Contrarian: Why we need AIM rivals by David Stevenson
Gervais Williams is an excellent investor. Over the last few decades, in various perches at big houses, Miton?s managing director has made his investors a great deal of money.
Yet what makes Gervais really quite fascinating is that he obviously thinks big. He is interested in fixing big problems that impact all of us at the national level, and can produce nasty surprises within our investment portfolios.
In his last book, Slow Finance, Gervais nailed what I think was and is a key problem ? that we have become addicted to turnover-driven investing, chasing hot trends, and expecting far too much in terms of investment returns. In his new book, The Future Is Small, Gervais picks up many of the ideas from that first book, but makes two bold claims, one of which I think is spot on, the other more questionable.
The first claim is that, as investors, we are all far too enamoured of big business. Investment institutions have a structural bias towards mega-cap names. They are liquid to trade, easily researched by the analyst crowd, and the businesses behind them can raise money cheaply.
If we X-ray our portfolios, we will probably discover we are all far too over-exposed to a small bunch of just 500 to 1,000 businesses worldwide ? at both the bond and equity level.
Williams claims a big change is underway. In his view ? one I would endorse, with caveats ? we are now in a deleveraging world where growth will be below par and those corporate mega-tankers (to use a widely used analogy) will struggle to cope with increased volatility. One example I would point to is the giant energy majors that lease actual mega-tankers.
Outfits like Royal Dutch Shell and BP have now been proven to be far too large for their own good (read Tom Bower?s excellent The Squeeze for evidence), too lacking in flexibility to cope with lower oil prices and, frankly, unfit for purpose. Gervais points to the recent declining momentum in earnings growth across the corporate space as further evidence.
Unfortunately, Gervais argues that our fiduciary guardians within the institutional community have bet virtually every penny we have given them on the large corporates.
And even those institutions that say they invest in ?small caps? are actually investing in larger small caps that bear no relation to the ant-sized businesses he thinks will have a better chance at prospering in this new normal.
These ant-sized investment prospects may be under-researched and under-invested, but they are also more likely to be undervalued and focused on building robust double-digit annual growth.
Crucially, in a world forced to go cold turkey on its debt addiction, small businesses have a unique advantage in that they are also under-leveraged, as banks find it hard to lend to risky small businesses under current regulatory rules. The last few decades have seen an orgy of debt-based strategies in which debt funds any risky activity.
This tax incentivised structure has to be ditched, and we have to kick-start a focus on venture-orientated risk equity capital ie, as investors, we might lose money with some stakes, but hopefully we will make some handsome capital returns on the big successes.
This is a tougher investing environment than simply lending via a syndicated bond, but it is necessary and long overdue.
The second argument is more debateable. All this new focus on smaller businesses will have to happen via some marketplace or another, and Gervais nominates AIM. I have not invested in as many AIM businesses as Gervais has, but I am afraid I would not defer to his view. It has been a failure, dragged down by a long sorry list of ?event-driven? speculative start-up stocks in the tech and resources space.
When I talk to the bosses of successful ?growth? orientated mature private businesses ? the classic gazelles of the SME world ? I get the message they would rather be waterboarded than list on AIM. Cost, poor market track record, questions around liquidity, and ongoing reporting requirements all crop up in conversation.
I think we should be looking somewhere else ? online and among private, OTC market places. Outfits like Asset Match and BritDAQ are already pioneering secondary markets, and Crowdcube, Seedrs, and SyndicateRoom are fast building primary market places for the crowdfunding of businesses.
We are also seeing the rapid growth of mini bonds as a way of raising debt capital for private businesses (sometimes very risky) at reasonable rates.
Small businesses cannot afford the large contingent of financial services intermediary hangers-on that go with the AIM quote, including corporate advisers, legal firms, and the rest, just to maintain a public listing.
If, as investors, we are going to help transform UK PLC, there are better places to start than AIM.
David Stevenson is a FT columnist, editor at Portfolio Review, and consultant
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