The number of smaller companies listed on London markets has dropped by around a third over the past 20 years. There were 1,829 companies with a market capitalisation below £1bn (in inflation-adjusted terms) in 2003, but this shrank to 1,282 last year. The number of micro-caps (below £100mn) dropped by 41 per cent, according to think tank New Financial.
“It’s been a pretty brutal decade – a few decades even – for UK public equity markets, but what’s abundantly clear is that smaller companies have been hit hardest,” New Financial chief executive William Wright said.
The figures are among the interim findings of a study conducted by New Financial alongside Abrdn, Euroclear, the Quoted Companies Alliance and Winterflood.
Delistings have outweighed the number of new listings in seven of the past 10 years, and the value of companies joining the market has been lower than those leaving it, the report found. Companies that have shifted to the main market in recent months due to size or maturity of the business include Alpha Group (ALPH), which went directly into the FTSE 250, and Atalaya Mining (ATYM).
Presenting the results at the Quoted Companies Alliance’s annual conference, Wright said the paucity also “seems to be getting worse”.
He highlighted five main causes for the decline: the rise in sources of alternative capital; an increased regulatory burden; a structural shift to scale across the industry; a realignment of demand from UK pensions and retail investors away from smaller domestic stocks towards larger global equities; and reputational issues linked to how some smaller listed companies have behaved.
'Vicious circle'
These factors have “combined to create a vicious circle, or doom loop” around smaller companies, Wright said.
Although small caps only make up 10 per cent of the market's total value, they are an important part of the economy, with combined revenues of around £300bn and one million employees. Their wellbeing “is a direct driver of the future health of our economy", said Abrdn’s head of developed market equities, Ben Ritchie. "Without a pipeline of successful and growing businesses, we will all feel the effects.”
Ray Anderson, executive chair of mobile payment platform provider Bango (BGO), said it listed on the stock exchange in June 2005 rather than taking venture capital funding and “for the first 10-15 years it seems to have been the right decision” given that it could raise additional funds for growth whenever it needed.
However, the company hasn’t completed an equity fund raise since 2018, and when it needed money to buy a Japanese competitor two years ago, it relied on its own cash and soft loans from a strategic investor.
“Because the AIM market didn’t really have appetite and our share price was in the doldrums … roughly what it was 15 years before.”
The same would be true if it tries to raise capital now, he added. “Because the share price is so low, dilution would be horrific.”
Based on current sentiment, the AIM market "isn’t in a place where companies who want to grow are going to be able to raise funds”, he said.
Julia Hoggett, chief executive of the London Stock Exchange, said AIM “has done an amazing job over the years”, with 54 per cent of all of the growth capital that has been raised in Europe over the past five years raised on London's junior market. Since 2004, some £175bn has been raised by companies on AIM.
Yet even if small caps can attract interest from investors, the difficulty they have is sustaining it. Data provider Calastone pointed out this week that UK-focussed equity funds have now witnessed three years of successive monthly outflows.
Judith MacKenzie, a partner at Downing, said that fund managers sometimes face pressure not to invest in smaller, illiquid companies. Although investors recognise the need for a long-term horizon when backing small caps, the open-ended UCITS fund structures prevalent in the UK market are “probably not quite fitted” to this style given their daily liquidity needs, she said.
Wright argued that the single biggest difference that could be made to London's stock markets is to reverse the decline in holdings of UK equities made by its pensions funds. This has fallen from around 53 per cent 25 years ago to just 6 per cent.
“You can’t have deep and effective capital markets unless you have deep, effective pools of long-term capital,” he said. “ We have big pools of long term capital in the UK – the second-biggest in the world. They’re just invested in the wrong place.”
