Despite the recent spate of privatisation, Brian O'Kelly believes the current exodus of companies from the Irish Stock Exchange will, over time,be reversed.

The past 18 months have seen many companies leave the Irish Stock Exchange. Much has been written about the apparent demise of the Irish stock market, as evidenced by the recent spate of privatisations.

These have involved management teams, typically backed by a venture capitalist, bidding for the companies which they manage. As a result, these companies move from the stock market and into private ownership.

Larger capitalisation companies such as Smurfit and Green Property, and smaller ones such as Alphyra, Sherry FitzGerald, Conduit and Riverdeep are recent examples of this phenomenon. In addition, Eircom was the subject of a contested offer between two private equity/venture capital consortiums. This culminated in the largest such transaction in Europe in 2001.

Given all this activity on the one hand, and the lack of IPOs on the other, one could be forgiven for having concerns that the capacity of the stock market to provide equity capital to Irish companies has diminished. When the implosion of the technology sector and the significant decline in the valuation of Elan is added in, it is easy to paint a picture of a market in structural decline.

I believe such concerns are over-stated. The history of global stock markets is cyclical. Companies have traditionally come to the market in a bullish environment and tended to depart during bearish phases. The more fundamental issue for companies is whether they are being denied access to capital.

The international success of companies such as CRH, Anglo Irish and Galen would not have been possible without the ability to fund their expansion through the issue of equity on the stock markets. More recently, Independent Newspapers and Grafton have funded their strategic objectives by raising additional equity on the stock market.

The range of financing options for Irish companies is wider than ever before. To illustrate this point, let us go to the mid-1980s. If an Irish company needed equity capital then, its options were very limited. The Irish stock market was dominated by Irish institutions whose investment horizons were artificially constrained by exchange controls.

As a result, capital was available through an Irish IPO only if a relatively small group of investors found it sufficiently attractive. If the company wished to stay private, its funding options were limited to a small number of domestic venture capitalists.

Contrast this with the picture today. Companies are typically listed on another stock exchange as well as the Irish one, and Irish brokers compete successfully to provide liquidity to an ever-growing list of international institutional shareholders in Irish companies. Meanwhile, the founding shareholders in success stories such as Ryanair, Galen and Paddy Power are able to exit and recycle their wealth into other ventures.

But what are we to make of the exits from the market? Is Smurfit going private a sign that the equity markets failed the company? Again, looking back to the late 1980s reminds us that Smurfit took its US affiliate private for a few years in a leveraged buyout (in 1989) and subsequently refloated the company in 1994. Nobody at the time saw the buyout as a harbinger of doom for the US equity market, and it was not. It was a transaction which made sense in the context of the paper industry and the shareholders' needs at the time.

So why the recent surge in companies being taken private?

There is now a greater range of capital available to meet the needs of Irish businesses. Indeed, the remarkable rise in the availability of private equity funding coupled with historically low levels of interest rates have probably been the most important factors behind the significant increase in companies being taken private in recent years.

Other key factors include: the relatively poor performance of the equity markets over the past three years; poor market sentiment towards small cap stocks as fund managers increasingly focus on global companies; and the poor share price performance of many companies resulting from a combination of underperformance against expectations and lack of liquidity.

Increased availability of affordable funding from equity providers and banks are also a factor. Also a feature is management teams becoming frustrated with their company's rating, while also becoming aware of the potential capital upside from an appropriately structured MBO.

Going private is not, however, a panacea for management frustration with a company's share price.

Putting an MBO together is an extraordinarily complex, risky and costly process. It also takes place in a highly regulated environment where all participants must play by the rules set out in the Irish Takeover Panel Act, 1997 and the Takeover Rules. A company will only be able to complete privatisation if the management team can convince a funding provider of the merits of its business model going forward.

Equity providers have high expectations regarding returns and the swapping of one set of shareholders for another does not change the fundamentals of a business. Equity providers will also be concerned as to what the likely exit will be - given that the IPO market is currently closed, a trade sale or refinancing are the most likely alternative exits.

It is very likely that the next 12-18 months will see further take private activity on the Irish market, particularly among some of the smaller stocks. It is critical that management teams considering such a move are fully cognisant of all of the issues involved before commencing discussions with potential funding providers.

As far as the Irish stock market is concerned, I have no doubt the current exodus of companies will over time be reversed. Improved sentiment will encourage companies to seek equity from the public markets. Indeed, one major source of the flotations of the future is likely to be sales of companies by the very private equity houses and venture capitalists which are today taking companies off the stock market. The wheel will turn full circle.

Brian O'Kelly is managing director of Goodbody Corporate Finance.