By Marcus Leach
A quarter of small cap companies, advisers and investors believe that the small cap investment market in London requires a radical restructure to encourage recovery.
This is according to new research conducted by Imprima, a leading provider of virtual data rooms and financial communication services.
With increased global competition, limited investor appetite for small cap companies and a slower than forecast economic recovery the London small cap market risks seeing an exodus of the stronger companies to other markets.
Commentators have suggested that tax breaks, a further shake-out of the weaker listed companies and a stricter admissions policy would help to strengthen the small cap sector.
The research research shows that the two key barriers undermining liquidity in the small cap sector are a shortage of shares in sufficient quantities and lack of knowledge about the company.
Other barriers include concentrated shareholding structures, lack of knowledge about the sector and a shortage of independent research. An overwhelming majority (93%) of respondents said that they found independent research on small caps useful.
When it comes to advising how small caps can improve their liquidity, 96% of respondents believed there should be greater focus on engaging with private clients through private client brokers. Over eight in ten said small caps should increase their analyst following and over half (52%) recommended commissioning independent research.
“Small cap companies can get frustrated by their inability to attract institutional investment and grow the value of their ventures as shares are tracked and traded," John Paul Murphy, Imprima’s Group Corporate Reporting Sales Director said.
"While most people believe that the small cap sector will recover in line with the rest of the capital markets, a quarter think that more radical action needs to be taken. Our view is that there is plenty that small caps can do today to improve their visibility and the understanding of their proposition.
“Many small caps fall into the liquidity trap because they are not doing enough to differentiate themselves from the competition. The most important of these are to get your equity story straight and to demonstrate strong management and potential value.”
The research revealed that the three most important sources of information for learning about small cap stocks are the company websites, independent research and online annual reports, the latter being more popular than the hard copy format. Other sources of information include specialist investment media, professional advisers and national media.
According to the survey, there is a growing interest amongst small cap investors and advisers in accessing company information from their mobile devices: press releases and share prices were the most popular types of information, registering 81% and 78% respectively followed by daily company updates (52%) and investor presentations (48%).
Remote access to annual reports is also becoming increasingly important. Small cap market participants are particularly attracted by annual reports that can deliver information in multiple formats, including video and audio. Small cap experts were also attracted to the cost savings generated by sending out fewer hard copies.
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