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Small Cap Network Liquidity Event Writeup

Small Cap Network Liquidity Event Writeup

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Published by Stockopedia
This summarises the Small Cap Network’s recent ‘Escaping the Liquidity Trap’ Forum. The event was an open forum discussion at the London Chamber of Commerce including a panel of industry experts and an audience of small and mid cap company managers and market participants such as SME advisers and investors.
This summarises the Small Cap Network’s recent ‘Escaping the Liquidity Trap’ Forum. The event was an open forum discussion at the London Chamber of Commerce including a panel of industry experts and an audience of small and mid cap company managers and market participants such as SME advisers and investors.

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Categories:Types, Business/Law
Published by: Stockopedia on Nov 21, 2010
Copyright:Attribution Non-commercial


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6 October 2010
Guest Speaker 
Gavin Oldham is Chief Executive of Share plc andThe Share Centre, theindependent retail stockbroker.Share plc successfully joinedthe London Stock Exchange's AIM market in May 2008. A partner with Wedd DurlacherMordaunt before the 1986 re-organisation of the LondonStock Exchange, Gavinfounded Barclayshare (nowBarclays Stockbrokers) in 1985,leaving in 1990 to start TheShare Centre. His particularinterest lies in encouraging individual share ownership as aroute to a more democraticform of capitalism. He led asuccessful campaign to changethe Companies Act 2006 inorder to enfranchise nomineeshareholders.
Liquidity and market visibility are a constant cause for concern for UK listedsmall cap companies.In many cases, institutional investors are unable to invest in smallcaps due tosize restrictions, while private investors are deterred from investing byliquidity or are difficult to reach through traditional media and br oker channels.With market-makers widening spreads in the wake of the credit crunch andmainstream media attention focused elsewhere, small caps face anincreasingly challenging task in communicating with investors, making their shares accessible and liquid, and improving their market exposure.
About the Small Cap Network
The Small Cap Network ("SCN") is an industry Working Group focused ondiscussing issues of common concern in the UK smaller companiesmarket.SCN aims to work with respected Industry Trade Bodies such as theQuoted Companies Alliance to tackle pressing issues for SMEs such asliquidity, access to information andmedia visibility.To find out more, visitwww.smallcapnetwork.orgor email us atinfo@smallcapnetwork.org 
Although it was a wide-ranging debate, the key topics discussed can be summarised as:1.
What drives illiquidity for SMEs?2.How important is it to have a balanced shareholder register?
Why are Placings used so often when they exclude retail investors?4.Why aren’t Open Offers used instead?5.How well is the SME market being regulated?6.Is existing regulation being enforced?7.What aren’t more institutional investors more active in the SME space?8.What can I do post-placing to diversify my shareholder register?9.What actions can management take to increase access for retail investors?10.Should I consider commissioning independent research?11.How does London compare with overseas SME markets?12.What role do the NOMADS play?13.What role do the Market Makers play?14.What are the advantages of an Order-driven vs. Quote Driven Market?15.What impact does the tax environment have on liquidity?16.Concluding Remarks
October 6th Open Discussion Summary
The following provides a summary of the Small Cap Network’s recent ‘Escaping the LiquidityTrap’ Forum at the London Chamber of Commerce. The event was an open forum discussionincluding a panel of industry experts and an audience of small and mid cap companymanagers and market participants such as SME advisers and investors.The discussion was conducted on the basis of Chatham House rules, so anonymity has beenpreserved in respect of specific comments made by participants. However, for disseminationpurposes, we have summarised the main comments below.Given the breadth of the discussion and the number of participants, this summary has beenproduced on a best endeavours basis. As it was a lively debate between multiple participants,a number of the comments may be contradictory and – for the avoidance of doubt - the viewsexpressed below obviously reflect those of the speaker in question, rather than the Small CapNetwork as a whole.If you have any comments or disagree with any of the points made, we welcome feedback to info@smallcapnetwork.org.
6 October 2010
What drives illiquidity for SMEs?
There are serious problems in operating the primary market properly for an SME. The way a primary market is run can set up the secondary market for failure. One of the most interesting examples of the disconnection between primary and secondary markets is not actually inrelation to SMEs but was evidenced in the recent float of Ocado.
When most companies go onto the SME markets, their first concern is understandably one of raising capital. The focus with their advisers is concentrated on due diligence, preparing documentation, and deciding on valuation. Part of that should be assessing where demand meets supply but the key concern is usually to attract institutional buyers for newly issued stock, and that’s because the chosen method is invariably a placing one.
The method for primary valuation is looking at the business earnings and the prospects of that company, while obviously having an eye to what ratios are in the secondary market. However,unfortunately, the secondary market doesn’t always work that way.
Supply and demand basically make up the secondary market valuation. If you don’t have aneye to where supply and demand is coming from, then actually it’s not a great help in pricing the new issue in the first place or, in fact, designing the placing. The secondary market hasvery different dynamics for valuation and advisers can seriously misjudge that process.
Participation in primary market activity is currently restricted almost entirely to institutional investors. Placings are built around a discretionary environment, either an institutional decisionor a discretionary broker decision; they’re not actually designed for marketing stock to privateinvestors.
Often a company goes in for its new issue, the launch takes place, trading opens and thecapital structure, post placing, is so thin that there’s very little turnover, institutions are locked in – the ‘lobster pot’ syndrome.
If there’s no turnover, the secondary market participants will lose interest. Any small movements can impact on the price because the Market Maker wouldn’t risk actually holding a position overnight - why commit his capital if there’s no turnover? 
How important is it to have a balanced shareholder register?
It’s very important to target a balance of personal investors and institutions from the outset.
Companies should think creatively as to where the constituents of supply and demand aregoing to come from once the market is opened up and they should concentrate the minds of their corporate adviser upon those market dynamics.
 A balance is important so that the turnover from personal investors, at least every month,should allow a moderate institution to be able to deal in a stock during that period - that’s about the right kind of balance to aim for.
6 October 2010

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