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
Arts and Entertainment
Books should be for everyone, says Els, 8. Publisher Scholastic now agrees
booksAn eight-year-old saw a pirate book was ‘for boys’ and took on the publishers
Life and Style
Mary Beard received abuse after speaking positively on 'Question Time' about immigrant workers: 'When people say ridiculous, untrue and hurtful things, then I think you should call them out'
tech
Life and Style
Most mail-order brides are thought to come from Thailand, the Philippines and Romania
life
News
i100
Life and Style
tech
Voices
Margaret Thatcher, with her director of publicity Sir Gordon Reece, who helped her and the Tory Party to victory in 1979
voicesThe subject is being celebrated by the V&A museum, triggering some happy memories for former PR man DJ Taylor
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
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

Ashdown Group: Business Analyst - Financial Services - City, London

£50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...

SThree: Trainee Recruitment Consultant

£18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...

Recruitment Genius: Administrator - IFA Based

£22000 - £24000 per annum: Recruitment Genius: This is an opportunity to join ...

Day In a Page

General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence
Public relations as 'art'? Surely not

Confessions of a former PR man

The 'art' of public relations is being celebrated by the V&A museum, triggering some happy memories for DJ Taylor
Bill Granger recipes: Our chef succumbs to his sugar cravings with super-luxurious sweet treats

Bill Granger's luxurious sweet treats

Our chef loves to stop for 30 minutes to catch up on the day's gossip, while nibbling on something sweet
London Marathon 2015: Paula Radcliffe and the mother of all goodbyes

The mother of all goodbyes

Paula Radcliffe's farewell to the London Marathon will be a family affair
Everton vs Manchester United: Steven Naismith demands 'better' if Toffees are to upset the odds against United

Steven Naismith: 'We know we must do better'

The Everton forward explains the reasons behind club's decline this season
Arsenal vs Chelsea: Praise to Arsene Wenger for having the courage of his convictions

Michael Calvin's Last Word

Praise to Wenger for having the courage of his convictions