Mercia CEO says private markets are now a key route to liquidity for companies inside and outside the golden triangle
Private markets are fulfilling an essential role in providing finance to fast growing companies during a period of heavily subdued listing activity, particularly outside the London-Cambridge-Oxford triangle, according to Mark Payton, CEO and co-founder of Mercia Asset Management.
Private markets managers, especially growth equity funds, have increasing been providing capital to the small and medium-sized companies that may have historically opted to list on the Alternative Investment Market (AIM).
He said: “Businesses have been struggling for liquidity at the lower end of the main market and on AIM, because there has been a flight of capital.”
While capital flight often occurs at the nadir of an economic cycle, the lack of liquidity has already lasted for an unusually long period. “You don’t really get long-term capital in the small cap market anymore. Most people think it will be at least six to 12 months before we’ll see the market come back,” he said.
Market dynamics
The lack of activity on public markets is preventing founders, management teams and other early investors from realising a return on their capital.
Said Payton: “Very few businesses are coming on to AIM. And those businesses already on AIM below a certain size, certainly below £50 million market cap, are struggling to attract secondary capital when they are looking to grow. It’s a very difficult market. But in private markets, growth equity capital is available for good businesses, and there are also secondaries markets.”
He noted that successive governments have said they wanted domestic businesses to remain in the UK while expanding into international markets “rather than what is going on now, which is typically being acquired by overseas companies”.
“In private markets, growth equity capital is available for good businesses.”
Mark Payton, Mercia Asset Management
However, he said that AIM has been negatively affected by the halving of inheritance tax relief on shares listed on the market, announced at the last Autumn Budget. “For AIM to come back, we need more businesses with a desire to list. That will only come if there are improvements to liquidity, regulations and the tax regime. Although not insurmountable, AIM is facing several challenges,” he said.
Private markets managers are holding on to their stakes in companies longer than in the past and no longer necessarily view an IPO as the ideal outcome.
“Some well-known businesses have been private for a very long time,” he said. “We’re ultimately trying to create value and there will be a realisation event at some point, whether that is a trade sale, an internal or external secondary, or an IPO. Private markets are fulfilling more functions than in the past.”
Outside the triangle
Payton noted that opportunities outside the so-called golden triangle are particularly suitable for private markets as they often require long-term, modest amount of investment.
“There’re many opportunities outside the triangle, and these are very suitable for private markets. There is a difference between what goes on in the triangle – especially those linked to the Universities of Oxford and Cambridge which typically have deep capital requirements – and what goes on nationally. We have the privilege of seeing many great businesses across the UK.”
While there are many businesses capable of strong growth, Payton said there are “very few providers of capital” in the regions distant from London so there are many opportunities. “You must be physically based in the regions to access those opportunities,” he said.
“Businesses outside of the triangle typically require less capital, but they also typically require a longer, more patient approach. They tend to take longer to grow.”
Mercia was founded on three platforms; deal origination, including physical locations close to investee companies; value creation, to support management’s growth aspirations; and sales and distribution.
“We look to match the right type of capital against the ever-growing number of investment prospects we are exposed to,” he added
Mark Payton is speaking at Longview Networks’ Institutional Venture & Growth Forum at the London Stock Exchange on 24 September.