Equity funding no longer preferred finance choice for smaller UK firms

For the past 10 years, UK small and mid-cap companies have twice yearly told the Quoted Companies Alliance (QCA) that if they needed external financing, the public markets would be their preferred choice.

That has now changed, with the country’s smaller firms citing a preference for bank debt over an equity raise for the first time since the organization began surveying UK small and mid-cap listed companies in 2011.

Just 39 percent now say an equity raise would be their first port of call for external finance, compared with 52 percent that would choose bank debt.

The QCA says there are a number of factors potentially behind the shift. First, it speculates that very low interest rates may be making debt more attractive, but notes that this is a long-term trend ‘having been the case since the Bank of England monetary policy was eased in response to the financial crisis’.

‘It seems it is the context of pandemic recovery that has made bank financing cheaper,’ it continues in a statement accompanying the survey results. ‘Many listed companies have already been supported by public equity recently and have scaled back on debt during the pandemic if they were able to, so now may be the most advantageous time to take advantage of cheaper debt.’

With the UK economy facing a number of headwinds – including delivery driver shortages, supply-chain bottlenecks and staff shortages – in what is normally one of the busiest periods of the year, the QCA adds that its survey points to increased pessimism among small and mid-cap firms around the wider economy.

‘In line with the long-term trend, the outlook for the wider economy shows less optimism from companies compared with their view of their own business performance,’ it notes. While the QCA says companies have generally ‘remained confident in their own prospects’, sentiment there has dipped, too: the headline figure of companies’ own business outlook fell from 77.2 to 73.1 out of 100 on QCA’s optimism index.

In September, data from Link Group showed a Q2 2021 ‘dividend boom’ among companies listed on London’s AIM market. First-half dividend growth for AIM-listed companies came in at 40.7 percent after a Q2 boost when underlying dividends (which exclude one-off special dividends) soared 56.6 percent as small-cap companies paid out £265 mn ($365 mn) to shareholders, said Link at the time. The ‘rebound’ came after AIM payouts fell 40.4 percent during the first four quarters of the pandemic, it noted.