Schroders believes now is a “once in a generation opportunity” for investing in domestic small and mid-cap companies as it readies the launch of an investment trust targeting public and private firms in this area of the market.
Speaking during a webinar for clients, Schroders head of equities Rory Bateman said the firm was mulling an investment trust investing in a concentrated portfolio of 20 to 30 stocks of both public and private companies. It is slated to launch in Q4 of this year subject to demand.
Bateman said the fund would seek to be a cornerstone investor in companies in the £50m to £2bn market cap range looking to refinance their balance sheets as they handle the hit from the Covid-19 crisis. This, he argued, would give them the confidence to “go out there and ensure they emerged from this crisis in a stronger position”.
It comes after Schroders group chief executive Peter Harrison (pictured) wrote a note on the firm’s website urging the government to create a patient capital fund, worth between £20bn and £30bn, to support the growth ambitions of public and private companies.
Bateman said: “We don’t dispute the fact the government has done a good job in regard to the furlough schemes, VAT deferrals etc, but the issue for us is fresh, primary equity coming into these businesses is de minimis and that can’t be right because companies cannot be taking on debt in perpetuity, it has to come to an end.”
Bateman said the MSCI UK Small and Mid Cap (Smid) index had significantly underperformed its world counterpart, and the domestic sector has seen some $2bn of ouflows since the coronavirus crisis kicked off. But relative to the world index, the UK Smid market typically trades at around a 15% discount, he added.
Small and mid-caps underrepresented in equity placings
He also noted while the overall number of equity placings had increased this year to the tune of about £14bn, just £3.8bn of that total was in the Smid space.
“£3.8bn is a drop in the ocean if you think about what the government’s done in terms of supplying debt to UK plc. In the small to medium segment of the market, £100-200bn has been made available in loans for SMEs and at the upper end of the spectrum, large UK plc companies they don’t really have a problem; they’re able to issue equity, they have very strong presence in the equity markets, they have good backing from the investment banks.
“So it’s really this £50m to £2bn [space] which we feel has been significantly underrepresented in terms of new fresh equity getting into those businesses.”
He added these companies need primary equity injected into them, otherwise “we risk losing a number of our really high quality sustainable businesses”.
“It is my view that we are genuinely in unprecedented times and it sounds dramatic but it could be a once in a generation opportunity to think about UK equities,” he said.
Tim Creed, head of investments Europe at Schroder Adveq, the firm’s private equity business, argued the private equity market generally targets companies less affected by Covid-19. He added those in the £50m to £2bn bracket tend to avoid sectors like oil and gas and autos which have been hit hard by the pandemic.
He said: “The UK is one of the most experienced and established and sophisticated private equity markets in the world. It is full of a very large number of very high quality investors, a very large number of high quality private equity professionals who have proven experience through different recessions.
“We think that means that the UK private market is particularly is a particularly strong position now.”
