Show a 1980s Swedish banker a list of the companies which have raised equity capital on the Stockholm Stock Exchange over the past year and he would not believe his eyes. There are computer game designers, fitness centres and dental care operators, but barely one manufacturing company. Show him the valuations and he might have a heart attack. Start-up firms with no proven revenue streams have raised Skr200 million ($25 million) on P/E ratios of 40 and higher. The shares in one recent IPO, Prosolvia, a virtual-reality software designer, rose by more than 170% during 1997 and are now trading at 63 times estimated 1997 earnings. The existence of companies like Prosolvia (and their ability to raise such large amounts of capital) says much about the way in which Sweden has changed over the past five years. Gone are the days when the only companies were huge industrial groups in mature manufacturing industries. Today Sweden is buzzing with start-up companies in fields such as genetic research and Internet technology. "In the past there were very few new companies in Sweden," says Ulf Lowenhav, director of Aragon, a local broker. "But that has all changed. People are coming up with new ideas and there are a lot of entrepreneurs around who are willing to challenge the establishment." And it is not just Sweden which has learnt to love small caps. Across the Nordic region there has been an explosion of interest in hi-tech stocks. In Denmark, three companies (Colorprint, Olicom and Memory Card Technology) raised a total of almost $100 million through IPOs last year. And there are a plethora of medical technology companies looking for capital. Many are based in the so-called Medicon Valley along the Malmo strait which divides Denmark from Sweden. Norway, Finland and Iceland have not moved as fast, perhaps because of the economic dominance of shipping, forestry and fishing respectively. But even in these countries there have been some spectacular deals. Shares in Norway's Merkantildata, a provider of computer-integration software for businesses which was listed last year, rose by more than 300% in 1997 and the company now has a market capitalization of more than Nkr5 billion ($527 million). Finland, which has its own version of Silicon Valley in the northern town of Oulu, is also looking forward to a spate of hi-tech IPOs this year such as the Fmk250 million ($46 million) flotation of Oulu Technopolis, a technology business park. Even Iceland has its own star performer in the shape of DeCode Genetics, a genome research company which could receive investment of more than $200 million over the next five years following an agreement signed with pharmaceutical company Roche last month. The need of these firms for start-up or expansion capital has had a rejuvenating effect on local brokers and banks. Many had found it hard to compete against US rivals for capital-market mandates from the region's big companies and many analysts predicted their demise. But small-cap stocks have provided these brokers with a well-defined niche. Few international banks are interested in IPOs of less than $500 million in size, leaving the smaller end of the market open for local players. Last year over 63 Swedish companies raised equity capital on the local market for the first time. All but 10 were involved in hi-tech industries. Almost all of their advisers were local. US bankers hope that as the capital needs of such companies grow they will seek to raise equity in the US market where valuations (they say) are higher. But local bankers such as Bo Zetraeus, head of equity capital markets at SE Banken, argue that the domestic markets are quite able to satisfy their future needs. "In almost all cases there is no difference in the valuations put on hi-tech stocks," he says. "And it is often better for local companies to build a stable shareholder base through a local listing rather than relying on less committed foreign investors." So far the level of foreign interest in the small-cap stocks has been limited by the fact that many are listed on Sweden's grey market, the O List. According to Lowenhav, over 95% of the paper of most small-cap IPOs in Sweden is placed with local investors. However, he believes that foreign participation, particularly from the specialist hi-tech funds in London and the US, will rise this year when more companies seek full listings. Whether the spectacular growth seen in small-cap IPOs last year can continue into 1998 remains to be seen. Some of the companies which came to the market in early 1997 have since seen their share prices fall dramatically. Daydream, a Swedish computer games company, for example, saw its market capitalization go up to Skr250 million early in the year, only to see interest drain away when investors took their profits and the share price fell by more than 25%. "Investor interest in small-cap stocks is not as high as it was in the first half of 1997 when investors were very keen to put a bit of spice into their portfolios," says Lowenhav. Nevertheless, Lowenhav remains confident that deals will continue to get done. "The companies that are coming to the market this year are often of higher quality than many of those that came last year," he says. But he warns that companies may need to downgrade their price expectations to find buyers. This may provide an opportunity for some of the venture-capital funds which have found it hard to find new investments given the heady valuations on offer on the stock exchange. Many, such as Procuritas in Sweden and Finland's Sponsor Capital, have raised large amounts of new capital over the past year, and are actively looking for investment possibilities.
