back to basics for equity markets

8/3/2019 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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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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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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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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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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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.



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12/20

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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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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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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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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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.


Neither agree

nor disagree

32%

Dont know

8%


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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.


18/20


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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20/20

Belfast

T 028 9031 5500

Birmingham

T 0121 212 4000

Bristol

T 0117 305 7600

Cambridge

T 01223 225600

Cardiff

T 029 2023 5591

Edinburgh

T 0131 229 9181

Gatwick

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Glasgow

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Kettering

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Leeds

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Leicester

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Liverpool

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London

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Manchester

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Milton Keynes

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Newcastle

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Northampton

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Norwich

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Thames Valley (Oxford)

T 01865 799899

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T 01189 839600

Sheffield

T 0114 255 3371

Thames Valley (Slough)

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Southampton

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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

Partner, Head of AIM & Smaller Listed

T +44 (0)20 7728 2578

E [email protected]

Contact us

Kam Mattu

Business Development Manager - AIM & Smaller Listed

T +44 (0)20 7865 2336

E [email protected]

back to basics for equity markets

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