Outlook: Stock market fails smaller companies

JUST three short years into life at the head of a publicly quoted company, Peter Presland, chief executive of Rebus Group, an IT company specialising in the insurance sector, has had enough and is selling out to venture capitalists. Rebus is only the latest in a growing number of so-called "public to private" transactions, and as such it is symptomatic of the deep disillusionment many smaller companies have begun to feel with the stock market.

In recent years there has been a growing polarisation in the quoted sector between big and small companies, and between perceived sunset and sunrise sectors. If your company happens to be a small or medium sized enterprise in an out of favour sector, then your chances of using the equity markets to fund expansion at a reasonable rate are virtually nil. Plainly it is much worse than this, however. Rebus is in a glamourous sector, IT, but it is also small so it is still being afforded a stock market rating so low that its advisers cannot recommend use of equity to fund growth.

What's the point of being subjected to the disciplines of a publicly quoted company, many managements are asking themselves, if we cannot avail ourselves of the benefits of the capital markets? This sort of question is now being posed with such regularity by smaller companies that it is no longer possible to write these complaints off as the whinging of underperforming executives.

Many smaller companies feel themselves trapped in a vicious circle of decline; if they don't achieve a reasonable stock market rating, they don't get access to capital and will for ever remain small. So they have to adopt a strategy consistent with generating good short term growth and delivering on budgets set by others - namely the short term earnings forecasts of City analysts. This in turn necessitates a short term investment strategy within the company, which tends to mean it can never break free of whichever narrow business perspective it is locked into.

In such circumstances, the attractions of venture capital are obvious. Ironically, most buyout capital comes from the very institutions that in their stock market dealings are applying these short termist pressures; there is, however, a small part of each portfolio which is allocated to longer term, more illiquid investment.

As a consequence, there is a certain amount of robbing Peter to pay Paul going on here. In the past, the big institutions were reluctant to accept venture capital bids on the grounds that any company buying itself must be worth more than it is paying. In the last year or two that perception has changed. The underperformance of smaller company shares has made many keen to sell at almost any price, further depressing the value of these companies.

For big institutions with an interest in the venture capital industry, the process is a zero sum game, since they can expect a share of the higher returns these companies might earn as privately owned entities. The venture capitalist also has the opportunity much more effectively to bring about consolidation and management change than would have been possible in the quoted sector.

Unfortunately, this is a process in which the retail investor can rarely participate. All too often small private investors are being forced out at an undervaluation. Later, on the other hand, they are asked to participate in the inflated valuations at which these companies return to the stock market. The capital markets are not meant to work in this discriminatory and unfair manner.

News
people
Arts and Entertainment
Lena Dunham
booksLena Dunham's memoirs - written at the age of 28 - are honest to the point of making you squirm
News
Jacqueline Bisset has claimed that young women today are obsessed with being 'hot', rather than 'charming', 'romantic' or 'beautiful'
people
Arts and Entertainment
A bit rich: Maggie Smith in Downton Abbey
tvDownton Abbey review: It's six months since we last caught up with the Crawley clan
PROMOTED VIDEO
Sport
Frank Lampard and his non-celebration
premier leagueManchester City vs Chelsea match report from the Etihad Stadium
Life and Style
A new app has been launched that enables people to have a cuddle from a stranger
techNew app offers 'PG alternative' to dating services like Tinder
Arts and Entertainment
Jake Quickenden sings his heart out in his second audition
tvX Factor: How did the Jakes - and Charlie Martinez - fare?
Sport
premier league
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvOnly remaining original cast-member to leave crime series
Sport
Mario Balotelli celebrates his first Liverpool goal
premier leagueLiverpool striker expressed his opinion about the 5-3 thriller with Leicester - then this happened
News
ebooksAn unforgettable anthology of contemporary reportage
News
Britain's shadow chancellor Ed Balls (L) challenges reporter Rob Merrick for the ball during the Labour Party versus the media soccer match,
peopleReporter left bleeding after tackle from shadow Chancellor in annual political football match
Arts and Entertainment
Female fans want more explicit male sex in Game of Thrones, George R R Martin says
tvSpoiler warning: Star of George RR Martin's hit series says viewers have 'not seen the last' of him/her
News
i100
News
i100
Sport
Plenty to ponder: Amir Khan has had repeated problems with US immigration because of his Muslim faith and now American television may shun him
boxing
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Day In a Page

A roller-coaster tale from the 'voice of a generation'

Not That Kind of Girl:

A roller-coaster tale from 'voice of a generation' Lena Dunham
London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

London is not bedlam or a cradle of vice

In fact it, as much as anywhere, deserves independence
Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

Vivienne Westwood 'didn’t want' relationship with McLaren

Designer 'felt pressured' into going out with Sex Pistols manager
Jourdan Dunn: Model mother

Model mother

Jordan Dunn became one of the best-paid models in the world
Apple still coolest brand – despite U2 PR disaster

Apple still the coolest brand

Despite PR disaster of free U2 album
Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments