Target the mid-market

For the last four years or so, large companies have been struggling with performance so investors have been taking a greater interest in companies outside of the FTSE 100 – they have found outperformance.

So says James Henderson, who has run the UK Equity Income Fund at Henderson Global Investors since January 2005. He has seen the UK mid-market sector’s changing fortunes and now thinks it is on the up.

In the 24 months to July 2, the FTSE 350 rose 21.8 per cent, beating the FTSE 100’s 18.7 per cent increase. The FTSE Small Cap rose 49 per cent, but that is not automatically a pull for investors.

“Since 2008, investors have also been wary of liquidity,” says Mr Henderson. “They have been avoiding small cap stocks and heading to the mid-market instead. Good results have attracted more investors.”

Company directors of mid-sized companies are experiencing uplift too.

Saying a firm is listed on the London Stock Exchange is a handy way to open doors, especially overseas

“There is a palpable confidence from our members in the sector, especially in manufacturing,” says Tom Thackray, senior policy adviser at the Confederation of British Industry. “Order books are fuller and investment is up. This supply-side activity brings confidence to the rest of the market.”

It would be reasonable to expect a flurry of companies hungry for funds to grow. But despite confidence on both sides, there have been relatively few new listings on the UK stock market. Additionally, the private placement market that has taken off in the United States and Germany remains grounded in the UK.

“Family-owned mid-market firms may be nervous about giving away equity on public markets or even to private equity who will only be there, taking some sort of control, for up to five years,” says Mr Thackray. “It is different for a fast-growing tech company, which probably doesn’t have the same amount of assets. Each company is different.”

However, being publicly listed is good discipline, according to Mr Henderson. “Problems within the company are likely to be spotted sooner and an IPO [initial public offering] is good publicity for those wanting to grow into new markets. Saying a firm is listed on the London Stock Exchange is a handy way to open doors, especially overseas. This can be more difficult for a privately financed company,” he says.

Will mid-market companies take advantage of market goodwill in 2014? Many of them believe the current economic climate is sustainable. “Trade missions from the UK realise the mid-market is one of the biggest challenges, but also it holds one of the biggest opportunities,” Mr Thackray concludes.