Crisis in UK small caps threatens UK growth

Thursday, December 01, 2011 | Posted by: Grant Thornton
Categories: Thought Leadership | Tags: economy, AIM, LSE, FTSE, London, Philip Secrett, investors, UK economy, capital markets, stock market, fund managers, small caps, equity markets, smaller listed, UK equities

Starved of capital, the small company sector is facing a crisis that may have severe knock-on effects for the future health of the UK economy. A Grant Thornton survey of 50 leading UK fund managers and institutional investors, who between them control funds valued at £43 billion, highlighted the concerns in a new report released this week.

Philip Secrett, Head of AIM & Smaller Listed at Grant Thornton UK, summarises the small cap crisis below. Meanwhile, the full report is available to read: Back to basics for equity markets: Are London’s equity markets failing the small cap sector?

”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 and develop 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.”

Key findings from the report include:

• There is a clear danger that the next generation of UK companies is being staved of the capital necessary for growth.
• The future vibrancy and health of the UK economy is being placed at risk through market failures today.
• The number of companies quoted on AIM has dropped by nearly a third since its peak of 1,694 in 2007 to just 1,156 companies (at the time of writing).
• More than two thirds (68%) of respondents disagreed that compared with other exchanges London is a less attractive place to invest than six months ago.
• Structural changes in the market driven by regulation and technology have undermined the ability of stockbrokers to broker stocks, market makers to make markets and analysts to issue research.
• Our respondents indicate that the amount of money dedicated to UK equities is already shrinking.

Philip Secrett, added: “Stakeholders must act decisively to stave off a crisis on the London Stock Exchange. There is a danger that we are reaching a point at which London’s financial ecosystem collapses, preventing institutional investors from investing in UK equities.”

For the full analysis on these findings, download the report: Back to basics for equity markets – Are London’s equity markets failing the small cap sector?

For further contacts or information, visit our capital markets page.

You might also find these links useful:

*The AIM of the game: why and how to list on the Alternative Investment Market
* Economic impact of AIM and the role of fiscal incentives
* Grant Thornton US: Market structure is causing the IPO crisis