The initial public offering launched by Malita Investments plc placed a new marker in the history of the Malta Stock Exchange. The history of equity IPOs in Malta is a chequered one. This is partially attributable to the negative performance of the majority of equity IPOs post-listing. A combination of pricing too highly and promising too much, as well as a lack of equity culture generally, are the culprits here. Investors have been bitten many a time, so it was encouraging to see that so many investors stepped up to participate in the Malita IPO. A government entity with a particular story to tell – perhaps this one is different.

The first step should be to sell off the exchange – privatise it- David Curmi

Investors need to rediscover that feel-good factor when investing on the MSE. The government has been a major beneficiary in this process. Malita’s fund-raising has enabled the government to finance its City Gate project in a way that does not directly impact its finances as the debt taken on by Malita does not form part of the government’s balance sheet.

Without the MSE this would not have been possible. Perhaps, therefore, it is time for government to take stock of the MSE and look at ways to enhance its development. Otherwise it will continue its slow and painful drift towards the dark abyss.

Let’s take one step back. What is the primary function of a stock exchange? Essentially, it is to provide a platform where companies can raise capital to finance their development. In many developed economies this is a critical function that has assisted companies to grow into much larger, more successful entities.

Locally the experience is mixed and the hurdles available to budding entrepreneurs are substantial. From the early stage companies through to the larger, less risky companies, sourcing funding is increasingly difficult. And this is bound to get worse as banks turn off the taps amid the funding stresses. In this context a proper functioning equity market is even more critical. What can be done?

The first step should be to sell off the exchange – privatise it. The government has recently proved incapable of showing any form of long-term vision for the exchange and it should do the honourable thing and let the exchange act like a true capitalist entity. An incoming government should also be bold enough to do this. Without the shackles of government, but with its clear support, the issue of liquidity can begin to be tackled.

This requires real thought and planning. Lack of liquidity in the market is a cancer that is currently eating away at all players involved in the investment chain.

Whether it is listed companies, insurance companies, funds, asset managers or direct investors – lack of liquidity is the primary reason used for staying away from the market. And it is only going to get worse. Any long term plan that does not address this issue therefore has missed the point.

The government is not the only problem though. There are failings occurring on many other fronts. The other major players in the investment chain are the companies listed on the exchange, the regulator, asset managers and stockbrokers, and the investors. All have a role to play.

Obtaining a listing on an exchange is supposedly the start of a long-term relationship with a new set of shareholders and investors. Sadly, it is clear that some companies treat investors with utter disdain and look at them as no more than a necessary nuisance – it is evident from the quality of information that is released. A more positive and open dialogue is needed with the market. This is where the regulator should come in. The big picture needs to be looked at in order to find ways to regain the trust and confidence of investors.

Asset managers and stockbrokers alike have important failings too to address. A greater degree of dialogue with companies and proper analysis of it helps in the value discovery process. It is true that sometimes this is work done for a public good as the value is spread to all investors but it is an important piece that is often missing.

Objective criticism and closer dialogue with management will help keep management on their toes with their eyes on the ball.

The recent Go plc experience is a positive sign in this respect. And as asset managers engage in this process and get closer to their investors, trust is rebuilt and performance is improved through closer monitoring and better understanding of the issues.

It has always surprised me why local funds do not provide regular updates to their investors over and above the statutory reports. This is an important tool that can be used to convey important messages of performance and expectations to their own investors.

To do this, however, one needs to have sat with management to discuss their plans and objectives, thereby holding them accountable in the long term.

Curmi & Partners Ltd are members of the Malta Stock Exchange and licensed by the MFSA to conduct investment services business. This article is the author’s objective and independent opinion. It is based on public information and should not be viewed as investment advice in any manner. The value of investments may fall as well as rise and past performance is no guarantee of future performance.

Mr Curmi is managing director of Curmi and Partners Ltd.