Expert commentary by Tim Ward, CEO, Quoted Companies Alliance
The UK is recognised as being an open and receptive venue for growing companies both domestic and international. The public markets and the associated infrastructure of institutional investors, retail investors, advisers and liquidity providers has been built up over many years. This experience cannot be replicated easily and it has contributed to many thousands of growth companies being able to raise the necessary finance to build wealth for investors, employees and the wider stakeholder base.
The fact that 1000 Companies to Inspire Britain is in its sixth edition is testament to this breadth and depth of markets. Many companies have established a well-worn path to market. Their success should encourage others to consider this route as a very credible source of finance at the time of initial public offerings (IPO) and for subsequent rounds from experienced and committed long-term investors.
In every survey on economic sentiment that the Quoted Companies Alliance has conducted with YouGov, we have seen that while confidence about the UK economy is generally depressed, companies on public markets remain consistently positive about their own prospects. This has even been the case during several economic downturns.
History shows that Europe has an addiction to temporary bank debt as a means to finance growth. This is fine while interest rates are low and the economy is bouncing along nicely. But there is a time in the economic cycle when banks reduce, or even withdraw facilities, and this leaves companies exposed to the realities of shrinking working capital at a time when orders are drying up.
The public markets have a record of being able to bridge this funding gap. Two-thirds of money raised on AIM is related to further rounds of finance rather than at IPO. This reflects that investors are prepared to back companies who have an established track record, that investors take a long-term view beyond short-term downturns and that growth companies on public markets can operate with more confidence than those addicted to debt.
The OECD says that empirical results suggest that in most OECD countries, more debt is typically associated with slower growth while more stock market financing generates a positive growth effect. At a company level this has also proved to be the case.
This long-term open and receptive approach is not found in all public markets in Europe. It is possibly unique to the UK. It is one of the reasons why we have a flourishing growth company environment where companies grow with confidence beyond the start-up and scale-up stages. We should not take this for granted, but in these uncertain times a place where permanent equity capital is available should not be overlooked. It is worth serious consideration by any company wanting to go to the next level.