Smaller quoted UK companies say equity markets do not not fairly value their businesses, convincing many of them to the virtues of taking the private equity route to financing, says a survey by accountants and business advisors,BDO Stoy Hayward.

The firm’s Public-to-Private survey of 86 firms, carried out between September and October this year, explores the views of smaller quoted companies with a market cap of up to £250 million as well as private equity investors and institutional fund managers.

The survey comes at a time when stock markets for smaller firms such as London’s Alternative Investment Market, which boomed earlier in the decade, partly as a result of an influx of foreign-based firms looking to raise capital, have languished amid the financial crisis. Markets such as AIM have been criticised at times for having a large chunk of firms that trade scarcely and have low liquidity.

However, private equity buyouts of firms have hit headwinds over the past 12 months as debt financing for such deals has become more expensive and difficult to sell into the market.

Among the report’s findings are that 69 per cent of small quoted firms say the stock market does not fairly value their business, notwithstanding current market conditions. Furthermore, with the benefit of hindsight, one third of the firms surveyed say they would not have led their company through a flotation.

Some 66 per cent of the companies surveyed believe that the private equity funding model is generally better than the public markets at incentivising management, and 67 per cent feel it is better at understanding smaller companies. Moreover, 49 per cent of companies said private equity would be better than the capital markets at investing for growth and acquisitions.

Additionally, 32 per cent of companies are fairly/very likely to consider a public-to-private deal within the next few years while 48 per cent of institutional shareholders expect to encourage management teams to seek private equity funding for a public-to-private deal.

Michael Cobb, Corporate Finance Partner at BDO Stoy Hayward, said: “Our survey is further evidence that a majority of smaller quoted companies are very frustrated about their place on the public markets. A significant number of directors feel that it is in their company’s best interest to explore coming off the market and obtaining private equity funding. Many institutional investors agree and are actively encouraging management teams to find them an exit.”