Punch setback for the City

THE big story of the week is the one about the dog that didn't bark. For months, the ground has been carefully prepared for the flotation of Punch Taverns, the pubs group run initially by Hugh Osmond and lately by Giles Thorley. When plans to get a public quotation for the shares were aborted late on Wednesday, it was a setback of massive proportions for the City.

The debate is not about whether Punch is a good business, nor whether it needs the money. The answer to these questions is that it is certainly well-run and that a delay in its flotation will not make a material difference to its long-term prospects.

The humiliating volte face does, however, hit the venture capital industry and the investment banks. The ethos of venture capital is that it can turn its investments over quickly - it can go into a business, streamline it, gear it up with debt, make one or two logical acquisitions and sell it on to the investing public. But if the final buyer is not there, if the private equity funds are deprived of their exit, they are very quickly in trouble. The longer they hold an investment, the less attractive the rate of return it generates and the less easy it is for them to attract the new funds.

One dead swallow does not destroy their summer but there can barely be a house in London that has not felt a shiver of fear this week. They are sellers of companies, and the buyers, the investing institutions have clearly signalled that they are not interested. The implications of that for their business are all bad.

The implications are bad for the investment banks, too. They live on the fees they get for raising money for clients. When the flow of new issues dries up, they feel the pain directly and immediately They need a huge flow of deals to feed their furnaces. The past year has been awful for them and they had hoped things would get better this summer. Punch dashes those hopes. Things look much bleaker today than they did last Friday.

These institutions have never been well-managed, have lost control of their cost base and have been poor at adjusting to a downturn. Their strategy has been to turn their bottoms to the chill winds, stick their heads in the sand and wait for the storm to pass. The abject and humiliating failure of Punch to find buyers at a reasonable price suggests they have to do something more profound. That could be unpleasant for those who work there.

Sadness abroad

I HAVE been trying to work out whether or not I mind if the London Stock Exchange is sold to foreigners, because it may well be soon. This week, it belatedly confirmed it was in talks. The most likely suitor is the US Nasdaq exchange.

The significance of this development is that until now we had all hoped that London would be predator rather than prey. Not any more. American securities laws require Americans to be on top. Even if this deal does not happen, the fact that the talks have taken place and the LSE share price has soared confirms it as a target.

I cannot see an American deal happening for another reason. Whoever gets London will dominate Europe, which means Frankfurt and Paris have to do something. The odds favour the French. Euronext, the amalgam of Paris, Brussels and Amsterdam, already has Liffe, which has left it with no money but when the prize is the London Stock Exchange, it will be found from somewhere. Frankfurt may try, too.

Does it matter? Probably not, given that exchanges these days are little more than computer systems with increasingly disloyal customers. But the London Exchange being foreign-owned will take more than a bit of getting used to. And it is surely sad, for all the City's embrace of other nationalities, that we really have been so inept that nothing is left in British hands.