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Q&A: Mark Lister @ PKF

Tuesday, December 11, 2007

With UK small-caps rounding off 2007 with some uncertainty about what lies ahead for the markets in 2008, Mark Lister, a Corporate Finance Partner at business advisory firm PKF, talked to SmallCapNews.co.uk about what he expects to see.

SCN: When you speak to the leaders of small-cap companies, what do they tell you about their biggest hopes and fears for the future of their businesses?

ML: In general my clients remain fairly optimistic about the future of their businesses,
seeing opportunity for both organic growth and growth by acquisition. Subject to industry specific factors, such as commodity prices, most see continued market growth in their sector.

Undoubtedly, however, issues such as the “credit crunch” and CGT reform and the resultant impact on the share markets creates uncertainty and a fear that this will have a permanent impact on the value of their business unrelated to its trading performance and, in some cases, that a devaluing of their “paper” may restrict their acquisition strategy.

SCN: Is the current political and economic climate a positive one for these companies?

ML: There does appear to be a growing disparity between the economic climate facing businesses in their trading activities and the financial and political climate. The former, on the whole, continues to be positive with strong turnover growth and high order book levels. However, with the current US economic issues and crisis over sub prime lending in the banking sector, the latter are causing uncertainty about the impact they will have on the value of companies and their access to finance.

SCN: The removal of CGT taper relief in the Chancellor’s Pre-Budget Report attracted criticism because of its potential impact on small-caps. What problems do you think the move could cause for smaller company investment?

ML: The removal of taper relief on Capital Gains Tax will clearly have an impact on AIM as it removes one of the key differences between investing on AIM and the Main Market for individuals with the potential CGT rate moving from 10% on qualifying investments, which included AIM, to a standard 18% on all investments.

For entrepreneurs, joining AIM was a very tax efficient way of realising some of their wealth and bringing in external investors but now the attractions have lessened. There is also a concern that there will be a rush from investors to dispose of shares before the deadline of 5 April 2008. This should largely be negated by the growth in institutional investment in AIM, but it may have an ongoing impact on liquidity of lower caps.

SCN: What is your opinion on the growing strength of the PLUS market in London? How important is that market and should it be a rival to AIM?

ML: The PLUS market has undoubtedly been successful in its initial target of establishing itself as a third party trading platform for shares listed on the Full Market and AIM. Now, following receipt of Recognised Investment Exchange status, it is offering itself as an alternative to AIM as a market for listed securities. How successful this will be remains to be proven and the access to capital and ongoing share liquidity it is able to provide will be key determinants in this.

However, in a recent survey undertaken by PKF and the QCA, 12% of AIM companies expressed dissatisfaction with the market and a similar level stated that, with hindsight, they would not choose to list on AIM. The most often quoted reason for this was the burden of regulation and this may suggest that the PLUS market may prove more attractive to entrepreneurial companies.

SCN: AIM has attracted criticism in the past for the quality and readiness for public life of some of its constituent companies. What are your views on how AIM works and its value to the companies that choose to list on it?

ML: The lighter touch of regulation on AIM became a focus during the protracted bid for the London Stock exchange by NASDAQ, with a senior official of the SEC referring to the market as “like a casino”. However, this lighter touch is undoubtedly one of the reasons for AIM’s growth and, in particular, its success in attracting overseas listings.

The fundamental difference in approach on AIM is that it delegates much of the responsibility for monitoring the suitability of new entrants to the Nomads and, indeed, its approach to concerns over the quality of new entrants has been to increase the onus on the Nomads rather than increase the level of regulation on the companies themselves.

In my view this has always been one of AIM’s strengths, in that it provides access to capital to growing entrepreneurial businesses with a level of regulation which is appropriate without becoming prohibitive in cost terms.

In terms of investors it gives access to such companies which, although higher up the risk scale than a FTSE 100 Blue Chip, can often yield greater returns. Although the attraction of the market has, to some extent, been driven by favourable tax treatment the overall success of the market and the increasing level of institutional investment demonstrates the overall attraction of the proposition.

SCN: Bearing in mind the global economic turmoil that has affected UK markets this year, how optimistic do you think smaller listed companies and their investors can be about the next 12 months?

ML: I think the concern that smaller listed companies and their investors will have is whether the current turmoil represents a blip which will gradually calm down, or whether it represents the start of a sustained economic downturn.

There are already several examples of floats being pulled due to market uncertainty as we approach the winter break and we will probably get a clearer picture once the spring season opens. In short, I think companies and their investors are hesitant and uncertain rather than either optimistic or pessimistic.

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Mark Lister is partner in charge of PKF’s Leeds office and heads up the firm’s corporate finance practice in the north of England. He has over 12 years experience as a dedicated corporate finance specialist in the Yorkshire market and is particularly concerned with management advisory assignments and due diligence reviews for off-market, AIM and PLUS Markets Group transactions. His experience covers a wide range of sectors with particular focus on the food, engineering and leisure industries.

www.pkf.co.uk