The grey market is unregulated, but it offers shareholders liquidity, writes Laura Slattery

In the fuzzy world between private equity and publicly quoted shares, there exists a grey market - shares in unlisted companies that are traded in an informal market operated by stockbrokers.

Companies such as infrastructure group NTR, finance company International Securities Trading Corporation (ISTC) and, most recently, Dairygold spin-off Reox Holdings are all examples of companies that haven't sought a full market listing - yet - but have given their shareholders the convenience of some liquidity on their investment.

"Grey markets would be set up where it is too early for the companies to float, but they want to achieve some limited liquidity," says Kevin Keating, director of Goodbody's corporate finance division.

"If you want to sell your shares, we will do it for you - we will match buyers and sellers," he says. "It's not really an alternative to a listing.

"Ultimately, the exit for investors will come on a trade sale or a float, but the grey market will provide some liquidity in the meantime."

Share trading in Reox Holdings plc, the Dairygold division formerly known as Red Box, started earlier this month, with the share trading handled by Davy Stockbrokers and Goodbody Stockbrokers.

The sellers of the Reox shares are the farming members of the Dairygold co-op. The buyers are the Dairygold farmers who like the long-term prospects of the company and want to buy additional shares, and anyone else who fancies the share.

Before Reox and the grey market was set up, co-op members who wanted to sell their shares couldn't sell them to non co-op members or make a profit. They were obliged to sell them back to the co-op at par value.

"Now the members can realise the full value of their shares," says David O'Brien, senior portfolio manager at Davy Stockbrokers.

"It's traded on a matched bargain basis. You can only sell the stock if a buyer can be found and vice versa," says O'Brien.

"You don't come in at eight o'clock in the morning and see a ticker next to the stock, the way you would with AIB, for example."

As long as the volumes aren't too high, trades can be settled on a same-day basis, according to Keating. But Reox has over 7,500 shareholders, so if they all decided to sell at once, there would be a problem.

Toll roads operator NTR, which also has interests in the waste sector, broadband and renewable energy, is something of an anomaly.

"NTR acts as if it is a quoted company," says Andrew Ennis, director at the corporate finance arm of NCB Stockbrokers.

With a market value of just under €1 billion, the company is a significant stock and attracts the same kind of research coverage that is devoted to quoted companies.

"It replicates the kind of information that Bloomberg would supply on its site, showing the price and volume of shares," says Ennis.

Happily for NTR investors, the share price graph shows that in the third quarter of 2003, the share price was just over €1. Earlier this week, it was trading at €5.25 per share.

Some companies' grey markets operate through just one stockbroker, but NTR's share trading is handled by Davy, Goodbody and NCB, meaning there is more liquidity.

However, the company now has two major shareholders - One51 and the Roche family - and for that reason, volume in trading has dried up somewhat, adds Ennis.

Meanwhile, at ISTC, the debt finance company founded by former Anglo Irish Bank executive Tiarnan O'Mahoney, there are plenty of buyers and not enough sellers, according to Keating.

Its grey market was established last June to provide less than 150 investors with some liquidity after the company raised €145 million in private equity fundraising.

In its first year of trading through the grey market operated by Goodbody, unit prices doubled in value from €100 to over €200.

O'Mahoney has said that the company may consider listing as a publicly quoted company at some stage.

Confusingly, there are shades of grey. The term grey market is also used for the short period of behind-the-scenes trading just before a company floats. In the days and weeks between a company announcing its share allocation and the day of the initial public offer (IPO), institutional investors, hedge fund managers as well as, in some cases, spread betting enthusiasts, will make trades.

In Ireland, Eircom attracted such trading before its last IPO, while brokers say that there may be some grey market activity immediately before Aer Lingus's scheduled float in September.

However, companies can hover about in an informal, so-called grey market for years without seeking a listing simply because it suits them.

Listed companies must all follow the same reporting requirements, but grey markets are generally unregulated.

"On the face of it, there is less protection because the markets are regulated and listed companies have an obligation to inform the market about price-sensitive information," says Keating.

"Basically, it is like buying shares in a private company."

Apart from the liquidity issues, there could be concerns about whether the company's valuation is the correct valuation, says O'Brien.

"But the advantage is that in times of market volatility, the prices don't tend to move around as much."

In pre-IPO grey markets, it is also a case of buyer beware, as investors' bets hinge on the stock actually getting listed. If the IPO is postponed or cancelled, the investment could go wrong.

Most of the companies that trade in a grey market in the medium to long term have been success stories, finding it easy to raise funds and retain the support of shareholders.

Apart from the steady ascent of NTR and ISTC share prices, Reox has also got off to a reassuring start, with shares rising in value from €2 on the first day of trading to €2.15.

The healthy economy may have something to do with it, notes O'Brien.

"All of the shares have been pretty positive. But that is perhaps a function of the last four years."