Investing in smaller companies can increase diversification, help with a client’s tax planning and boost the UK economy – and now is a great time for advisers to learn more
Larger companies will typically make up the majority of a client’s pension and ISA investments.
But exposure to smaller companies within a diverse portfolio can deliver valuable benefits.
What’s more, now could be an ideal time to invest and back the next generation of pioneers. That’s because these businesses have a great opportunity to shape the future of the UK economy following the shock of a global pandemic.
Nimble and adaptable
Smaller company investing comes with more risk. Because these companies are less established, they have a higher rate of failure and the shares can be less liquid than the shares of larger businesses.
However, this doesn’t mean all smaller companies aren’t resilient. In fact, early-stage companies can often adapt best to shocks.
The pandemic, for example, has caused disruption to long-held beliefs and traditional approaches. This has created new opportunities and markets that dynamic early-stage companies are perfectly placed to address.
Smaller companies are great at being nimble, far more so than larger businesses which typically struggle to turn the ship or adapt as quickly.
New businesses tend to operate on more modern, technology-driven business models, meaning they can react better to shocks, and are potentially in a stronger position to come out the other side of the pandemic.
One way to increase personal wealth is to make an early investment into shares of a small business that goes on to achieve significant growth.
Smaller companies have the potential to grow earnings faster than larger companies, injecting growth into a client’s portfolio. Over the long term, it’s typical for small companies to outperform large ones.1
Uncorrelated to market volatility
Where a client is investing in small unquoted companies, these are also less affected by market sentiment. That’s because their share prices are calculated based on the underlying performance of the business. They are less susceptible to the volatility caused by the emotions of the herd, as seen with listed stocks.
However, it’s important that clients go in with open eyes. Smaller company investing is high risk and investors need to understand those risks. For example, liquidity may be an issue.
Right now, the UK is a thriving place for early-stage smaller companies. Some recent examples of businesses Octopus has sold stakes in, on behalf of investors, include Depop and WaveOptics – both delivering excellent outcomes for investors this year.
Depop, a second-hand fashion app, was bought by global e-commerce platform Etsy for $1.6 billion, while augmented reality innovator Waveoptics was snapped up by Snapchat for more than $500 million.
Octopus was also an early investor in car retailer Cazoo, the UK-based ‘unicorn’ which floated on the New York stock exchange this summer.
The UK is now the world’s fourth most prolific developer of ‘unicorns’ – private businesses valued at more than $1 billion – and taking innovative tech firms from start-ups to the public market or sale to global businesses.2