continue, suggested the enormous publicity afforded to new issues had also boosted demand. 'More column inches are devoted to new issues than I can ever remember.' Every other day, a new entrepreneur coming to the market gets his picture in the business pages.

David Anderson, corporate finance director of Lazard Brothers, is advising Badgerline, which floats next week. He said institutional investors were becoming more picky: 'When you have a lot of new issues, people are much more discriminating about which they support. They can afford to be choosy.'

However, some investors fear the floating companies - and their advisers - are getting too greedy. Several recent flotations have been priced significantly higher than the advisers initially hinted. A few more companies going to a discount on first dealings could easily sour sentiment.

Warren Buffett, the American investment guru who has accumulated an dollars 8bn ( pounds 5.4bn) fortune, believes new issues rarely offer the value of already quoted companies. After all, the sellers choose the timing of the sale, and the best time to sell is not, by definition, the best time to buy.

Few on this side of the Atlantic have heeded his warnings so far, but a few more flotation flops would doubtless produce poorer but wiser converts to the Buffett school of thought.

(Photographs omitted)