Gambler with a cautious streak

Stuart Wheeler, who hit the headlines when he made the biggest single donation to a party in modern political history, may have been a top poker player, but the Oxford-educated head of spread-betting company IG Index believes in taking a more reflective approach to business

Punters with a view on the outcome of the next general election know where they can place their bets now. Stuart Wheeler's 15 minutes of fame on the front pages of national newspapers earlier this month thrust his spread-betting company, IG Index, into public focus as never before.

Punters with a view on the outcome of the next general election know where they can place their bets now. Stuart Wheeler's 15 minutes of fame on the front pages of national newspapers earlier this month thrust his spread-betting company, IG Index, into public focus as never before.

It was a welcome burst of publicity, according to the 66-year-old chairman and chief executive. But that is the only connection between the company and its founder's astonishing gift of £5m to the Conservative Party's general election war chest. "It is very rare that the company even makes a charitable donation, I'm afraid, because I think it is up to the shareholders as individuals to do that. I gave my donation because I think the Conservatives are right for the country; I have no reason to think the shareholders hold that view."

It can be difficult to believe when seen through our sleaze-tinted glasses, but Mr Wheeler doesn't want anything in return. He has publicly disavowed any ambition of wearing ermine and if he were cynically after a favour for IG Index - perhaps a helpful result from the current review of betting tax laws - it's difficult to believe that a shrewd businessman wouldn't spend his £5m on a stake in Labour plc.

Mr Wheeler's hand-out certainly hasn't tempted many punters to bet that the Conservatives will win more seats in the next Parliament than previously expected. IG Index's "spread", within which the bookmaker reckons the Tories' seat count will fall, has remained virtually unchanged at between 223 and 231. Bravehearts who believe that underestimates the eventual Conservative wins can "buy the spread" at, say, £10-a-point. For every seat beyond 231 that the party picks up, IG hands out a tenner and if Mr Wheeler is right in arguing William Hague can still win a parliamentary majority, the punter would come away with a handsome win.

That's the great temptation of IG's game: the more right you are, the greater the scale of the winnings. It is also the great evil: for every seat below 223, the client loses £10. The scale of the losses is potentially enormous - punters on individual share prices risk being wiped out should the company issue a profit warning, a sin that can often be punished by a 20-odd per cent fall in its shares.

Spread betting is possible on any subject where a spread of outcomes is conceivable, and IG's range of bets has been growing conservatively for almost 27 years. The company was set up to allow gambling on the price of gold after the US liberalised trading restrictions in 1974. But from these humble beginnings - "just me and a quarter of a girl," according to Mr Wheeler - the company expanded into betting on stock market indices and on individual shares, currently its most lucrative business. With the addition of sports betting, account holders can now have a flutter on anything from the number of goals in tonight's Manchester United v Sunderland game to the Manchester United share price.

Who are IG's clients? Sophisticated gamblers, according to Mr Wheeler. "Not surprisingly, quite a lot do come from the City or work in the investment community, but not nearly as high a proportion as you might imagine. We have retired tea-planters, retired civil servants, playboys, hairdressers, lorry drivers, taxi drivers, lords, vicars, you name it."

Mr Wheeler is some sophisticated gambler himself, in it for the game more than for the winning - although he's done a fair bit of that, too. He was thrown out of a Las Vegas casino for being too good at blackjack and he made a mid-1980s appearance in the world poker championships - "There were 162 people in it, and I was the 38th person to be knocked out, but two previous winners had been knocked out ahead of me, so it was no big disgrace". In his spare time he enjoys a few rounds of bridge with friends at his Moroccan home, where he has noticed with regret that advancing years have made him a less sharp player than of old.

Friends were surprised only by the size, not the direction of his political magnanimity. His background is quintessential Tory, with education at Eton, Oxford and the Bar followed by a nascent career in the City. A scrape with a friendly bullet during National Service in the Welsh Guards scars his stiff upper lip. In private and in business, there is a theme: Passionate conservatism. "Although I'm running a gambling business, I'm cautious by nature," he says, explaining a sceptical view of growth through acquisitions. There have been just two in IG's 26-year history, and little sign of a third for the time being. "You get the client list and you get the members of staff that you want, but what you are always frightened of is that there is a big overlap and you'll find the clients are all your own clients anyway."

IG's similarly conservative approach to the internet has its critics, and there has been some surprise at the meagre share of business which is transacted online. One rival said: "I suppose the fact that IG's website is not real-time dealing is partly the reason that it only transacts 14 per cent of its financial bets and 25 per cent of its sports bets via its internet site, formally confirming deals by e-mail."

Mr Wheeler admits to being "very much at sea when talking about computers", but the company is just weeks from making a decision on a new round of IT spending. It is possible, though, that the board will baulk at the costs of developing a fully-automated online betting system. A recent marketing trip to Sweden, the most internet-advanced country in Europe, found surprisingly little interest in doing business with IG online.

But IT spending is on an upward curve, as admitted in its maiden interim results statement earlier this month. Such is the Wheeler conservatism that, unveiling record-breaking current trading, the company sent shares tumbling by issuing a "note of caution" on future prospects. Although the board remains confident, Mr Wheeler told shareholders to remember that "we are in an industry where profits cannot be forecast with any certainty".

The statement was for the benefit of institutions who joined the share register only at IG's flotation - as the holding company IG Group - last July. Founding shareholders hardly needed to be told. They remember the great stock market crash of Black Monday, October 1987, which nearly broke the company and put paid to IG's previous attempt to float. "That was the worst week of my life," recalls Mr Wheeler. "The worst part of the crash in the end was the reduction in trading volume that followed it, and there was no way we could float on those figures. We had a pretty good record up to then, but you want to float on the basis that you have three or four years of increasing profits and that meant a down year. We didn't really build up a tremendously good record again until recently."

The decision to have another go seemed natural after some impressive growth in the late 1990s. Turnover, which had been less than £6m in the 12 months to May 1998, doubled and doubled again in the succeeding years. In the same way that the prospect of near-instant riches was encouraging more and more private investors into the equity market - and inflating a dangerous bubble in tech shares - interest in financial spread betting was increasing rapidly beyond the City. Meanwhile, the sporting side was benefiting from televised mid-week football.

The year to May 2000 covered the peak of the dot.com boom and brought IG record profits, topping £10m. At the time of the July flotation, when its founders cashed in £21m between them, the company had almost £8m in the bank and so raised only a modest £1.1m.

IG wanted to raise its profile, not its reserves. When touting for business overseas, as the company has promised increasingly to do, customers can be wary of an unfamiliar company's ability to settle a betting or derivatives or foreign exchange account. They are often looking for reassurance not only in a company's balance sheet, but in a robust market capitalisation.

And IG wanted to raise the level of incentives it could offer staff, whose loyalty was becoming increasingly dear. "It is very competitive in this business to get the best staff, to incentivise them to come and to stay," said Mr Wheeler. The float meant share options all round - just in time. "We've got a highly profitable business in a niche market, so competition is a stone-cold certainty. Cantor Index made a determined effort to get the whole of our financial dealing desk when it was setting up a rival a year or so ago. I was extremely nervous because our dealers are very good, and they get on very well together. If a float had not been on the cards, it would have been difficult to persuade them to stay."

IG has signalled that its transformation from niche bookmaker into broader financial services group is likely to quicken. Although it is yet to confirm that margins will justify the move, a survey of customers found an encouraging minority would be willing to use IG as a formal stockbroker, should it introduce equity trading. Sceptics argue that IG would be entering a crowded market, just as industry observers are predicting a big shake-out. Peel Hunt's acquisition by KBC of Belgium is seen as the first stage in a round of consolidation among private client-focused brokers.

But the company has been heartened by the performance of a 1999 addition to its product range, contracts-for-difference, a non-betting instrument for investing in future movements of share prices or indices. CFDs are now the fastest growing part of IG's business.

"A lot of people still have an antipathy to betting, particularly people abroad," says Mr Wheeler. "In this country you have to talk about betting because you are avoiding 40 per cent capital gains tax. But if you don't have a tax advantage, why on earth would you want the thing to be a bet?"

It is an issue that is central to IG's future, not just because it wants to move into conventional stockbroking - real share trades attract capital gains tax. Speculators on the FTSE 100 index could trade futures on Liffe - London's derivatives exchange - but they would be taxed, too. What happens if financial spread betting loses much of its tax advantage?

IG maintains it is impossible to say if Custom & Excise's review of the arrangements for taxing spread bets, part of a much larger examination of betting laws, will change those arrangements to the company's disadvantage.

Industry players profess themselves relaxed about the outcome, expected in the second half of the year. Analysts are not so sure. The Government could seek to close what is essentially a tax loophole. "People are loathe to talk about this because the industry obviously doesn't want any change," said one observer. "The tax situation makes spread betting a very advantageous way to buy and sell shares. There must be a risk that IG will soon be operating under a tighter tax regime."