Smaller companies look for stock market exit sign

Smaller companies are not being fairly valued by the stock market, making many of them look to private equity for funding, according to a survey by accountants BDO Stoy Hayward.

The firm’s Public-to-Private survey claims 69 per cent of smaller quoted companies (SQCs) feel the stock market does not fairly value their business, even without the effects of the recent credit crunch. And at least a third of the companies surveyed said they regretted floating on the stock market.

John Stephan, corporate finance partner at BDO Stoy Hayward in Birmingham, said: “Our survey is further evidence that a majority of smaller quoted companies are very frustrated about their place on the public markets. A significant number of directors feel that it is in their company’s best interest to explore coming off the market and obtaining private equity funding. Many institutional investors agree and are actively encouraging management teams to find them an exit.”

Dissatisfaction among SQCs may open the door to them opting for private equity funding as a viable alternative to capital markets, the survey suggested. Two thirds of the firms surveyed said they believed the private equity funding model is generally better than the public markets at incentivising management and the same number felt it was better at understanding smaller companies. Nearly half of the respondents said private equity would be better than the capital markets at investing for growth and acquisitions.

The smaller the company, the less they felt they were perceived to be fairly valued. Nearly 70 per cent of all SQCs believe companies with a market capitalisation of less than £30million are not fairly valued by the market. This figure fell to 45 per cent for companies with a market capitalisation of between £30million and £99million, but was only 24 per cent for companies with a market capitalisation of over £250million.

After being asked to ignore conditions, institutional fund managers agree smaller listed companies on the stock market have a raw deal. Seventy per cent of the institutional fund managers surveyed say that companies with a market capitalisation of less than £30million were not fairly valued.