Writing in the Annual Results statement of his small City finance house Dowgate Capital (DGT), chairman Tony Rawlinson bemoans the poor performance of the company’s share price, which has fallen from 19.5p at the time of its flotation in October 2006 to 13.5p today.
And this despite ‘building a profitable and sound business, commissioning a research note to explain what we do and what we are seeking to achieve, retaining a public relations adviser, joining the relatively few AIM-quoted companies that pay a dividend, launching a share buyback program, and completing a share consolidation.’
He is not the only small director who is wondering just exactly what he has to do to convince investors to support his shares. But he is at least in a position to do something about the problem. He is looking to expand Dowgate’s client list of small quoted companies and can offer both a corporate finance and broking service.
But will Dowgate’s efforts make much difference to the problem of unnoticed small companies, which Rawlinson attributes to an unwillingness of investors to take stakes in illiquid stocks and a withdrawal from the small company sector of some other brokers?
These are of course two sides of the same coin, and it is a coin that has been in circulation for as long as I can remember. Brokers are only interested in representing companies if there is something in it for them, and traditionally their reward has come in the form of juicy commissions gained by persuading their clients to buy shares in the companies that they represent. But there is no point in advising investors to buy shares if they simply cannot get hold of any, and as the brokers encounter this problem so they cease research coverage and stop making any effort to promote the company.
Problems compounded
This only makes the matter worse, and creates a vicious circle which leaves companies feeling misunderstood, undervalued and neglected. This is not just a matter of pride. It affects their ability to raise fresh funds or expand through the issue of new shares – two of the main reasons for going public in the first place. The problem has already given rise to one fairly new phenomenon, that of ‘sponsored research.’ Here the company will pay an independent research boutique to write an explanatory note and make some forecasts – carefully vetted by the company itself of course. These research reports cost several thousand pounds, but whether they make very much difference I am not so sure.
The problem is getting worse. As always happens in a bear market brokers are withdrawing from more marginal areas, but in the longer term the issue will remain so long as the supply of small companies exceeds the available level of interest in them. Today over 1,600 companies have their shares traded on AIM, more than double the number that existed in the last bear market of 2001. Of these 571 have a market capitalization of below £10m, which is small by anybody’s standards and can scarcely be sufficient to justify the costs of being a public company. A further 610 are valued below £50m, below the cut-off point for many institutional investors.
In its drive to promote AIM as the pre-eminent market for small companies from all over the globe the London Stock Exchange has lost sight of the need to ensure that, once these companies have achieved their quotation, there is sufficient interest in the secondary market. Rather than seeking to attract even more companies to AIM what it should be doing now is working out a way of actually reducing the length of the list. This certainly won’t be popular. Where there is a public company there are directors and other advisers, not to mention the Stock Exchange itself, drawing fees.
No company wants to be put out of existence, and it is not an easy or popular thing to do. But the Stock Exchange does have the power to de-list stocks and has done so in the case of inactive ‘shell’ companies. What it should now do is devise some way of killing off companies that have failed to deliver on their original business plan, are losing money year after year and only surviving by going round the City with a begging bowl and some new spin on their future.
Because this long tail of tiny companies, run by disgruntled directors and held by shareholders who only wish they could get their money out is dragging down the whole performance of AIM, and giving it a bad reputation in the process.
This article is taken from Tom Bulford’s free daily email ‘Penny Sleuth‘