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.

Start your day with The Independent, sign up for daily news emails
News
Young Winstone: His ‘tough-guy’ image is a misconception
people
Sport
Adnan Januzaj and Gareth Bale
footballManchester United set to loan out Januzaj to make room for Bale - if a move for the Welshman firms up
Arts and Entertainment
Ellie Levenson’s The Election book demystifies politics for children
bookNew children's book primes the next generation for politics
News
Outspoken: Alexander Fury, John Rentoul, Ellen E Jones and Katy Guest
newsFrom the Scottish referendum to the Ice Bucket Challenge, our writers voice their opinions
PROMOTED VIDEO
News
i100
Sport
Yaya Sanogo, Mats Hummels, Troy Deeney and Adnan Januzaj
footballMost Premier League sides are after a striker, but here's a full run down of the ins and outs that could happen over the next month
Arts and Entertainment
L to R: Hawkeye (Jeremy Renner), Captain America (Chris Evans) & Black Widow (Scarlett Johansson) in Avengers Assemble
film
News
Nigel Farage celebrates with a pint after early local election results in the Hoy and Helmet pub in South Benfleet in Essex
peopleHe has shaped British politics 'for good or ill'
Arts and Entertainment
Pharrell Williams' “Happy” was the most searched-for song lyric of 2014
musicThe power of song never greater, according to our internet searches
Sport
Tim Sherwood raises his hand after the 1-0 victory over Stoke
footballFormer Tottenham boss leads list of candidates to replace Neil Warnock
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Arts and Entertainment
Sink the Pink's 2013 New Year's Eve party
musicFour of Britain's top DJs give their verdict on how to party into 2015
Voices
Strictly Come Dancing was watched by 6.9m viewers
voicesIt has been hard to form generally accepted cultural standards since the middle of the 19th century – and the disintegration is only going to accelerate, says DJ Taylor
Arts and Entertainment
Roffey says: 'All of us carry shame and taboo around about our sexuality. But I was determined not to let shame stop me writing my memoir.'
books
News
i100
News
Caplan says of Jacobs: 'She is a very collaborative director, and gives actors a lot of freedom. She makes things happen.'
people
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

Selby Jennings: VP/SVP Credit Quant- NY- Investment Bank

Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...

Selby Jennings: Quantitative Research | Equity | New York

Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

Selby Jennings: SVP Model Validation

Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

Day In a Page

War with Isis: The West needs more than a White Knight

The West needs more than a White Knight

Despite billions spent on weapons, the US has not been able to counter Isis's gruesome tactics, says Patrick Cockburn
Return to Helmand: Private Davey Graham recalls the day he was shot by the Taliban

'The day I was shot by the Taliban'

Private Davey Graham was shot five times during an ambush in 2007 - it was the first, controversial photograph to show the dangers our soldiers faced in Helmand province
Revealed: the best and worst airlines for delays

Revealed: the best and worst airlines for delays

Many flyers are failing to claim compensation to which they are entitled, a new survey has found
The stories that defined 2014: From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions

The stories that defined 2014

From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions
Stoke-on-Trent becomes first British city to be classified as 'disaster resilient' by the United Nations

Disaster looming? Now you know where to head...

Which British city has become the first to be awarded special 'resilience' status by the UN?
Finally, a diet that works: Californian pastor's wildly popular Daniel Plan has seen his congregation greatly reduced

Finally, a diet that works

Californian pastor's wildly popular Daniel Plan has seen his congregation greatly reduced
Say it with... lyrics: The power of song was never greater, according to our internet searches

Say it with... lyrics

The power of song was never greater, according to our internet searches
Professor Danielle George: On a mission to bring back the art of 'thinkering'

The joys of 'thinkering'

Professor Danielle George on why we have to nurture tomorrow's scientists today
Monique Roffey: The author on father figures, the nation's narcissism and New Year reflections

Monique Roffey interview

The author on father figures, the nation's narcissism and New Year reflections
Introducing my anti-heroes of 2014

Introducing my anti-heroes of 2014

Their outrageousness and originality makes the world a bit more interesting, says Ellen E Jones
DJ Taylor: Good taste? It's all a matter of timing...

Good taste? It's all a matter of timing...

It has been hard to form generally accepted cultural standards since the middle of the 19th century – and the disintegration is only going to accelerate, says DJ Taylor
Olivia Jacobs & Ben Caplan: 'Ben thought the play was called 'Christian Love'. It was 'Christie in Love' - about a necrophiliac serial killer'

How we met

Olivia Jacobs and Ben Caplan
Bill Granger recipes: Our chef's breakfasts will revitalise you in time for the New Year

Bill Granger's healthy breakfasts

Our chef's healthy recipes are perfect if you've overindulged during the festive season
Transfer guide: From Arsenal to West Ham - what does your club need in the January transfer window?

Who does your club need in the transfer window?

Most Premier League sides are after a striker, but here's a full run down of the ins and outs that could happen over the next month
The Last Word: From aliens at FA to yak’s milk in the Tour, here’s to 2015

Michael Calvin's Last Word

From aliens at FA to yak’s milk in the Tour, here’s to 2015