Private investors must be encouraged to invest in UK smaller companies to compensate for a fall off ...
Private investors must be encouraged to invest in UK smaller companies to compensate for a fall off in institutional interest.
That is the conclusion of an independent report commissioned by the DTI and put together by a group headed by Tim Waterstone, chairman of HMV Media Group.
Delistings in smaller quoted companies (SQCs) have risen to their highest level since the last recession due to a lack of liquidity, according to the research the commission compiled.
This has happened because SQCs have been over-reliant on decreasing numbers of institutional investors with increasingly large funds at their disposal. The focus of fund managers had shifted towards the larger FTSE 350 companies, resulting in a restricted capital market for SQCs.
Many small businesses are still finding it difficult to raise new capital, according to Waterstone, despite the rise in the share prices of SQCs this year. This is underlined by the dramatic fall in the value of new equity being raised by SQCs with a market cap below £250m. In 1996, some £4.3bn was raised compared with just £1.1bn during the first nine months of 1999.
Despite recent rises in small cap share prices, the overall performance of the sector has fallen behind the FTSE All Share performance since mid-1996.
Large institutions are still not investing in them, so brokers are not earning commission and stop paying for research, so there is little or no analysis available for private investors or other institutions which might be interested.
SQCs must therefore act to widen their shareholder base and attract greater private investment, according to Waterstone.
The report, 'Improving Share Liquidity', argues that SQCs can and must target private investors and it outlines steps SQCs could take to target and secure private investors, how to communciate with them effectively and how to secure their long-term support.
Waterstone said: "These companies are an essential part of the UK economy. If we lose them we lose much of our ability to compete against the most innovative of global businesses."
The report also contains recommendations which the City, regulators and Government could take to encourage private investment in SQCs. The first is SQCs should target private individuals and challenge their advisers to find ways to attract private investors both at flotation of a company and in the secondary market.
The second recommendation is that corporate brokers should be encouraged to recognise the benefits of private shareholders in providing essential liquidity and promote their involvement at initial fund raisings and in the secondary market.
Waterstone said: "Private investors currently own 20% of the stock market's equity. A small shift in the weighting of their investments towards the SQC sector would have a marked impact, as would an adjustment to the tax system which is currently weighted in favour of institutional investors."
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