I have, for the last 18 years, had the pleasure of running First Property Group plc, a small listed property company with a market value of £52 million, which I founded and which invests in the UK, Poland and to a small extent in Romania. My public company experience before this was as Finance Director of a Lloyd’s reinsurance broker; and before that I worked in corporate finance at Lehman Brothers. So my experience in the public domain is not inconsiderable. Throughout this time a succession of governments has vocally supported the cause of smaller listed businesses. First with the Unlisted Securities Market of the late 1980’s and then the current Alternative Investment Market (or AIM).
But sadly, notwithstanding this apparent support, the plight of our sector has got worse, not better. Some of it is self inflicted but I would go so far as to say that the capital markets have now more or less ceased to operate for companies the size of First Property.
Our sector has always had its fair share of spectacular failures – that is the nature of nascent and small businesses – but the lead up into the peak of the boom in 2007 was a shocking period. Unscrupulous entrepreneurs backed by even less scrupulous brokers, tapped up the stock market to float a whole host of businesses which should never have seen the light of day. In the property sector these companies were epitomised by the string of businesses buying strange and wonderful property in even stranger locations [Dragon Ukrainian Properties ring a bell?]. Not surprisingly, when the music stopped, there was a slew of failures and a commensurate slew of chastened investors. Institutional investors hot footed it out of AIM.
To make matters worse, as they retreated, there emerged on the stage some category killer companies which have soaked up institutional capital as never before. To name a few: Apple, Google, Amazon and Facebook. When I started work and for many years after, the biggest company in the World was Exxon. It now has a market capitalisation of $320 billion. Apple alone is three times that size and the combined market value of the big four is some $3 trillion – equivalent to the GDP of the United Kingdom! In their need to have an exposure to these behemoths, institutional capital has been pulled away from smaller companies.
Ironically these monsters were born out of the Internet and, with the advent of the Internet and online trading platforms, the cost of trading in listed shares plummeted. You might have expected this to be good for the listed sector. But the opposite has proven to be the case for small companies. There is now no money in it for brokers to bother making secondary markets in shares which do not trade in high volumes and even less in it for them to write research reports. The trading volumes simply do not produce enough of a broking fee. So, as investors retreated, so have the brokers.
Then the EU implemented regulations ostensibly to secure the interests of investors but which have been damaging for listed companies across the board, particularly smaller ones.
The first was the introduction of Solvency II, requiring insurance companies to set aside varying amounts of capital dependent on the asset class. EU member state Government bonds, for example, were deemed to be the least risky asset class and so require no capital reserves to be held. Listed shares on the other hand require a reserve of 39% of their value*. This has naturally led to insurance companies leaning towards the holding of government bonds over listed companies. Perversely, making an investment in Greek Government bonds would require no capital reserves but investing in blue chip companies would. Little room for higher risk AIM listed stocks.