Small and medium-sized companies are vitally important to the UK economy. Some 4.8 million SMEs (turnover up to £25 million) account for the majority of registered UK businesses and more than half of UK private sector employment and turnover. Recent analysis by Demos Finance, Britain’s leading cross-party think-tank, indicates that of the 4.8 million SMEs, the majority are sole traders with no employees while approximately 1.2 million employ 1–499 people and only 2,900 employ more than 500 people (the equivalent of 44 per cent of the UK’s labour force). Yet only two per cent of SMEs use external equity to help fund their expansion.
Aggregate bank lending figures mask both the turbulence that companies have felt and a more fundamental truth, namely that equity finance is often the most appropriate structure to finance risk. It is permanent capital that takes a long view. It does not take fright nor does it insist on immediate repayment. There is, therefore, a compelling argument for creating a level playing field in terms of the tax treatment of equity versus debt for corporations encouraging businesses to raise equity. While welcoming the recent abolition of stamp duty on AIM stocks, the Chancellor should be encouraged to go further.
Equity finance has always been an ideal way to fund growth companies; the importance of those businesses cannot be over-estimated. According to Demos Finance, high-growth firms represent only six per cent of those employing more than 10 people, but account for more than 50 per cent of the growth in jobs. Equity Capital for Industry has made a similar point, identifying approximately 5,000 firms in the UK with serious growth potential if they get the right support.
At Cenkos, we enjoy spending time and energy putting companies and investors together and offering advice to them on the next stage of their growth journey. AIM has been a vital source of capital for such companies and Cenkos has contributed significantly to that. Since we opened for business in 2005, we have raised just under £8 billion for a large number of companies. Fund raisings have varied in size from £1 million to more than £500 million and our doors are always open to any companies who wish to discuss their capital needs.
In safe hands
Cenkos Securities is helping some of the UK’s brightest businesses raise capital on AIM and the main market
Cenkos Securities is an independent, specialist securities firm. Like many of the companies profiled in this report, we are a young, entrepreneurial and growing business. At Cenkos, we share a passion for growth. In our short history we have raised more than £5 billion for our clients through the public markets in order to fund and accelerate their growth. We are extremely proud of our clients’ success.
Through AIM and the Main Market of London Stock Exchange, the UK equity capital markets provide an excellent source of long-term funding for UK businesses. In addition, the UK markets benefit from an exceptionally strong base of institutional investors who have a long-term investment horizon and understand and support growth companies. Their commitment to growth companies spans many decades and is essential in supporting economic development.
£5bn – The amount that Cenkos has raised for its clients through the public markets to fund and accelerate their growth
London Stock Exchange enables companies regardless of size to raise capital efficiently throughout the economic cycle. AIM, in particular, is unique in this respect, offering smaller companies a funding route that is not available elsewhere. In difficult economic times, when sources of capital dry up, access to funding is critical. Throughout the recent downturn, we were able to raise substantial amounts of capital, enabling our clients to maintain financial strength and take advantage of the opportunities that such an environment offered. It is this access to capital that gives growth companies the confidence to aim high.
The improved market environment and investor sentiment provide an exciting opportunity for businesses to secure funding. Many of the companies in this report will benefit from accessing the equity markets in the future, whether it is to execute their organic growth strategy, fund acquisitions or enhance their credibility when engaging with large customers and suppliers. We look forward to helping them achieve their goals. While an Initial Public Offering may seem a longer-term project, a company can prepare in its early days.
We have developed a list of key areas for management teams to focus on, as they build and grow their businesses in preparation for a public listing. They are:
1. Understand the potential in your market and develop a vision – ensure you understand the dynamics of your market and develop a business model with a growth strategy designed to capture the full opportunity. Assume there will be funding for a management team with a vision and a robust business model – there will be.
2. Build a strong team – it is a fact that companies led by a team are more successful. Build a team to lead the business and take the company forward. A strong team creates leverage, enables better decision-making and de-risks an organisation. Investors value depth of management.
3. Create a discipline of delivery across the organisation – setting and meeting realistic expectations is a fundamental aspect of being a public company. Establishing that discipline from the outset creates a track record and ensures a smooth transition to life as a public company. Make it part of the corporate DNA.
4. Think of your investors as your partners and communicate openly – the public markets rely on a framework of disclosure, which in many cases represents a significant change for a private company. In addition, the ongoing support from investors comes from the trust developed between investors and a management team.
We are proud to highlight two of our clients who have used the public markets to accelerate their growth. We hope that they will provide inspiration for others to follow.
Brady Plc is the largest European-headquartered provider of trading and risk management software to the global metals, recycling, soft commodity, raw materials and energy markets. The company’s client base – including more than 300 of the world’s largest financial institutions, trading companies and miners – depends on Brady solutions to support their entire commodity trading and risk management operations.
Following the company’s listing on AIM, Brady has achieved 50 per cent compound annual growth in revenues in the past five years. The company, led by CEO Gavin Lavelle, has entered new markets, developed new software solutions and added global industry leaders as clients.
Brady’s growth can be attributed to combining organic growth with acquisitions, made possible through access to capital markets and a supportive investor base. Since 2010, with support from its nominated advisor and broker, Cenkos, Brady has raised £33 million to fund its acquisition strategy.
Region: East England
Sector: Computer Software
Smart Metering Systems Plc
Smart Metering Systems (SMS) floated on AIM in July 2011, raising £27 million for the company and founding shareholders. The company is investing substantially in gas meter assets and the new funds enabled the management to strengthen SMS’s balance sheet to support further growth.
The capital also helped the company to enhance its standing among its customers, the major gas suppliers, and to develop and patent an automated smart meter reading device, which is beginning to generate significant traction in the market.
By the end of June 2013, SMS’s total gas meter portfolio had increased from about 220,000 at the time of the IPO to in excess of 400,000, generating a recurring index-linked meter rental income stream of more than £13 million and growing. It now accounts for around half of SMS’s revenue and is a key strength of its business.
Revenue, profit and cash generation have increased since the float and the share price has grown by five to six times. In late 2012, SMS started paying dividends. Listing on AIM transformed the business and helped with its future plans.