Depending on the level of interest in your company, the IPO is often the easiest part of acclimatizing to life on the equity capital markets. Investment banks and corporate brokers take the lead and do much of the hard work, eager to justify their substantial fees. As a small cap, it is once you’re listed that it becomes much more difficult to maintain investor interest and keep lines of communication open.
Undercovered
A new report by Thomson Extel reveals that most UK small caps, defined as those businesses with a market cap of less than £1 bn ($1.88 bn), struggle to get a reasonable amount of analyst coverage. Twenty-six percent of those surveyed have only one analyst covering their company other than their house broker; 38 percent have three to five analysts, and more encouragingly, 31 percent say that they have more than five analysts.
As the finance director at a FTSE small cap, Hampson Industries, Howard Kimberley knows all about the difficulties of generating enough coverage. ‘The lack of breadth of analyst coverage is a perennial problem for smaller capitalized companies, particularly those in ‘old economy’ businesses,’ he says in the report. ‘Effective analyst cover is key to ensuring that our equity story is properly understood and communicated and hence that the performance drivers of our business are properly framed for balanced and meaningful analysis.’
While he is unhappy about the amount of coverage his company receives, Kimberley, unlike many of his large-cap counterparts, has no qualms about the quality of sell-side research. ‘While we have not been very satisfied with the breadth of coverage through the recent downturn in the aerospace industry, we have no complaints about the quality of research coverage of the sector,’ he adds.
The director of market services and head of Aim at the London Stock Exchange (LSE), Martin Graham, accepts that a lack of analyst coverage is a significant problem for many small caps. ‘The availability of analyst coverage is a challenge for all publicly listed SMEs,’ he comments in the study. But, with his marketing hat firmly on, he insists that companies get better coverage in London than they would elsewhere. ‘Anecdotal evidence, however, suggests that the research coverage for Aim companies exceeds that for companies listed on similar exchanges elsewhere in the world,’ he says.
Paid research suspicions
Every small cap wants more coverage, but how can they go about attaining it? Company-sponsored research has become more common in recent years. The report finds that 21 percent of respondents do pay for sponsored research to be written about them.
Some providers of sponsored research go to considerable lengths to show that they provide unbiased coverage of their clients. Despite these protestations, however, there are inevitably doubts about the veracity of research paid for by issuers.
Of the 214 small-cap fund managers surveyed, none think that companysponsored research is ‘very useful’ and 36 percent say that it is ‘not useful’, begging the question of whether it is worth companies shelling out for such research. In contrast, buy-side firms have much more time for independent research they have commissioned themselves, with 24 percent of respondents saying they find it ‘very useful.’
Better IR needed
It’s all too easy for small companies to feel they’re getting a raw deal from the analyst community, but are they really doing enough themselves to boost their profile with investors? Jimmy Burns, co-manager of Berenberg Bank’s small and mid-cap fund, thinks not.
‘The root of the problem in the UK lies in the underdeveloped role of investor relations,’ he says in the report. ‘While the UK has arguably the most developed small-cap industry in the world, the small-cap fund manager still encounters barriers to information which, perhaps surprisingly, are less prevalent in continental Europe.’
On the continent, Burns explains, companies send out comprehensive information on a regular, often quarterly, basis and ensure that their investor presentations are accessible to those who do not already know the company. It’s an altogether different picture in the UK. ‘By contrast, I find that [UK] companies are often hard to access and information flows are poor,’ he continues. ‘Companies typically depend on their house broker to organize meetings and to control access to management, resulting in a disproportionate amount of time being spent with a small number of existing shareholders.’
But Burns believes there is hope, and that UK small caps have a good opening to prosper on the back of Aim’s current buoyancy. ‘The UK has a fantastic opportunity to build on its reputation as a premier location for trading in small caps,’ he concludes. ‘The routes to company access have become stale and need revisiting, and objective secondary research needs to be encouraged to maximize this potential.’
