Missing PE M&A means small cap values good, says OMAM’s Nickols

Daniel Nickols, head of UK Mid and Small Caps Desk at Old Mutual Asset Managers, believes that the relatively low level of ongoing M&A activity involving private equity handing over investments to public equity players reflects attractive valuations of publicly listed stock.

Nickols said that if private equity investors were happy to exit at current market prices for smaller companies then M&A activity would be higher.

However, this is not happening, leading to the conclusion that public equity investors such as himself therefore have the opportunity to acquire stock market listed equity at attractive valuations.

The forward price/earnings ex-loss ratio of 10.6x for the key Numis Smaller Companies index, which Nickols uses as a benchmark for his UK portfolios, compares favouribly with the 10x for the FTSE All Share, he says: forward earnings per share growth according to figures from Peel Hunt are 5% for the All Share, but more than double that, 11.8% for the Numis index.

Nickols admits that smaller company equity is subject to higher volatility and liquidity issues not faced by large cap investments.

But, he says that by reviewing both top down and bottom up factors it is possible to manage this type of risk over the longer term to the benefit of investors. He said that he did not believe that managing smaller companies from a bottom up only perspective was suitable, because it was not possible to completely ignore the market trends affected by broader macroeconomic changes.

For example, some companies in his portfolios are focused on business in the UK, which is going through a period of weak economic growth. But these companies are in niches, such as offering outsourcing services for metering gas used in households for cooking and heating purposes. Demand for such outsourcing by gas suppliers is growing strongly, despite the broader economic malaise.

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