Executives of small cap companies increasingly complain to me that their shares are illiquid and performing poorly as a result. Is this association really valid?
First of all, one must not confuse liquidity with access to capital. The large pension funds that dominate UK plc. still allocate a good proportion of their funds to small caps. Institutional small cap OEICs offered by the likes of Standard Life and Henderson remain extremely popular with retail investors. Private client demand for small caps appears to be growing if anything. Consider the commercial success of small cap/private client interface advisors such as Edison and Broker Profile.
Capital markets generally work in the UK. Like the hapless dwarves in the BBC comedy Life’s Too Short, many small-caps are not being ignored simply because of their size. Management must understand that professional investors are sophisticated and need to be convinced of future capital and income growth before buying into a company. This is especially true for sub FTSE 250 and AIM listed stocks since index funds are less prevalent in these areas of the market.
Management have a duty to maximise value for their shareholders and their methods should be readily communicated to the market. Over the long-term, capital should be allocated efficiently and economic moats of competitive advantage established. It’s amazing how well a share price responds to credible shareholder value initiatives, no matter the market cap. Share price performance and liquidity both improve as investment risk falls.
Short-term, management of small cap companies may also look outside the company in their efforts to realise value. If the company has in fact been neglected by the stock-market (as is so often claimed) then there exist a plethora of venture capital trusts/ private equity funds/industrial buyers etc. to take advantage of the situation. Management should be open to considering all external approaches.
Poor liquidity may be a symptom of a company that is being ignored but it does not cause poor share price performance. If there is value in a company’s shares then it will be ‘outed’, either through management action or by an external predator.
