Public equity returns as preferred source of finance for UK small and mid-caps

Public equity has returned as the top choice for finance among UK small and mid-cap companies after briefly falling out of favor toward the end of last year.

The H2 2021 survey finding was the first time in a decade that public equity had fallen from the preferred top spot, according to the biannual survey from the Quoted Companies Alliance (QCA).

The survey at the end of last year found that bank finance briefly overtook equity – being seen as both the preferred and the easiest means of accessing external finance. Now, however, public equity is back on top, with 48 percent of companies saying public equity would be their preferred choice if needed (compared with 42 percent saying bank finance). Companies also say public equity would be the easiest option, with a mean score of 6.3 out of 10, compared with a score of six for bank finance.

This is quite a contrast from the H2 2021 survey, when 52 percent cited bank finance as the preferred option for capital raising – with just 39 percent saying public equity, a low not seen in the last decade of QCA research.

The ‘sizable minority’ of companies saying they expect to seek outside finance in the coming 12 months is down from half in the H2 2021 survey – no doubt as the ‘muted outlook’ for the economy sees companies put less of a focus on growth. Still, the return of public equity is arguably one of just a few positive points in a survey that largely finds UK small and mid-caps subdued in their outlook for the coming year.

‘Our recent sentiment survey reflects the headwinds businesses expect. Although company directors are still optimistic their businesses’ performance will improve over the next 12 months, that confidence has taken a market hit in the last two surveys,’ says Tim Ward, chief executive of the QCA, in a statement accompanying the survey findings.

‘Perhaps more worryingly, the outlook for the broader economy has slipped into negative territory and it may be the case that macroeconomic impacts on businesses take longer to feed through to the performance of growth companies,’ he adds.

Ward also calls on the UK government to support smaller firms. ‘Now is precisely the time the government should avoid implementing harmful corporate governance reforms and should instead be expediting positive reforms that will make our stock markets more attractive for growth businesses. The Queen’s speech next week is an opportunity for this government to set out the right path for improvements and we hope it will deliver.’

The survey was conducted in April 2022 and the QCA points to the impact of war in Ukraine and inflation during the recent period as ‘obvious reasons to have a more muted outlook than expected’ – new challenges that came after a more optimistic time early last year when companies thought the impact of Covid-19 had been overcome.