The risks facing our smaller firms - Tim Ward

That is the message that we have found in our latest investor survey that we have conducted with Peel Hunt LLP.

In 2019, there were just 36 IPOs across the London Stock Exchange’s Main Market and AIM. The number of companies leaving the markets meant that AIM finished at a 15-year low in terms of numbers.

This means 2019 was worse in this regard than even the global financial crisis years of 2008 and 2009.

The decline in smaller companies coming to the public markets has wide implications for the country, including reducing the options of financing for companies, in driving too large a proportion of companies to be reliant on bank financing, and reducing opportunities for people’s pensions to be invested for growth in the future.

The reasons for this de-equitisation trend are varied and UK political uncertainty and global trade tensions are a part of it, but much lies in the hands of UK policymakers and regulators to resolve. Regulations, such as MiFID II, have worked to reduce liquidity in small and mid-caps in recent years.

This is something that previous editions of the QCA/Peel Hunt Mid and Small-Cap Investor Survey anticipated and now the impact is being more clearly felt, with the inevitable consequence that the regulations have had a negative impact on smaller quoted company liquidity.

The QCA emphasises the need for proportionality in policy and regulation for smaller quoted companies. There is a huge disparity in size on the UK’s public equity markets with the largest company in the FTSE 100 having a market capitalisation of over £180bn, and the smallest company in the FTSE All-Share having a market cap of around £40m.

Now to your man in the street £42m doesn’t sound “small” but it is just 0.02 per cent of the size of the largest company and both companies are required to follow the same rules. This

does not make sense at all and results in overly burdened smaller companies that we need to flourish in this country.

Small and mid-caps in the UK employ over 3 million people (around 11 per cent of UK private sector employment) and contribute over £26bn in tax (about 5 per cent of UK tax take).

Research that the QCA conducted with Hardman & Co last year revealed that in Yorkshire and the Humber there are 98,453 people employed by small and mid-sized quoted companies. This is all at risk if we allow investors and regulators to demand a one-size-fits-all approach.

Now that we seem to have an end to the political uncertainty of recent years and a new Government with its majority in Parliament we need to see action. Ideas proposed in our investor survey could help, including a re-weighting of pensions away from bonds to equities; encouraging pension funds to take small stakes in growth companies; taking a proportionate

approach to regulation; and providing tax incentives for equity investment.

It’s always darkest before dawn and there are glimmers of hope that we will see an upturn in equity market activity in 2020.

However this should not give policymakers cause to step back from addressing the long-term trend of de-equitisation.