Small engineering companies will become increasingly rare on the stock market as fund managers move their money into sectors like software, a report out this week warns.
The report, by KPMG Corporate Finance, found a negative gap of 28% between fund managers who plan to cut investment in engineering companies this year and those planning an increase. In software and computer services, there was a positive gap of 66%.
Potential new entrants to the stock exchange are unlikely to be able to generate sufficient funds to make a listing worthwhile. And companies which are already listed may have to amalgamate to survive, according to KPMG partner Neil Austin. `Small companies in sectors like engineering have very few choices. They can merge or get taken over, or they can go private again,’ he said.
Companies which choose to stay on the stock exchange should appeal more to small investors to make up the institutional funding gap, Austin said.
`Some of the smaller listed companies are a bit unforthcoming,’ he said. `They need to reach out to small investors, for example by using websites for investor relations. And they need to be more open about events when they go wrong.’
Large companies are less likely to face a drop in funding because their shares are easier to buy and sell, the report says. In addition a series of mergers has created much larger investment funds which are more interested in the shares of the bigger companies.
But large investors are also interested in sectors with strong perceived growth prospects, such as media, e-commerce and the new techMARK index, set up to promote high-technology companies. Some engineering firms, as well as computing, telecoms and biotechnology firms are listed with techMARK. More than a third of fund managers surveyed said membership of techMARK would raise a company’s profile.
Some engineering companies said the level of interest shown by fund managers would make no difference to their own investment plans.
But KPMG’s report warns that firms may face a problem raising finance if they are not well-regarded by large investors.
And according to Sukhbinder Heer, corporate finance partner at RSM Robson Rhodes, engineering firms should also keep fund managers interested in case they eventually decide to sell up. `Some companies might look at their share price, throw up their hands and say “so be it”,’ he said. `But to attract any kind of investment interest in the future they must develop a strategy to deal with the knowledge economy.’