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Escaping the small cap liquidity trap

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Escaping the small cap liquidity trap 3

By John Paul Murphy, Imprima
Increased global competition, limited investor appetite for small cap companies and a slower than forecast economic recovery means that the London small cap market risks seeing an exodus of stronger companies to other markets.  Commentators have suggested that tax breaks, a further shake-out of the weaker listed companies and a stricter admissions policy would help to strengthen the small cap sector.Escaping the small cap liquidity trap 4
Small cap companies can get frustrated by their inability to attract institutional investment and grow the value of their ventures as shares are tracked and traded.  While most people believe that the small cap sector will recover in line with the rest of the capital markets, many think that more radical action needs to be taken.  Our view is that there is plenty that small caps can do today to improve their visibility and the understanding of their proposition.
For example, many small caps fall into the liquidity trap because they are not doing enough to differentiate themselves from the competition.  Attracting investors relies on making your company stand out from the crowd.  Potential investors need to understand your proposition, what makes you different, what milestones you have reached already and where you are heading next.  What proof points do you have about your performance to date – customers, partnerships, future sales pipeline?  
It’s also important to set realistic goals, so under-promising and over-delivering is the name of the game.  It’s vital to keep on telling and updating your story – while remaining honest with yourself about what can actually be achieved.
Because nature abhors a vacuum, business planning should include a pipeline of announcements for the next 12 months, with news or communications being sent to your investor base at least once a month.  By the time you’ve factored in results announcements, road show dates, new hires, product updates and contract wins there should be more than enough to talk about.  These should be included on your website in a news section and issued via Twitter or LinkedIn in a timely and integrated way. You can also use Investor Relations Apps to keep your stakeholders up to date with information on the go via their iPhone, iPad or other mobile device.
Research undertaken by Imprima with small cap owners and investors reveals that the three most important sources of information for learning about small cap stocks are company websites, independent research and online annual reports, the latter being more popular than the hard copy format.  Other sources of information include specialist investment media, professional advisers and national media.
According to our survey, there’s a growing interest amongst small cap investors and advisers in accessing company information from their mobile devices: press releases and share prices are the most popular types of information, registering 81% and 78% respectively followed by daily company updates (52%) and investor presentations (48%).
Remote access to annual reports is also becoming increasingly important.  Small cap market participants are particularly attracted by annual reports that can deliver information in multiple formats, including video and audio.  Small cap experts were also attracted to the cost savings generated by sending out fewer hard copies.
Many small cap companies have multiple retail investors who, compared with institutional investors can be difficult to manage.  But some companies have addressed this issue in a positive and effective way simply by getting to know their retail investors and finding ways to involve them in the business.  
For example, it’s possible to establish a ‘fan club’ of retail investors who have access to experts within the company and receive relevant information about updates to products or services.  This process can include regular meetings with retail investors during which experts are made available and demonstrations carried out.  
Institutional investors are a different challenge: they are notoriously short of time and inundated by requests for investment.  As well as getting your story straight and succinct, remember that they will prefer a short, paper-based presentation rather than a complicated Powerpoint.  Another issue to bear in mind is that potential small cap investors are looking at all sorts of propositions, from mining to biotech, and from financial services to technology.  Avoid the jargon associated with your sector and describe what you do in ‘man on the street’ language that everyone can understand.
It’s tempting to rush into an AIM listing as quickly as possible in order to take value from a business that has been built up over the years.  The problem is that so many AIM-listed companies float on a high valuation then fail to keep up momentum.  Investors become disenchanted with the performance of the stock and move onto new opportunities and the company fails to build liquidity and growth in its value.  Institutional investors tend not to be interested in a company until it reaches the £100 million market cap mark, so it can be difficult to climb out of the liquidity trap.  The solution is therefore to build more value into the business before it is floated on AIM and ensure that the share price is not over-inflated.
One of the gripes that investors have about small cap companies is that some founding directors seek third party investment but are reluctant to put their own money into the business.  Another is that directors pay themselves inflated salary and benefit packages, or award themselves high numbers of shares.  A third is that they sell their shares for profit on the quiet or in a seemingly fragmented way.  All in all, investors like to see that directors are in the business for the longer-term and not just for short-term personal profit.
Your annual report is the longest and most complex communication you will have with your investors and the chance to tell the story about where you have been and where you are heading.  There are statutory facts and figures that you have to include in the report, but the best reports go beyond that to give a real flavour of the personalities behind the business, the passion that the people within the business have for their company and the ecosystem of clients and partners that will help to sustain it in the future.  Also, consider how you present your performance: the focus has been on growth but investors will be looking at other factors as well, such as risk and quality.
Finally, as a rule of thumb it takes around three years to correct a poor valuation of a company.  Be patient, set realistic milestones with a clear roadmap and points at which you can communicate news.  If genuine value exists, it will emerge in the end. 
As Warren Buffet would say: if a business does well the stock eventually follows.
 

Finance

Bank of England’s Haldane says inflation “tiger” is prowling

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Bank of England's Haldane says inflation "tiger" is prowling 5

By Andy Bruce and David Milliken

LONDON (Reuters) – Bank of England Chief Economist Andy Haldane warned on Friday that an inflationary “tiger” had woken up and could prove difficult to tame as the economy recovers from the COVID-19 pandemic, potentially requiring the BoE to take action.

In a clear break from other members of the Monetary Policy Committee (MPC) who are more relaxed about the outlook for consumer prices, Haldane called inflation a “tiger (that) has been stirred by the extraordinary events and policy actions of the past 12 months”.

“People are right to caution about the risks of central banks acting too conservatively by tightening policy prematurely,” Haldane said in a speech published online. “But, for me, the greater risk at present is of central bank complacency allowing the inflationary (big) cat out of the bag.”

Haldane’s comments prompted British government bond prices to fall to their lowest level in almost a year and sterling to rise as he warned that investors may not be adequately positioned for the risk of higher inflation or BoE rates.

“There is a tangible risk inflation proves more difficult to tame, requiring monetary policymakers to act more assertively than is currently priced into financial markets,” Haldane said.

He pointed to the BoE’s latest estimate of slack in Britain’s economy, which was much smaller and likely to be less persistent than after the 2008 financial crisis, leaving less room for the economy to grow before generating price pressures.

Haldane also cited a glut of savings built by businesses and households during the pandemic that could be unleashed in the form of higher spending, as well as the government’s extensive fiscal response to the pandemic and other factors.

Disinflationary forces could return if risks from COVID-19 or other sources proved more persistent than expected, he said.

But in Haldane’s judgement, inflation risked overshooting the BoE’s 2% target for a sustained period – in contrast to its official forecasts published early this month that showed only a very small overshoot in 2022 and early 2023.

Haldane’s comments put him at the most hawkish end among the nine members of the MPC.

Deputy Governor Dave Ramsden on Friday said risks to UK inflation were broadly balanced.

“I see inflation expectations – whatever measure you look at – well anchored,” Ramsden said following a speech given online, echoing comments from fellow deputy governor Ben Broadbent on Wednesday.

(Editing by Larry King and John Stonestreet)

 

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Bitcoin slumps 6%, heads for worst week since March

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Bitcoin slumps 6%, heads for worst week since March 6

By Ritvik Carvalho

LONDON (Reuters) – Bitcoin fell over 6% on Friday to its lowest in two weeks as a rout in global bond markets sent yields flying and sparked a sell-off in riskier assets.

The world’s biggest cryptocurrency slumped as low as $44,451 before recovering most of its losses. It was last trading down 1.2% at $46,525, on course for a drop of almost 20% this week, which would be its heaviest weekly loss since March last year.

The sell-off echoed that in equity markets, where European stocks tumbled as much as 1.5%, with concerns over lofty valuations also hammering demand. Asian stocks fell by the most in nine months.

“When flight to safety mode is on, it is the riskier investments that get pulled first,” Denis Vinokourov of London-based cryptocurrency exchange BeQuant wrote in a note.

Bitcoin has risen about 60% from the start of the year, hitting an all-time high of $58,354 this month as mainstream companies such as Tesla Inc and Mastercard Inc embraced cryptocurrencies.

Its stunning gains in recent months have led to concerns from investment banks over sky-high valuations and calls from governments and financial regulators for tighter regulation.

(Reporting by Ritvik Carvalho; additional reporting by Tom Wilson; editing by Dhara Ranasinghe, Karin Strohecker, William Maclean)

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Britain sets out blueprint to keep fintech ‘crown’ after Brexit

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Britain sets out blueprint to keep fintech 'crown' after Brexit 7

By Huw Jones

LONDON (Reuters) – Brexit, COVID-19 and overseas competition are challenging fintech’s future, and Britain should act to stay competitive for the sector, a government-backed review said on Friday.

Britain’s departure from the European Union has cut the sector’s access to the world’s biggest single market, making the UK less attractive for fintechs wanting to expand cross-border.

The review headed by Ron Kalifa, former CEO of payments fintech Worldpay, sets out a “strategy and delivery model” that includes a new billion pound start-up fund and fast-tracking work visas for hiring the best talent globally.

“It’s about underpinning financial services and our place in the world, and bringing innovation into mainstream banking,” Kalifa told Reuters.

Britain has a 10% share of the global fintech market, generating 11 billion pounds ($15.6 billion) in revenue.

“This review will make an important contribution to our plan to retain the UK’s fintech crown,” finance minister Rishi Sunak said, adding the government will respond in due course.

The review said Brexit, heavy investment in fintech by Australia, Canada and Singapore, and the need to be nimbler as COVID-19 accelerates digitalisation of finance all mean the sector’s future in Britain is not assured.

Britain increasingly needs to represent itself as a strong fintech scale-up destination as well as one for start-ups, it added.

The review recommends more flexible listing rules for fintechs to catch up with New York.

“Leaving the EU and access to the single market going away is a big deal, so the UK has to do something significant to make fintechs stay here,” said Kay Swinburne, vice chair of financial services at consultants KPMG and a contributor to the review.

The review seeks to join the dots on fintech policy across government departments and regulators, and marshal private sector efforts under a new Centre for Finance, Innovation and Technology (CFIT).

“There is no framework but bits of individual policies, and nowhere does it come together,” said Rachel Kent, a lawyer at Hogan Lovells and contributor to the review.

Britain pioneered “sandboxes” to allow fintechs to test products on real consumers under supervision, and the review says regulators should move to the next stage and set up “scale-boxes” to help fintechs navigate red tape to grow.

“It’s a question of knowing who to call when there’s a problem,” Swinburne said.

($1 = 0.7064 pounds)

(Reporting by Huw Jones; editing by Hugh Lawson and Jason Neely)

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