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Why small is beautiful in the hunt for value

Friday, November 25, 2016 6:01
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In the hunt for real investment growth perhaps we are looking in the wrong place.
A study conducted by SyndicateRoom reveals impressive returns are to be made from early stage companies.
Now you might expect SyndicateRoom to say that. After all it runs a successful online platform that matches start-ups with financial backers.
But this is one of few pieces of research that’s actually looked at the potential payback to be made from thinking small.
The number crunchers followed 578 early-stage businesses with an average value of £3mln over a period of five years.
In the time their collective value rose from £1.8bn to just shy of £8bn. That adds up to a compound annual growth rate of 33%.
So had you invested £10,000 in 2011 you’d now be sitting on a nest egg of £45,000.
By contrast, ploughing your hard-earned cash into the shares traded on the stock exchange would have delivered a measly 5%.
The so-called growth market AIM wouldn’t have produced much more.
Logic dictates that counter-balancing growth gives a heightened risk profile.
And the SyndicateRoom analysis did look at this.
It found over the five years 90 businesses saw their valuations written down to zero – that’s 15% of the portfolio.
Now it is likely the failure rate on the LSE is lower (we don’t know because we don’t have the numbers).
Yet the tight regulation and oversight that is supposed to protect investors in the equity market didn’t help those who ploughed their dough into Mirada or Quindell. 
That’s just two from a long list of ‘busts’ seen on the market (particularly AIM) in the last five years.
My point is there are risks with any investment – and in this cohort studied by SyndicateRoom the risks don’t look excessive.
What I am not saying, however, is go out, re-mortgage the house and bet the proceeds on a bunch of beardy weirdos in Shortditch.
Making investments is all about doing the basic research. If that means getting on the phone and speaking to management directly, then so be it.
Now here’s a plug for SyndicateRoom: As it is investor rather than company-focused it is set up to help the backers by pairing the individual private investors with the professionals, who are supposed know what they are doing.
Practically, an investment isn’t allowed on the site unless it has a cornerstone investor willing to pick up at least 25% of the shares being issued.
You are relying on the lead investor to have done the requisite due diligence. Looking at the site, these ‘leads’ are high calibre entrepreneurs with track records of success, or business angel groups. 
As most of the investments are eligible for the government’s Enterprise Investment Scheme, potential losses are mitigated (partially) by the taxman.
Anyway, plug over. The company’s research was insightful on another level. 
It estimates there is around £25bn of self-directed savings that could be ploughed into smaller businesses.
That’s huge – certainly more than £1bn government pledged in the Autumn Statement to kick start investment in this vital part of economy.
And, if past performance is a reliable yardstick, this new army of business angels may be handsomely rewarded for their generosity.

Story by ProactiveInvestors


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