Back to Basics for Equity Markets
Transcript of Back to Basics for Equity Markets
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A S U R V E Y T H R O U G H T H E E Y E S O F I N S T I T U T I O N A L I N V E S T O R S
Back to basics forequity marketsAre Londons equity marketsfailing the small cap sector?
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Back to basics for equity markets 1
Introduction
Calm reflection is probably not an activity that is readily associated with stockmarkets in 2011. But in the interests of predicting how stock markets, andindeed the economy, will fare in the medium and long term, Grant Thornton
commissioned Lighthouse Global to ask 50 of the most influential fund managersand institutional investors in the UK, who between them control funds valued at43 billion, for their views on the current status of capital markets, particularlyin regards to smaller companies. Their thoughts will be of interest to anyoneconcerned with the long term health of the UK economy.
The consensus among these experts
is that there is a growing crisis in the
small company sector. Management
teams are looking for funds to grow anddevelop new ideas but they are being
starved of capital. The experts point to
regulatory, technological and commercial
developments that have distorted aspects
of the UK equity markets.
These include 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.The conclusions of this survey
point to challenges that we believe must
be addressed if we are to maintain an
efficient capital allocation system, able
to meet the needs of both providers and
users. This paper sets out the key issues
and asks some core questions that we
hope will stimulate the debate.
Grant Thornton would like to
thank everyone who took part in this
survey. The time and care they took in
answering our questions is a measure ofthe seriousness with which they view
the problem.
Philip Secrett
Partner, Head of AIM & Smaller ListedGrant Thornton UK LLP
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2 Back to basics for equity markets
Executive summary
There is, however, a clear danger that
the next generation of UK companies is
being starved of the capital necessary for
growth, and that the future vibrancy and
health of the UK economy is being placed
at risk through market failure today.
These are the key conclusions of
this survey of 50 leading UK fund
managers and institutional investors,
who between them control fundsvalued at 43 billion. In detailed
interviews carried out in August and
September 2011, these experts gave their
predictions for the future development
of the London markets, explained how
their own approach to investment is
developing against the background of
major economic change, and gave vent
to their concerns over the problems
being faced by smaller companies
thinking of seeking a quote on a UK
equity market.
The decline in small cap listings
has both immediate and longer term
consequences for the economy. In a
study of the economic consequences
of AIM, published in 2010, Grant
Thornton showed that AIM companies
contributed around 12 billion in
UK GDP in 2009, and supported
around 250,000 jobs, more than those
supported by the UK pharmaceuticalsor defence industries.
Despite the global economic turmoil, and the rise of new economic powers looking toexert their influence over international commerce, the London stock markets are stillamong the best places in the world for investors and companies looking for capital.
Their worries focused on small cap
companies, including those on AIM,
where the number of quoted companies
has fallen by a third from the peak of
1694 achieved in 2007. They identified
a significant decline in the support
system of brokers and market makers
which would once have identified and
nurtured good prospects and interesting
ideas, promoting them to the market aslonger term growth stocks.
Opportunities for growth
lost to low valuations
Market inefficiencies have resulted in
persistently low valuations for small
cap companies, even those with a good
record of profitable trading and growth,
something that has led management
teams to question the value of either
seeking or retaining a quote on a public
market. For a growing number, the
lure of a sale to a larger competitor has
proved hard to resist and companies
which might have grown into the FTSE
250 stocks of tomorrow have been
swallowed up by overseas rivals.
Economic Impact of AIM and the role of fiscal incentives. Grant Thornton and London Stock Exchange, 2010.
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Back to basics for equity markets 3
Taking charge of the relationship
with investors
For AIM and smaller listed companies
the advice from our investors was that
management teams should take firmcontrol of the process of promoting
themselves to the market. Among the
specific advice given was:
franknessandopennessisvalued
highly too few companies are
prepared to be as honest as they
should be
providetherightamountof
information in annual reports and
avoid boiler plate disclosure directaccesstoseniormanagement
is very important investors want
to look you in the eye
dontoverdothecompanynews
providenon-financialdataonly
when it matters
company-commissionedresearch
is useful, but it is no substitute for
independent research.
Key questions
There are regular calls for market
reforms, especially a lightening of the
burden of regulation. But we believe that
these are missing the point. The currentregulatory framework is a good one and
yet, despite all the efforts being made
by Government and the London Stock
Exchange to encourage investment in
small caps, the market is still failing to
provide the necessary support.
This study, along with our regular
work in the London markets, leads
us to ask the following core questions
about the future direction of small cap
investment in the UK:
HaveUKequitymarketsmovedtoo
far from their core function, which is
to allocate capital?
Whatarethesystemicforcesthatare
depriving small caps of the capital
they need, and what can be done to
counteract them?
Aretheeconomicsofthesmall
cap sector sufficient to drive the
economic support system it needs tothrive and grow? If not, what can we
dotore-shapethem?
Howdowerebalancethemovement
of money out of equities and into
bonds and synthetic investments?
Is this movement irreversible?
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4 Back to basics for equity markets
Looking ahead
markets in the next 12 months
A third of participants preferred not
to offer a prediction. But for most
of these people this was a reaction to
uncertainty rather than a conviction
that things are going to get worse.A common view is that profitable,
cash generative businesses are still
reporting growth, and that while most
are cautious about their prospects, there
is little reason to expect that they will
not do well in the coming year.
Despite the steady flow of bad economic news, most of the investors who took partin this research are moderately optimistic about prospects for the year ahead. Askedwhere they thought the AIM All Share, FTSE 250 and FTSE Small Cap indices would
be at the beginning of September 2012, compared with September 2011, those fundmanagers prepared to offer a view were predicting growth of around 3.5 percent,on average, in each index (see Figure 1).
In terms of corporate PLC, our
experience with the companies we
tend to invest in - profitable, cashgenerative, established businesses
that operate in specific niches - is that
the majority have been reporting solid
growth and recovery. Now - to a man
- while they are expressing caution on
the outlook, there is little evidence yet
of any significant change in the buying
patterns of their major customers.
Reassuringly, most have also now
taken appropriate action to ensure that
they are better prepared to withstand
another significant economic downturnshould such a scenario develop.
Chris HutchinsonDirectorUnicorn Asset Management
Fund managers are predicting growth of around 3.5 percent in the smalland medium cap indices for the year to September 2012.
Figure 1: Where do fund managers think the markets will be in September 2012?
Points on
1 September 2011
Average points in
1 years time
FTSE 250 10100 10450
FTSE Small Cap 2900 3008
AIM All Share 740 765
Even among the pessimists,
no-oneispredictingawidespread
deterioration in performance. For
most, the outlook is a continuation
of the patchy, sporadic recovery inparticular sectors that they have been
seeing for the past 12 months, with a
more general improvement expected in
18 months to two years time.
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Back to basics for equity markets 5
The London markets are retaining their attraction for investors, despite their difficulties(see Figure 2). Two thirds say that London is holding its own against internationalcompetition from other exchanges, and for many the City remains a leading place to do
business. One fund manager was adamant that London still stands alongside New Yorkas the best place to have a dealing operation. It has enormous kudos he said.
Factors affecting performance
In the minds of our fund managers, the
importance of the key macroeconomic
factors likely to affect investment
decision making and asset allocation inthe next three years is evenly spread,
with no single factor particularly
dominant(seeFigure3).However,
the Eurozone sovereign debt crisis is
causing a great deal of concern.
The consensus view is that this is
predominantly a political crisis, and that
the politicians know what they must
do to solve it. They are being prevented
from taking decisive action by concerns
over the possible reaction of their
electorates, but this can only go on
for so long.
Increased regulation is also a source
of concern, but while the effects of some
kinds of regulation remain uncertain
(for example, one fund manager said it
was obvious that London should notparticipate in any financial transaction
tax that is being considered in Europe),
others are expected to have a significant
impact. Perhaps the best example of this
istheDodd-FrankActintheUS,where
the detailed regulations implementing
the Act are still being drawn up, and
several investors are keeping a close
watch on the process in the firm belief
that the US regulations will have a clear
impact on businesses in the UK.
We need to stop postponing the issue
and actually address it. Thats going
to be painful and some pretty toughpolitical decisions need to be taken
to get us there. The political risk that
goes with chucking one country out is
substantial, but the bigger problem is
that no-ones taking the decision.
Paul LeeDirectorHermes Equity Ownership Services Ltd
Figure 2: Is London retaining its attractiveness for investors?
Strongly disagree Slightly disagree Slightly agree Strongly agree
34% 34% 8% 4%
80% 70% 60% 50% 40% 30% 20% 10% 0% 10% 20%
Compared to other
exchanges London is a
less attractive place to
invest than 6 months ago
London is still one of the best places in the world for investors.
Neither agree
nor disagree
16%
Dont know
4%
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Back to basics for equity markets 7
coming from companies themselves has
increased in recent years, this is not seen
as a satisfactory alternative to the broker
research that many drew on in the past
when making decisions.
It could be argued that the
debundling regime, introduced in
2006 to force the buy side to separate
the costs of research from those
of trading, has had the unintended
consequence of undermining the
economics of the secondary market,resulting in a dearth of quality
research for small caps.
Philip SecrettPartnerGrant Thornton
Figure 4:Is AIM retaining its popularity among small companies?
Total AIM Delistings
Number of Admissions
on AIM
600
500
400
300
200
100
0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
toSept
58
102 102
277
72
177
85
160
112
162
88
355
141
519
227
462
224
284
258
114
293
36
102
198
72
111
There has also been a steep decline in the
amount of independent research carried
out on companies at the smaller end ofthe market. Fund managers frequently
described their preferred investment
targetsasunder-researched,and
although the amount of information
AIM listings have declined significantly in the past four years. At the time this research was carriedout, in September 2011, the total number of companies on AIM had fallen to 1156. This was downby nearly a third from the peak of 1694 in 2007. Asked to look ahead 12 months, fund managerspredicted 138 delistings and only 85 admissions for the year to September 2012.
In the absence of hard facts that
include comparative performance
measurement data, investors will
perceive the small cap sector as
more risky than larger businesses.The natural consequence is that
they will demand a higher return, or
offer a lower level of investment, to
compensate for the additional risk.
There are also problems caused
by patchy illiquidity in the small
cap markets. If asset prices do not
reflect the true fundamental value of
the underlying business and lack of
investor interest leads to an illiquid
market, the potential difficulty in
achieving an exit will further reduce
investor interest.
This makes it particularly
difficult for young, high growth
firms to attract investment, because
the number of investors willing to
take on these risks, when there are
less risky options available in the
market, is relatively small.
All these factors have combined,
in the eyes of many small company
management teams, to increase thecost and decrease the benefit of a
listing. For some, the tipping point
has been reached, and they have
chosen to go private or sell.
It is clear that the investment
environmentforsmallandmedium-
sized companies has become
significantly more difficult in the
past three to five years. But why
did our fund managers think this
has happened, and what did theythink can be done to deal with
the problem?
(Source: London Stock Exchange)
If the valuation is a derisory one,
which it is once you get to a marketcap below 50m, then some of
these stocks fall into a black hole of
lack of interest. Some stocks are so
abysmally rated that managements
say Whats the point? and take it
private or de-list it.
Chris RodgersDirectorFour Capital Partners
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8 Back to basics for equity markets
Seismic shifts as equity
allocation keeps dropping
The move away from equities as a major constituent of institutional investorportfolios is not a particularly recent phenomenon. Research from UBS, forexample, shows that among the big pension funds the proportion of assets
allocated to UK equities has fallen from a high of just under 60 percent in 1994to around 20 percent in 2010 (see Figure 5).
Figure 5:How have UK pension funds changed their asset allocation?
UK equities
Overseas equities and bonds
UK bonds
Property
Other
% share
60
50
40
30
20
10
0
Equities have lost their dominance in pension fund portfolios as managers haveswitched in search of income to meet demand from maturing pension schemes.
1980 1985 1990 1995 2000 2010
(Source: UBS Asset Management)
The process, which accelerated in the late
2000s, was accompanied by a widespread
corresponding shift into bonds. This is
explained by participants in our survey
partly as a response to demographic
changes in the UK population (creating
an increased demand for steady incomeas pension schemes mature) and partly as
a reaction from private investors against
high levels of volatility, combined with
uncertainty over the direction of the
UK economy.
I think, with low values, there is a
de-equitisation afoot. By any historical
standards, equities would seem to be
very cheap, but there is not the flow ofnew money coming in to the market.
Pension funds are de-risking and
private investors have been frightened
away by volatility and scaremongering
from the media on the economy.
Chris RodgersDirectorFour Capital Partners
The overarching shift is away from
equities into fixed income, driven
by maturing pension schemes and
fundamentals.
Paul LeeDirectorHermes Equity Ownership Services Ltd
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10 Back to basics for equity markets Market Structure is causing the IPO crisis, published by Grant Thornton LLP in October 2009
The report concluded that a Perfect
Storm, consisting of:
steepcutsintradingcommissions
adramaticnarrowingofspreads
from $0.025 per share to $0.01per share
theswitchfromadvice-based
trading to online trading, and
regulationsdesignedtoseparate
investment banking from research;
had severely damaged the economic
support systems that had nurtured and
sustained investment in small companies.
The study also concluded that in a
market where the profit on promoting
smaller companies has been severely
curtailed,thereisno-onelefttopromote
the smaller stocks. This is not seen as a
major problem for the larger companies,
who have simply taken on the role
of promoting themselves directly to
investors. But for smaller companies
andstart-ups,itpresentsarealbarrierto
further growth.
This has created two key problems.
The first is that, today, very few US
companies make it public. Instead, the
exit workhorse of venture capital isnow the sale to mostly large corporate
acquirors, which means that the true
potentialofmanyofthesestart-upswill
never be known.
The second is the adverse effect on
financialsupportforthemorefar-reaching
and risky ideas that have no obvious
buyer. Today, the study said, the first
question most venture capitalists ask ofapotentialinvestmentis,Whoarethe
natural strategic buyers for your company
oridea?.IftheanswerisNo-oneasit
might have been in 1983 when Genentech
was the first biotech company to go public,
the likelihood is that the Genentechs of our
world might never be funded.
Is the UK following suit?
This is a scenario that many of the fund
managers in our survey would recognise
from the UK.
ChrisHutchinsonfromUnicorn
Asset Management says that much of
the delisting by small cap companies has
been due to them being acquired, often by
cash-richUSbusinesseslookingforgood
opportunities resulting from
low valuations.
Whilst equity valuation multiples
remain low, cash-rich foreign
businesses are increasingly likely to
make opportunistic bids to acquire
businesses at bargain basement
prices and enter Europe via the UK.
Pharmaceutical businesses, medical
device companies, engineering firms
and software specialists are all
currently vulnerable.
Chris HutchinsonDirectorUnicorn Asset Management
For those management teams and
shareholders who are happy to follow
this route, this is probably good news.
But it is hard to discount the effect
oftheUSscenarioonthelong-termhealth of the UK economy and the
development of new ideas. If smaller
companies are determined to grow
on their own, but need capital and
support to do so in a tough market,
what strategies are open to them?
Seismic shifts as equity allocation keeps dropping
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Back to basics for equity markets 11
One fund manager urged management
teams to find ways of tapping into the
capital held in the communities around
them, citing share clubs as a
possible source.
Although these alternatives can
help, for companies needing serious
quantities of growth capital there is
really little option but to use establishedequity markets.
Despite the problems outlined above,
there is still a keen appetite among
investors for opportunities to invest in
sound companies with good growth
prospects, if only they can find them
(see Figure 7).
If the normal market mechanisms for
bringing together people with capital and
those who need it are not working, then it
falls on the companies themselves to takeon the role of broker and more actively
promote their stock to the market.
Taking charge of the relationship
with shareholders
A good starting point is to identify those
investors whose aims most closely match
the needs of the company. All investors
are looking for a strong balance sheet
and demonstrably good management,
but beyond this priorities may differ and
a little research can prove invaluable ifit is to identify a group of shareholders
prepared to become medium to long term
business partners for a growing business.
Alternative strategies
raising capital in tough times
Several of the fund managers who took part in this survey were keen to pointout that the traditional markets are not the only source of capital available tosmaller companies. Alternative forms of finance such as corporate bonds or
convertibles are increasingly popular with institutions trying to find ways toinvest directly in companies.
Howeverfindingasuitableinvestoris
only the start. Maintaining and deepening
the relationship is a project that demands
careful management. Some of the fund
managers key concerns when they are
looking for an investment opportunity,
and their expectations of management, are
set out in the table and in Figure 8 on the
following page.
Fund managers are looking for well-managed companies with strong balance sheetsand good prospects for growth.
Figure 7: What prevents fund managers from investing?
40%
35%
30%
25%
20%
15%
10%
5%
0%
Weak
balan
cesheet
Poor
man
agem
ent
Lack
ofgrowth
pros
pects
Debt
levels
/hea
vilyg
eared
Poor
shareh
older
structur
e/eq
uity/liq
uidity
Poor
comm
unica
tions
Inexp
erien
cedm
anag
ementt
eam
Weak
,inco
nsist
entc
ashf
low
Empir
ebuilde
rs/only
think
ofsize
Weak
comp
etitiv
epositio
n
Poor
busin
essm
odels
Divide
ndpolicies
/lack
ofdivid
ends
/poo
rretu
rns
Poor
cost
contr
ol
Lack
ofvalua
bleIP
Lack
ofacce
ssto
growing
glob
alma
rkets
Highv
aluati
onOthe
r
Dont
know
24%
18%16%
12%10%
8% 8% 8% 8% 8%6% 6%
4% 4%2% 2%
26%
36%
Were heavily allocated to
companies with strong asset bases,
strong cash flow and those with
good and growing income.
Gervais WilliamsManaging DirectorMAM Funds plc
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12 Back to basics for equity markets
Issue Fund manager comment Solution
High gearing falling out of favour The rubbish we were spun in the previous cycle aboutefficient balance sheets and gearing up to the maximum
possible levels to improve the returns on equity is now seen
as complete garbage. But if a company is very, very cash
generative, with a reliable, stable business, it still makes
sense, especially when debt is cheap, to have a degree of
gearing on the balance sheet.
Gearing strategies should reflect the revised attitude
many fund managers have towards risk.
Frankness and openness is valuedhighly
Telling the story in a convincing way requires telling the
bad as well as the good, and too few companies are
prepared to be as honest as they ought to be.
There is a culture, certainly at the smaller end of the
market, where short-termism seems to be more important.
Id much rather see a culture whereby people are morerealistic about prospects and build on a solid platform.
If I look at our most successful investments, there is a
common theme: management teams that understand the
need for constant delivery to expectations.
We dont like hearing bad news, but youve got to know
about it. What you dont want to do is lose trust.
Careful, well-constructed market briefings.
Clear guidance on appropriate performance
expectations.
Keep up to date with market views on the company/
sector.
Provide the right amount ofinformation in annual reports, andavoid boiler plate disclosure
Annual reports have gone from 5 to 50 to 150 pages,
but am I any better informed on business philosophy
or performance? The general view is that most of the
information out today is pro forma because someone
decided ten years ago that it was a good idea, and we cant
take it out. Now, the vast amount of information amounts to
information overload.
Thorough review of formal reporting to eliminate
unnecessary data.
Key information presented clearly and succinctly.
Additional data well signposted for those who might
want/need to see it.
Direct access to seniormanagement is very important
Its hard to build trust unless you have looked people in the eye.
With one of our companies, one of my colleagues went
to see them early in the year, they came to see us in
London before a fund-raising, and we have seen them again
recently. So weve seen them three times over the summer
and have enhanced confidence in what they are doing and
how they are doing it.
Hold regular meetings with shareholders.
Provide easy access to senior management.
Honest, informative personal interactions.
Dont overdo the company news There is too much noise out there. Telling the story clearlyand cleanly and then waiting for genuine news is much the
best way. There are companies that are forever issuing
notes about the tiniest things that have happened. It justgets frustrating and annoying, and you miss the interesting
stuff because you are so used to deleting all their emails.
Eliminate frequent corporate news emails.
Use the so what? test to filter out unnecessary news.
Senior oversight of news management process.
Provide non-financial data onlywhen it matters
Soft information, like environmental reports, can be very
important for certain groups of investors who look at the
hard and soft aspects of companies side-by-side.
If its material, absolutely, lets have it. If its not material,
dont give it to us.
Establish clear purpose for non-financial data.
Use the so what? test.
Company-commissioned research useful, but no substitute forindependent research
Clearly, youd prefer there to be independent sources of
research that arent driven by commission. If thats not
there, it is a sign that the market is not working properly.
Commissioned research is a sticking plaster rather than areal cure. In the interim it is helpful but it is depressing that
its needed at all.
Encourage independent research.
Fund managers key concerns when looking for an investment opportunity
Alternative strategies raising capital in tough times
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Back to basics for equity markets 13
14% 38% 34%
14% 14% 40% 26%
12% 14% 46% 20%
18% 14% 38% 24%
18% 24% 10%40%
26% 40% 24% 2%
80% 60% 40% 20% 0% 20% 40% 60% 80%
Not at all effective Not effective Quite effective Very effective
A frank, open exchange and good quality data will pay real dividends with investors.
Providing more detailed financial data(e.g. Split down by division, region or markets)
Providing more one-on-one accessto senior management
More regular updatesof company news
Provide more non-financialdata in company report
Provide more companycommissioned research
Being more frank with investorsabout the challenges they face
6%
8%
6%
8%
8%
8%
Dont know
Figure 8:How effective do fund managers believe these strategies are
in enhancing liquidity in a companys shares?
For companies able to take a greater
role in actions targeted at developing
greater liquidity in the secondary
market, this is good advice which will
help them develop a valuable, supportive
relationship with their investors. Butthis is little help if investors prepared
to nurture small companies with good
prospects are thin on the ground. There
seems to be a more fundamental problem
in the markets, which is forcing small
caps to look for alternative ways to fund
growth.Howcantheybebroughtback
in to the mainstream?
6%
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14 Back to basics for equity markets
Re-framingthedebatehowdowe
bring small caps back into the market?A view from Grant Thornton
There is a strong consensus among the fund managers and institutional investorswhotookpartinthisresearchthatsmallcapcompaniesarenotbeingwell-served by the UK equity markets. They agree that liquidity in smaller stocks is
low, and that factors contributing to this problem include a lack of good qualityindependent research into the smaller caps, and a tendency for trading to focus onhigh volume, large company stocks.
Whatislesscleariswhythemarketshavemovedinthisdirection,andwhatcanbe done to reignite interest in small companies (see Figure 9).
Figure 9: Is AIM still popular for fund managers?
40% 30% 20% 10% 0% 10% 20% 30%
Although 24 percent of fund managers say AIM and Smaller Listed is a good place to invest now, the majority are cautious or neutral on prospects for small caps.
Do we need a change in regulation?
It is common to hear that regulation
is too onerous and costly for small
companies, and that the authoritiesshould cut back on the rules that
companies seeking a listing have to
follow. But, looking objectively at
the AIM platform developed by the
London Stock Exchange for small cap
companies, we believe it strikes a good
balance between the interests of capital
provider and capital user. It is hard to
see how regulation could be reduced
without encouraging companies
to come to the market too soon something which professional investors
regularly deplore.
Many market participants do,
however, feel a sense of unease about
the shape of the markets that seek
to serve AIM and Smaller Listedcompanies. They are concerned
about the extent to which regulatory,
technological and commercial
developments have distorted aspects
of the UK equity market. They point
to the proliferation of high frequency
trading and the apparently unrestricted
growth of synthetic equity products,
both of which have resulted in unintended
and potentially damaging consequences
for smaller quoted companies.
12% 24% 16% 8%
Strongly disagree Slightly disagree Slightly agree Strongly agree
We need to get back to a market that
works more efficiently in the interests
of the users and providers of capital.
Thats one thats much less about
trading activity and much more about
underlying companies; investing in
companies as if they were companies
rather than providers of share chips
in a casino.
Paul LeeDirectorHermes Equity Ownership Services Ltd
Neither agree
nor disagree
32%
Dont know
8%
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Back to basics for equity markets 15
A revived ecosystem for small caps
At a more fundamental level, a key reason
for the problems afflicting small caps
is a slow strangulation of the economic
ecosystem that had grown up to supportthem. It looks as if the experience of the
US equity markets, set out in the October
2009 study from Grant Thornton, is of
considerable relevance for the UK.
This can be summarised as a
progressive decline in interest in dealing
in small company stocks, as the revenue
that can be earned from doing so is
driven down. In the interests of cutting
transaction costs and speeding up trading,
spreads and commissions have been
progressively reduced, 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.
In past years it was the revenue that
could be earned from trading in small
stocks that allowed brokers to fund
research, which in turn fuelled greater
levels of interest, thereby underpinning
liquidity. This system may have looked
costly and inefficient at the time, but it
providedamuch-neededrouteintothecapital markets that helped many small
companies grow into todays
corporate giants.
Questions for debate
If small companies are still not getting
the support they need, this raises some
important questions that we need
to debate: Havethemarketswehavetoday
moved too far from their core
function, which is to allocate capital?
Whatarethesystemicforcesthatare
depriving small caps of the capital
they need, and what can be done to
counteract them?
Aretheeconomicsofthesmall
cap sector sufficient to drive the
economic support system it needs to
thrive and grow? If not, what can we
dotore-shapethem?
Howdowerebalancethe
movement of money out of equities
and into bonds and other synthetic
investments? Is this movement
irreversible?
The source of future economic growth
The implications of the decline of
this system are that small companies
can no longer develop into the
economic powerhouses of tomorrow.Entrepreneurial, dynamic companies
are finding it extremely hard to get the
backing they need to become mainstream,
to the detriment of economic growth
and prosperity.
It is already rare to find a private
equity firm or venture capitalist in the
small and mid cap market whose aim is
to take their portfolio companies public.
The preference is to sell them on to a large
corporatebuyer.Whiledebtmarkets
continue to be a hostile environment for
small and medium sized companies, we
believe this commercial conservatism is
squeezing out the entrepreneurial drive
that is so important for the long term
health of an economy.
This is not a problem that can
be solved by solely turning to the
Government for further assistance. It is
more an issue of market structure, one
of changing economic priorities and the
effects they have on market behaviour.As such, it is within the power of market
participants to change the way that small
cap companies are supported, in the long
term interests both of the economy, and
of the markets themselves.
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16 Back to basics for equity markets
Our approach:
GrantThorntonUKLLP
commissioned Lighthouse Global,
the business advisory specialists, to
conduct an initial 50 quantitative
interviews amongst top fundmanagers and pension fund managers.
Therethenfollowed10in-depth
interviews amongst the same audience
to gain deeper insights and probe
the issues uncovered in the initial
quantitative phase.
Organisationsincluded-Unicorn
AssetManagement,HermesEquity
Ownership Services Ltd, Four Capital
Partners, Standard Life Investments
and MAM Funds plc.
Thetotalvalueoffundscontrolledby
participants is 43 billion, a quarter
of participants control a fund of 1bn
or over organisations spanned the
full spectrum of fund managers from
specialist organisations to the very
largest giving a good overview of the
whole market.
Theresearchphasetookplaceover
a period of 4 weeks, from 26 August
2011 to 23 September 2011.
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Back to basics for equity markets 17
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For other queries please contact your local Grant Thornton office:
For further information on any of the issues explored in this report contact:
Philip Secrett
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T +44 (0)20 7728 2578
Contact us
Kam Mattu
Business Development Manager - AIM & Smaller Listed
T +44 (0)20 7865 2336