If you thought the Midcap was bad, then you don't want to look at the FTSE Smallcap. The market cap requirement for entry has dropped by 50% from £149m in 2018 to just £75m at the last review. This is due to the large number of exits in recent years, which can be seen clearly in the Smallcap index (unlike the FTSE 100 and 250, which obviously don't change in number). There were 160 companies in the FTSE Smallcap (ex investment trusts) in 2018 - there are only 102 today. Current m&a means that 9 more will leave next year. The market cap of the Smallcap has followed this dismal trend and is now only £25bn vs £55bn in 2018. This is a clear example of market failure and urgent action is required if we want the equity market to function for growth companies.
Is it market failure or markets being markets?
It's a sad reflection of our focus on "investor protection" and "value for money", that inevitably drives capital to larger managers who can work with a lower cost base and the resulting consolidation drives capital allocation to larger, more liquid markets. Successive Govts have patted themselves on the back, convinced that they have done a great job in reducing fees for investors, whilst in reality killing a whole ecosystem that nurtured capital formation for emerging growth businesses. Historically this would be cyclical, as new, smaller niche managers would emerge over time, who can take advantage of price anomalies, but this feels much more like a continuing secular trend, as those smaller niche players would be crazy to set themselves up to work in a quoted market, where they are expected to work for a fraction of the fees charged in private markets, and the costs of acquiring AUM are higher in quoted markets than privately, due to insanely convoluted processes just to allow managers to let investors know what it is they are running. This should be treated as a national priority, but sadly I'm not sure anyone outside of capital markets is listening.
If you cut yourself from the biggest single market in the world that’s on your doorstep it’s no wonder that companies are lowly rated and international buyers strike. We voted to impose trading tariffs on ourselves! Economists? like David Buick voted for this.
Very informative
Urgent action is required if we want the equity market to function - full stop.
Very informative
I agree
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4dAgree with the diagnosis. Out of interest, what do you think is the right solution for the U.K. to change this? I often read that the U.K. has tougher regulations