Since the UK voted to leave the European Union on the 23rd June 2016 we might have expected to see a fall in management and market confidence resulting from uncertainty around Brexit negotiations and more recent geopolitical unrest.
However, activity in the small and microcap sector has remained buoyant as management teams look to raise funds for corporate activity.
For most of the past two years, despite Brexit, fund raising at the smaller end of the market has remained strong and we see no sign currently that this is set to change.
Indeed, by the end of September there had already been 30 small cap initial public offerings (IPOs) within our target sectors this year, valued at a cumulative £4.5bn and raising close to £1bn.
Even though there are just a few weeks remaining until the year end, we are in no doubt that we will see more before the end of the year.
Equity markets remain buoyant, with relatively low levels of volatility, which means that public markets remain a viable alternative to a trade sale or private equity for management teams going through a liquidity event.
There’s an opportunity to obtain sensible valuations, whether that’s to sell a business or raise funds in order to take the business forward and increase growth and profitability.
It’s encouraging that owners and managers of SMEs are not put off by the wider geopolitical uncertainty. Most of the current strength at this end of the IPO market can be put down to smaller companies operating in niche areas of the economy that are relatively resilient to wider economic events.
Perhaps this is because many of these companies are still growing and operate in less cyclical areas where management teams are more in control of their destiny and are less concerned by the impact on their firm of potential macro-economic headwinds.
These less cyclical businesses are where we focus our investments.
On the whole management teams have recognised that they cannot afford to sit on their hands until there is greater certainty around issues such as Brexit.
There are of course exceptions particularly in some consumer discretionary areas which have experienced softer trading since the Brexit vote.
Of the 21 smaller company IPOs we have reviewed this year which meet our strict operational and management criteria, we have invested in five. These include Alpha FX and Xafinity:
- Alpha FX is a provider of foreign exchange hedging services to mid-size corporates with multi currency activities seeking to hedge their exposure. Alpha FX listed on the Alternative Investment Market (AIM) in April raising £30m at float.
- Xafinity, an actuarial and consulting firm, which raised around £128m at IPO back in February, have plans to take the business to the next level and challenge the big three actuarial players.
Business conditions are currently favourable and while the visibility of upcoming IPOs is never long, at Livingbridge we are currently evaluating a steady stream of companies which are due to come into the small cap space over the next six months.
We believe the outlook for the small and micro cap sectors is strong and that there will be a steady stream of new investment opportunities over the rest of 2017 and into 2018.