HARDMAN & CO

Rapid growth potential makes small companies very attractive to fund managers, stockbrokers and professional advisers who manage funds for private investors. However, without sufficient first class research to reassure the regulatory authorities that the fund manager has conducted proper due diligence before investing, fund managers will not invest. Small quoted companies do not generate enough stockbroking commission to fund research. Less than 3% of all stockbroking commissions are generated by companies capitalised below £300m. "According to research from Thomson Financial First Call, more than half the companies quoted on NASDAQ are not covered by a single investment analyst.

And yet 76% of investors say that they are more influenced by analyst research than by annual reports or any other information source." Without adequate research: Small companies get overlooked during investment deliberations and decisions. Investors will not perceive the value in their shares. Existing shareholders will switch to shares in other companies which receive better coverage. Although stockbrokers produce research on their corporate clients, this is only circulated among their own clients and will not raise a company's profile with other fund managers or the public.

As a result, these fund managers, and other stockbrokers interested in the company, are not able to obtain the appropriate research needed for investment purposes. We are glad to see that KPMG, in its paper "Investing in SQCs", sees our kind of independent research house as a way forward for smaller companies which have seen commission-hungry stockbroking firms cutting analyst coverage. Indeed, KPMG says that "These agencies... offer SQCs the opportunity to place information about themselves in the market place, with a level of detail that analysts at securities houses could not justify producing." The relevant page of the document is available as a pdf file, reproduced with permission of KPMG Corporate Finance.