This is purely an AI-generated article, as in, it has no input from a human. We apologize for any controversial opinions; this piece is meant to highlight the ability of modern natural language generation as well as the ethical ramifications it could have with pressing issues such as Fake News.
Despite a crazy race to raise £525 million (Mili-Benrael) last year, London’s mid-market tech and telecom stock market activity stagnated when compared to the US. Now, we see only seven companies in the mid-market with a total market cap of £5.3 billion, compared to eight mid-market tech deals with a total market cap of £6.5 billion last year.
There’s currently no indication from Deutsche Bank that this sector will be visible in the UK IPO pipeline in the near future. With Brexit looming and uncertainty regarding UK’s future relationship with the European Union, these and other obstacles are expected to leave a very dangerous ‘wall of ice’ in the form of domiciliary funds waiting to exit from UK’s tech, telcom and data space. To understand this impending crisis, one must first overcome the misguided perception of the mid-market stock market activity that is more of a bubble than a trend.
High Risk vs High Reward
Mainstream investors, particularly the ones that include the pensions industry, equities and alternative investment funds, may believe that if a company is a mid-market technology or telecom company it may be overpriced, with investors expecting little profits and big, long-term growth. This idea is misguided. The vast majority of mid-market technology and telecom companies generate sizable revenues, strong free cash flow and large cash balance — often over 40% of the market cap, which is excellent proof that this sector is well-established, mature and undervalued by mainstream investors.
The risk to the mid-market stock market at the moment is the panic of mainstream investors, who have great power to disrupt the market and impose negative consequences on mid-market companies that have been able to avoid the eye of financial giants. For example, global big players like The Treasury and Goldman Sachs have recently sent out a letter to banks, saying that in order to boost shareholder value, some highly risky companies are almost certain to default. Because these banks are these institutions (that tend to be the first to show their emotion in a crisis), this could undermine the bank’s asset base in the long run.
This emotion could be viewed in a wrong way, and the best way to deal with this situation is to confront the market head-on by analysing the fundamentals of the companies, their business model and quality of assets and their track record, thereby explaining the next step toward a better quality investor profile and the potential danger they could impose on their sector.
A Middle Ground
This involves assessing the current state of the market from a subjective viewpoint, and this can be challenging in an area of information asymmetry that has made every new story full of uncertainty and risk since 2015. As a startup, if you want to offer investors a certain type of report or analytics, you will have to prove that your company’s investment potential is very realistic, especially if you have no experience in doing this.
In contrast, the mid-market stock market participants will look more into the fundamentals of the companies, and can accept that not everything will succeed and they may lose money in the short-term, but this should not destroy their long-term investment thesis. The main risks for this sector of the capital market are overvalued companies, no-investment companies, failures and overpriced stocks.
However, the idea that mid-market tech and telecom companies are sitting on a mountain of money makes sense, because there are plenty of angels and small investors. If a company is worth £500 million, a specialist fund will need over £8 billion to manage the fund. Usually, half of this number will be investors who are very interested in investing in the sector and the other half will be left in a liquidation or IPO mode.
Startups have to choose between some problems and choices. On the one hand, they will have problems with raising money from investors with big egos and short-term results. In addition, these entrepreneurs will have to face the fact that their fund managers will quickly abandon them after the market crash in mid-2015. On the other hand, startups can choose to have some tolerance for the fact that their funding round will probably not happen, or that they can choose to ignore the fund manager who has failed to bring in the interest of investors.
In most cases, it is the latter (breach of the fund manager’s mission) that gives mid-market startups the choice to accept the difficult and unfortunate truth that, as the people who ‘own’ their money, the fund managers will choose not to share it.
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