Data from the London Stock Exchange Group PLC (LSE: LSEG) reveals that trading volumes up to October 2023 have decreased by 22% year-to-date, accompanied by a 37% reduction in the number of trades.
Securities listed on the AIM experienced a steeper decline, with their total traded values falling by 42%. This contrasts with main market-listed securities, which saw a 22% drop in total traded values.
While these figures could conclude the discussion, a deeper analysis is warranted to explore the future outlook of the market.
Recently, there’s been a noticeable uptick in activity within the small-cap secondary market.
Despite the challenging conditions that persisted from 2022 into 2023, there are emerging signs of recovery on the London Stock Exchange. A notable example is Videndum PLC (LSE: VID), which raised £125 million in a share placing in mid-November, remarkable not only for the amount but also for achieving this at just a 3% discount. This is significant in the context of the film and TV supplies company’s market position.
Great Southern Copper PLC (LSE: GSCU) managed to secure £905,000 through market tapping, albeit at a 10% discount. Similarly, CleanTech Lithium PLC (AIM: CTL, OTCQX: CTLHF) exceeded its £6 million fundraising goal by one-third, securing £8 million, though at a 15% discount.
While these are discounted offers, they inject a sense of optimism about the future of Britain’s growth companies, despite the less-than-ideal funding terms. This sentiment is bolstered by instances of premium placings, such as XP Power Ltd (LSE: XPP) raising £43.9 million at an 11% premium.
Monitoring the discounts or premiums applied to these secondary offerings is crucial, as they reflect the market’s risk appetite for a company. Larger discounts often indicate lower demand and potential equity dilution for current shareholders, which can be advantageous for bargain hunters but less so for others.
This raises questions: Are we moving past the era of steeply discounted offerings? Could this signify an end to the funding challenges for small-cap companies, especially with interest rates potentially reaching their peak? Or are we drawing premature conclusions, overlooking ongoing issues within the London Stock Exchange?
PrimaryBid, as a broker serving the retail investment community, offers a distinct insight into the demand dynamics of the junior market from the perspective of retail investors.
Retail investors, typically wealthier individuals as opposed to institutional buyers, have a more significant presence in the lower tiers of the capital markets. According to PrimaryBid, about 30% of stocks in AIM-listed companies are held by retail investors, in contrast to less than 10% in the leading index, where institutionally managed passive tracker funds dominate.
This scenario presents both opportunities and challenges. Smaller companies, lacking the backing of large tracker funds, must craft compelling narratives to attract investors, a necessity that becomes even more critical in a bear market.
Nicholas Smith, a Managing Director in the capital markets team at PrimaryBid, notes, “In capital-raising efforts, companies with a strong investor base are finding market conditions relatively favourable. However, those lacking a compelling story or attempting unconventional strategies are facing difficulties in securing deals.”
Engaging the retail market poses its own set of challenges. Retail investors have the option to bypass new placements and instead purchase shares directly from the open market to fulfil their desired investment volume.
Despite these challenges, Smith has observed an increasing trend of retail investor participation in deals throughout the year. However, he emphasizes that companies lacking a strong narrative will continue to face hurdles in attracting investment.
