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Small quoted companies feel private equity has more to offer, says survey

Smaller quoted companies feel that the stock market does not fairly value their business making many open to private equity alternatives, according to a survey by accountants and busine

Smaller quoted companies feel that the stock market does not fairly value their business making many open to private equity alternatives, according to a survey by accountants and business advisors BDO Stoy Hayward.

The survey explores the views of smaller quoted companies with a market cap of up to GDP250m as well as private equity investors and institutional fund managers.

It reveals that 69 per cent of smaller quoted companies feel that the stock market does not fairly value their business, notwithstanding current market conditions.

Furthermore, with the benefit of hindsight, one third of the smaller quoted companies surveyed say they would not have led their company through a flotation.

Dissatisfaction among smaller quoted companies may open the door to them opting for private equity funding as a viable alternative to capital markets, the survey suggests.

Sixty six per cent of the smaller quoted companies surveyed believe that the private equity funding model is generally better than the public markets at incentivising management and 67 per cent feel it is better at understanding smaller companies.

Moreover, 49 per cent of smaller quoted companies said private equity would be better than the capital markets at investing for growth and acquisitions.

Additionally, 32 per cent of smaller quoted companies are fairly/very likely to consider a public-to-private deal within the next few years while 48 per cent of institutional shareholders expect to encourage management teams to seek private equity funding for a public-to-private deal.

The smaller the company, the less they are perceived to be fairly valued.

Nearly 70 per cent of all smaller quoted companies believe companies with a market capitalisation of less than GDP30m are not fairly valued by the market.

This figure fell to 45 per cent for companies with a market capitalisation of between GDP30m and GDP99m, but was only 24 per cent for companies with a market capitalisation of over GDP250m.

After being asked to ignore current market conditions, institutional fund managers agree that smaller publicly listed companies on the stock market have a raw deal by being publicly listed.

Seventy per cent of the institutional fund managers surveyed say that companies with a market capitalisation of less than GDP30m are not fairly valued.

The pessimistic outlook among smaller quoted companies is in part due to their perception of a lack of interest among their institutional shareholders and their analysts, as well as a general lack of funding. The survey reveals that 64 per cent say their growth is constrained by a lack of access to equity funds.

Michael Cobb, corporate finance partner at BDO Stoy Hayward, says: ‘Our survey is further evidence that a majority of smaller quoted companies are very frustrated about their place on the public markets. A significant number of directors feel that it is in their company’s best interest to explore coming off the market and obtaining private equity funding. Many institutional investors agree and are actively encouraging management teams to find them an exit.’

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