Coinciding with several AIM and smaller fully listed companies saying they are delisting due to a lack of market liquidity or the cost of listing, new research has been published showing that if the current trends continue the last FTSE Smallcap company will leave in 2028.
Although slightly tongue-in-cheek, the report from Peel Hunt was based on facts, which showed that the number of companies reduced from 160 at the end of 2018 to 114 at the end of 2023, and based on current takeover bids progressing, this will dwindle to only 100 on a proforma basis.
The declining number of companies on London's main market outside the FTSE 350 partly reflects what Peel Hunt head of research Charles Hall says is the main underlying issue for the UK markets: the scale of fund outflows, with 34 consecutive months of investors pulling money from UK equities.
He said this has resulted in management teams "questioning the rationale for being quoted".
It has also smoothed the path for more mergers and acquisitions (M&A) activity, with lower valuations making M&A attractive for acquirer, leading to boards being more likely to agree to an offer, and shareholders agreeing more readily to offers.
Peel Hunt pointed to a shift in the landscape of M&A emerging in the first quarter of 2024, with an uptick in activity and a diversification of market participation.
A total of 12 transactions have been announced, with the distribution revealing a concentrated interest in larger entities: seven within the FTSE 350, two in the FTSE Smallcap, and three on AIM.
This represents an increase in pace, with only 13 such deals in the whole of the first half last year, and in size, where out of 39 transactions in the whole of 2023, only two targeted the FTSE 350. Also two bids this year have seen multiple bidders (Wincanton and Spirent) whereas last year bids were only increased on six occasions, each time reflecting shareholder pressure.
Corporate buyers were also notably taking the lead over financial buyers so far this year, rather than private equity.
"It has been surprising to see relatively low activity from private equity, given the circa $4 trillion of dry powder currently available," said Hall, who penned the report.
"Although interest rates have peaked, the reality is that debt is still relatively expensive and higher equity tickets are required given the cost and ability to secure leverage."
He noted that fundraising for private equity has been challenging, with larger funds taking a material share of new money.
"We expect this to change as financing conditions improve, which means that private equity is likely to be a more active acquiror going forward."
The trend of declining company numbers in London sounds negative, Hall acknowledged, "but the reverse scenario can happen and can
happen quickly.
"It really needs a trigger to break the cycle," he said, suggesting that increased investment fund flow will be the "key driver".
This could come from an increased appetite for UK stocks by domestic and overseas retail investors, Hall said, while also taking the opportunity for some lobbying, saying a boost could also be triggered by a reduction to stamp duty and/or government incentives for pension funds and insurance companies to up their allocations.