The subject of how to raise capital for local companies has long been a thorny issue in Bermuda.

Last week it was announced that the sale of Cellular Ones' parent company to a foreign owner had been blocked by the BMA.

It is indisputable that there is public support for a policy to limit non-Bermudian ownership of Bermudian companies, but as the Minister of Finance observed in December 2000 many local companies have outgrown the local capital base.

Michael Leverock of Cellular One hit the nail on the head when he said: "If Bermudians won't step up to the wicket, we have to get the capital from somewhere."

Someone with broad experience of the financing options in Bermuda is Bruce Sharpe. For several years he was in charge of the investment banking department at the Bank of Butterfield.

He now has his own company, Sharpe Financial Services: "The business that we do covers a multitude of sins which includes investment banking."

He says that the work tends to fall into three main categories - mergers and acquisitions, financing and strategic advice.

Neither the Bank of Bermuda nor the Bank of Butterfield have retained their investment banking departments and Mr. Sharpe has his views as to why there is little investment banking activity on the Island.

In his opinion, there was never much of an IPO market for local companies: "While the BSX promote themselves as being a vehicle for the raising of capital, the IPO market for local companies is really non-existent in Bermuda."

He attributes this view to two main factors:

private companies are by their nature illiquid, smaller and more risky; and

Bermudians are generally risk averse when it comes to investments.

In his experience, the Bermudian preference is for investments to include a guaranteed return.

While the Bank of Bermuda was involved in a flurry of IPOs about eight years ago, Mr. Sharpe's department embarked on a series of public offerings of debt instead.

"We structured two fixed coupon bond issues for the hospital and one for the Corporation of Hamilton. They carried a fixed rate of interest. Those issues were oversubscribed."

Asked whether a secondary market in those bonds ever existed, he says: "As much as existed on the BSX. There was no front running, 90 percent of the buyers bought them for the long term."

The lack of activity on the BSX tends to bear out his theories. The low volumes of trading is a disincentive for companies considering listing because an illiquid market is less likely to reflect changes to value.

An expert in Appleby Spurling and Kempe's corporate department observes that there can be numerous benefits to a company by going public. As well as meeting working capital needs, addition capital can be used to acquire other businesses, expand research and development efforts, invest in facilities and equipment, or retire existing debt. It may also be deployed so as to enhance the competitive position of the company by enabling the company to enjoy greater market penetration. The opportunity to take a company public may become important to the owners of a family-owned company whose younger members do not inspire to manage the business.

However the reality is that it has been several years since a local company did an initial public offering on the BSX.

"The BSX can only do so much, and they have probably done their best to encourage trading in local shares." But a population the size of Bermuda's does not support high trading levels: "Big is good - size does matter," laughs Mr. Sharpe.

There is potential for private placements where investors will receive equity. "Equity is cheaper than debt because there are no dividends. That's one reason why companies like BDC (Cellular One's parent) went the equity route," says Mr. Sharpe.

However debt raising can be more straight forward and also has the advantage of instilling discipline in the corporate culture.

"I think that debt is very good under the right circumstances because it forces borrowers to be focused on cash flow."

But in the early stages of their business, companies need access to unfettered funds. According to Mr. Sharpe there is a big market for venture capital -style funding in Bermuda.

"People including myself have thought about investment venture capital funds. It's an idea that comes from the back burner to the front burner from time to time.

"But we as a culture are very conservative. Venture capital is the antithesis of conservative investment."

There is a certain amount of mergers and acquisitions activity, although one recently fell through: "Gorhams became a form of management buy out."

He speculates that there is room for consolidation in several local industries in Bermuda: "You name the industry and there are bound to be too many players."

Consolidation is the coming together of businesses with an overlap of interests. "Reasons to merge would be synergies or economies of scale."

There are also many compaThere are also man companies that could benefit from a change of ownership.

“Those companies which offer the brightest hope for the future could be languishing today because of board room style and outlook. They could be sitting on a nest egg. That company owned by more forward thinking ‘out of the box' style shareholders could double its profitability.”

But so far, this has never been achieved against the will of a board; Bermuda has never been the scene of a hostile take-over.

In the classic sense, a hostile take-over involves one party buying up a large proportion of shares of a publicly listed company and then making a public offer to the rest of the shareholders of, for example, twice the current trading price. Once they have acquired full ownership of the shares they can make efficiencies such as lay-offs, possibly resulting in efficiencies and running the company more profitably. But this sort of predatory behaviour has not been in vogue in Bermuda:

“Bermudians are generally lovely people. They don't want to hurt other peoples' feelings.”

Asked whether this is why there is little shareholder activism in Bermuda, Mr. Sharpe replies:

“The reason is that shareholders don't want to speak out in opposition to a local company. But in the US and Europe shareholder activism has sometimes resulted in company boards doing things and taking actions that they would not otherwise do...I do know of people in Bermuda who have talked about engaging the services of such companies in order to put some spark in a few local AGMs. I think it's a great idea. The average AGM in Bermuda lasts less than haIf an hour!”