Public markets failing small companies

Over one-third of executives of listed companies regret leaving private hands and floating on the stock market.

A survey by corporate finance advisers BDO Stoy Hayward also reveals that the majority of respondents – a mix of quoted business execs, institutional fund managers and private equity backers – believe the public markets unfairly value those companies worth below £100m.

Of the 86 listed company directors interviewed, 34% said that if they could turn back the clock, they would not pursue an IPO.

Alex White, a corporate finance partner at BDO, said: “There is a disturbing but widespread agreement that the market is failing most listed companies. Ninety per cent of all quoted companies are capitalised at less than £500m and yet this group account for only 5% of the total stock market valuation. It is no wonder that with the benefit of hindsight, one third of CEOs would not lead their company through floatation, according to our survey.”

The investigation also found that two thirds of quoted companies believe private equity is better at incentivising management than the capital markets, and a similar amount believe it understands and value small business better.

However, 31% of listed businesses believe private equity is generally worse at building long term value compared to the capital markets – 21% though they were better. Also, only 22% say private equity is better at allowing management teams to get on with managing the business

Approximately four in ten quoted companies have considered a public-to-private (P2P) deal and/or been approached in relation to such a transaction in the last 12 to 24 months, and almost half of the institutional fund manager respondents admitted they will consider encouraging investee companies to look for P2P funding in the next year or two. One third of quoted companies plan to consider a P2P deal over the same time period.

As one respondent said: “The companies concerned have hit the buffers – there’s no longer any point in being a public company. Nobody’s interested in them.”

The saviour of quoted companies is thought to lie not with private equity though, but with trade buyers. Asked which do they think is most likely to maximise shareholder value, 40% replied “selling to trade”, with 27% choosing to remain listed and just 13% opting for a P2P.