The Hardman & Co Monthly: October 2023
Feature article: Liquidity – shrinking when it’s most neededA review of liquidity in London since 2016
Summary
► Liquidity is the lifeblood of equity markets.
► Following the events at the Woodford Equity Income Fund (WEIF) in 2019, professional investors, increasingly, focus on liquidity when making investment decisions.
► However, this paper shows that liquidity declined significantly between 2016 and 2022. Our work demonstrates that, in 2016, the total value traded of trading companies listed on the London Stock Exchange (i.e., excluding investment companies and financials) was 60.6% of their average market capitalisation in that year. By 2022, that percentage had fallen to 44.3%.
► Thorough analysis shows this decline is common to the Main Market and AIM, to nine out of 11 of the market capitalisation size bands we have analysed and to nine out of 11 super sectors.
► In some respects, the impact of this decline is more significant for small and mid-cap companies. That is because institutional investors will consider how many pounds million can be easily invested, rather than the percentage traded, when deciding on investments. Thus, as percentage liquidity falls, an increasing number of smaller companies will fall below a minimum threshold.
► We have worked with Winterflood Securities, a major market participant, to reach a deeper understanding of the role of retail investors in liquidity today, via the Retail Service Provider network.
► We consider the consequences of falling liquidity and outline some suggestions to help company management teams improve liquidity in their shares.
► Finally, we briefly consider whether the proposals from the Treasury will improve liquidity.
Advanced Oncotherapy is focused on providing radiotherapy systems for cancer treatment through the use of a proton therapy technology. Co. operates in two business segments: proton therapy and healthcare related properties. The healthcare related property U.K. segment relates to Co.'s property in Folkestone, which is being marketed for sale.
Apax Global Alpha is a closed-ended investment company that invests in a diversified portfolio of private equity funds and derived investments in debt and equities. As of Dec 21 2017, Co. targeted an annualized Total Net Asset Value Return across economic cycles of 12-15%, net of fees and expenses. Co.'s investment activities are managed by Apax Guernsey Managers Limited (the Investment Manager) under a discretionary investment management agreement. The Investment Manager obtains investment advice from Apax Partners LLP (Apax Partners). Apax Partners advises on investments globally in companies across four sectors: Tech & Telco, Services, Healthcare and Consumer.
Arbuthnot Banking Group is primarily involved in banking and financial services. Co. is organized into three main operating segments: Retail banking (associate), which incorporates household cash management, personal lending and banking and insurance services; U.K. Private banking, which incorporates private banking, commercial banking and wealth management; and Group Centre, which is comprised in Co.'s Group Centre management. As of Dec 31 2016, Co.'s total assets were £1.27 billion.
H&T Group is a holding company. Through its subsidiary, Harvey & Thompson Limited, Co. is engaged in pawnbroking, gold purchasing, retail of jewellery, cheque cashing, unsecured lending and other related services.
ICG Enterprise Trust is an investment trust. Co. is a private equity investment company focused on buyouts in developed markets. Co. invests in private equity funds and also directly in private companies. As of Jan 31 2017, Co.'s total investment portfolio amounted to £594.3 million.
Pantheon International is an investment trust company. Co. invests in a diversified portfolio of private equity assets managed by third party managers across the world. Co. manages its portfolio by creating primary and secondary investments in private equity funds as well as co-investing directly in companies alongside private equity managers. Co. is engaged in the single segment of business, being an investment business. As of May 31 2017, the market value of Co.'s investment portfolio was £1,224,000,000.
Surface Transforms is a developer and manufacturer of carbon ceramic products for the brakes market. Co. is engaged in the design, manufacture and sell carbon fiber components. Co.'s products in the automotive industry are lightweight, durable and refined, providing heat dissipation and material strength. In the aerospace industry, Co.'s products provideweight reduction, improved brake performance and wear life. Co's research activities are concentrated on the ongoing identification of new products and applications for carbon fibre reinforced ceramic friction and non-friction materials.
Volta Finance is a closed-ended investment company with the objective of investing, among other asset types, in the following main asset classes: Collateralized Loan Obligation, Synthetic Corporate Credit, Cash Corporate Credit and ABS. Co. has appointed AXA Investment Managers Paris S.A., as its Alternative Investment Fund Manager to manage the investments of Co.
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