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Small caps could face problems in right issues

T Bailey fund manager Jason Britton warns that the small-cap sector could be hit by rights issues, following Royal Bank of Scotland’s decision to raise £12bn from shareholders.

Britton says other banks could follow RBS and he believes small-caps are vulnerable due to their dependency on bank financing.

He says: “Smaller companies are often dependent on bank financing for expansion and growth plans. If the ongoing problems in the credit markets prevent these companies from refinancing their funding as facilities expire, then they will probably need to turn to shareholders to provide ongoing support in the form of a rights issue. This will be bad for share prices in the smaller companies sector.”

Smaller companies have seen strong returns in the past five years but in the past 12 months the IMA smaller companies sector has struggled with the average fund falling by 18.6 per cent.

Thames River co-head of multi-manager Robert Burdett says: “I would not highlight small-caps as a particular area where there will be trouble as much will depend on balance-sheet strength.”

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