UK – Only one in ten UK smaller quoted companies meet the minimum market capitalisation desired by institutional investors, according to a study by the London based consultancy KPMG Corporate Finance. The 101 fund managers surveyed prefer to invest in companies with at least 52% of shares available for trading, but only 122 out of 1,556 UK smaller cap companies in the FTSE universe fit the free float profile the managers are looking for.

The research suggests that fund managers are keen to invest larger sums of money in bigger and more liquid companies in the smaller cap sector, the ideal free float of a firm should now be over £105m (e167m) with a market capitalisation of around £200m. More than half (57%) of the managers are going to increase the value of a single investment in a smaller cap company this year, with an average minimum holding of £1.3m in a single company seen as being ideal by those surveyed.

“All the figures are increasing. Fund managers are looking for larger minimum investments, increased free float and bigger holdings. More companies will, therefore, fall outside the interest of many fund managers. Gaining access to capital will be more difficult so companies will need to have a strong growth story and those with closely held shares will be required to release them into the market to improve liquidity,” says Neil Austin, public company advisory group partner at KPMG Corporate Finance.

Even though lack of liquidity is seen as a major drawback for smaller cap companies the results of the survey show an improvement in the last four years. According to the latest study, 14% of fund managers believe that liquidity is improving, compared to 10% in 1999-00 and 1% in 1998-99. Parallel to these results, only 25% of managers see a worsening in liquidity according to the latest figures, while 31% forecasted this last year and 70% the year before last.

As a result of concerns over liquidity, 55% of fund managers expect more companies than before to abandon the stock market in the next few years, while 8% expect a smaller number of companies to do so, says the report. The bright side of too small and under-performing companies ceasing to be listed, says the surveyor, is that it should create a better visibility of the remaining firms.
“The message from our research is clear. To attract investment, smaller quoted companies must have a credible growth story and high quality management. Then they must communicate this through good investor relations. Not all can succeed,” says Austin.