Since the UK voted to leave the EU on 23 June 2016 we might have expected to see a fall in management and market confidence resulting from uncertainty around Brexit negotiations, an unexpected election this year and more recent geopolitical unrest. 
However, activity in the small- and micro-cap sector has remained buoyant as management teams look to raise funds for corporate activity.
For most of the past two years, despite Brexit, fundraising at the smaller end of the market has remained strong and we see no sign currently that this is set to change. Indeed, by the end of September there had already been 30 small-cap IPOs within our target sectors this year, valued at a cumulative £4.5bn and raising close to £1bn. With over two months remaining until the year end, we are in no doubt that we will see more before the end of the year.
London is currently set to mirror global IPO activity, which in 2017 is on course to be the busiest year since 2007 with an estimated 1,600 to 1,700 flotations, collectively raising approximately £150bn.
Equity markets remain relatively buoyant with relatively low levels of volatility which means that public markets remain a viable alternative to a trade sale or private equity for management teams going through a liquidity event. There’s an opportunity to obtain sensible valuations, whether that’s to sell a business or raise funds in order to take the business forward and increase growth and profitability.
It’s encouraging that owners and managers of small- and medium-sized enterprises (SMEs) are not put off by the wider geopolitical uncertainty. Much of the current strength at this end of the IPO market can be put down to smaller companies operating in niche areas of the economy that are relatively resilient to wider economic events.
Perhaps this is because many of these companies are still growing and operate in less cyclical areas where management teams are more in control of their destiny and are less concerned by the impact on their firm of potential macro‐economic headwinds such as geopolitical risks, the winding down of monetary policy and volatility linked to the UK’s exit from the EU. These less cyclical businesses are where we focus our investments.
On the whole management teams have recognised that they cannot afford to sit on their hands until there is greater certainty around issues such as Brexit.
Large businesses may be able to afford to put off their big plans and decision‐making, but smaller businesses must continuously evolve and innovate to grow.
There are of course exceptions particularly in some consumer discretionary areas which have experienced softer trading since the Brexit vote.
Of the 21 smaller company IPOs we have reviewed this year which meet our strict operational and management criteria, we have invested in six. These included Alpha FX, Xafinity, Nexus Infrastructure, and Arena Events Group.
Alpha FX is a provider of foreign exchange hedging services to mid‐size corporates with multi-currency activities seeking to hedge their exposure. Alpha FX listed on the Alternative Investment Market (AIM) in April raising £30m at float which included some money out for the founders and new money for the company to strengthen its balance sheet and provide collateral for the hedging contracts it facilitates.
Xafinity, an actuarial and defined benefit pensions consulting firm, raised around £128m at IPO back in February. The business has plans to take advantage of strong current levels of activity as pension trustees seek advice to address historically high deficits. It is also seeking to challenge the big three actuarial players with superior technology and customer service.
Nexus Infrastructure, which specialises in providing essential engineering services to the housebuilding and commercial sectors is made up of two companies: Tamdown which provides specialist infrastructure services including earthworks and substructures; and
TriConnex, which designs, installs and connects gas, fibre broadband, electricity and water networks, a business that has grown rapidly from a standing start to become the leading player in this specialist niche market. Nexus Infrastructure was admitted to AIM in July raising £35m at float.
Arena Events Group, a specialist provider of temporary physical structures to major sporting, outdoor and leisure events, including blue chip events such as The Open, and The Superbowl. The company raised around £60m at its IPO in July this year.
Market conditions are currently favourable for new issues and while the visibility of upcoming IPOs is never long, at Livingbridge we are currently evaluating a steady stream of companies which are due to come into the small-cap space over the next few months.
Ken Wotton is fund manager at Livingbridge Equity Funds. All views are his own and should not be taken as investment advice.