By Jean Roche, lead manager Schroder UK Mid Cap fund
Our long-held view that UK mid-cap companies are significantly undervalued has increasingly been validated, and in particular over the past year, as we have seen a succession of trade buyers and private equity firms reaching the same conclusion.
The FTSE 250 is currently trading on approximately 12 times forward earnings, well below its long-run average and at a discount to UK large caps and most developed market peers. The dividend yield on the index now exceeds that of the FTSE 100 – an unusual position that underscores how far sentiment has moved against this part of the market.
These valuations are increasingly disconnected from the underlying quality of the businesses available within the index. In general terms, balance sheets are strong, earnings have held up better than share prices suggest. Importantly, we have seen more upgrades than downgrades across our holdings so far in 2026.
The M&A bonanza
This is an opportunity that other market participants are increasingly acting on. Over the past 12 months, a number of holdings in our own portfolio have been acquired.
Just Group, the UK retirement income specialist, was bought by Brookfield Wealth Solutions at a 75% premium to its undisturbed share price. Spectris, the precision instrumentation business, attracted a bidding war before agreeing to KKR’s offer at close to a 100% premium.
More recently, Spire Healthcare has received a proposed offer at a 66% premium, and Bodycote – a specialist in heat treatment and thermal processing – received a conditional approach from Apollo at a 27% premium, although this was withdrawn.
Cumulatively, these companies accounted for more than 12% of the portfolio. This builds on the momentum of 2024, which saw bids for a number of holdings including Tyman, Britvic and Hargreaves Lansdown.
What is striking is the quality and diversity of businesses attracting bid interest. These are well-run, cash-generative businesses with strong market positions, acquired because buyers recognise that their public market valuations bear little relation to their intrinsic worth.
The FTSE 250 has always been fertile ground for this kind of activity. The index is constantly refreshed – companies enter through IPOs, promotions from the FTSE Small Cap index, demotions from the FTSE 100, and exit through promotion to the FTSE 100 or, as we are seeing now, through corporate activity.
That dynamism is one of the index’s most distinctive characteristics, and one of the reasons we have always believed it rewards active management over passive exposure.
The rewards do not accrue equally, however. Active management is particularly well placed to benefit. Concentrating the portfolio in businesses where the gap between price and intrinsic value is most extreme means that when bids arrive, the premiums can be eye-catching.
While the average premium on a bid for a UK quoted company of any size over the last 12 months has been around 35%, offers for some SCP holdings have been significantly higher as mentioned above, reflecting the attractiveness of the businesses with which we have populated the portfolio.
And, despite the recent acceleration in M&A activity, the universe of undervalued opportunities within the Mid 250 opportunity set remains substantial.
Performance enhancing bids
While bid activity can be immediately performance-enhancing, we often feel reluctant to see companies acquired, because even at such high premiums, a bid may not fully capture the long-term potential that we see in a business.
That is a reflection of just how undervalued this part of the market has become. Indeed, the valuation case for UK mid caps is as compelling as we can recall – and we believe SCP is exceptionally well placed to take advantage of it. The businesses we own are well-run, well-capitalised and, in most cases, trading at prices that we believe significantly understate their worth.
For long-term investors, starting valuation is the most powerful determinant of future returns. On that basis, we look to the future with considerable confidence.
