We have been reporting recently on the issues facing the smaller listed company market. See this post on concerns about the decline in smaller company IPOs, and this post on PwC’s survey of AIM company sentiment. Hard on the heels of that PwC survey comes this Grant Thornton report, “Back to basics for equity markets: Are London’s equity markets failing the small cap sector?”. The Grant Thornton report contains a short discussion of:
- Structural reasons for neglect of the small cap market; and
- The decline in the support system for smaller listed companies
as well as advice to smaller companies from institutional investors on how to engage better with the investor community.
Structural problems in the market, and a weakening support system
The Grant Thornton report identifies these structural problems in the small cap market:
“…the proliferation of high frequency trading and the apparently unrestricted growth of synthetic equity products, both of which can have unintended and potentially damaging consequences for smaller quoted companies…a market that is focusing on the economics of trading in large quantities of large company stocks at the expense of investing in the smaller scale growth stocks.”
And describes a declining support system of brokers and market markers -
“which would once have identified and nurtured good prospects and interesting ideas, promoting them to the market as longer term growth stocks”
but which is now crippled by reducing spreads and commission
“to the point where there is little option for traders but to focus on the high volume end of the market in order to make money”.
The report also emphasises the perennial problems of low liquidity in small cap stocks, and a lack of independent research on smaller companies.
Taking charge with investors
All is not doom and gloom, however. The Grant Thornton report observes – and the PwC report on AIM stressed this – that management teams are seeking to grow, and are looking for new funds to do so and to develop new ideas. If companies hope to do that, there is advice on taking control of the process of promoting themselves to the market from the institutional investors surveyed, which includes:
- “Frankness and openness is valued highly – too few companies are prepared to be as honest as they should be
- Provide the right amount of information in annual reports and avoid boiler plate disclosure
- Direct access to senior management is very important – investors want to look you in the eye
- Don’t overdo the company news
- Provide non-financial data only when it matters
- Company-commissioned research is useful, but it is no substitute for independent research.”
There is a longer version of this advice on page 12 of the Grant Thornton report. The emphasis on frankness and openness when dealing with investors chimes with the PwC AIM survey, which identified “managing investor relation”s and “managing news flow” as the top two challenges facing AIM companies.
The view that the equity markets are failing in their core purpose of allocating long-term capital to companies is being explored in the current” Kay Review of UK Equity Markets and Long-Term Decision Making”, which we discuss in this post and this post.
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