Why invest in SMEs?

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SMEs are the backbone of the UK economy and investors are starting to tap into this underappreciated asset class.

It’s a simple question and one that investors don’t ask enough. The SME market offers a variety of benefits, but not enough funds have the knowledge or speak the language of SMEs to tap into it. Thankfully, that’s beginning to change as more people see the value in the SME market as a channel for high-value impact investment.

The SME market employs approximately 16.8 million people in the UK (or 61% of the total workforce). As the backbone of the UK economy, SMEs offer a stable and attractive investment opportunity.

5 benefits of investing in UK SMEs

  1. Stable investment
  2. Low-risk asset class
  3. Private market
  4. Agility
  5. Support communities

1. SMEs are a stable investment

The returns on an SME investment are much easier to predict than a stock or other public market investment. SMEs generally fly under the radar of macro-economic forces that rock the big exchanges, providing long-term profit growth. In 2020, SMEs generated 52% of the estimated total turnover of UK businesses.

Some SMEs are prone to recession and circumstance, as seen during COVID-19. But because SMEs exist in every industry and sector – from manufacturing and construction to real estate and the arts – those that invest in a variety of SMEs reduce their exposure to these risks.

Generating share price growth in SMEs isn’t about waiting for a chance to exit and sell it on. Making the most of SMEs as a stable, long-term investment requires intelligent co-ownership strategies that help businesses perform better.

2. The SME market is a low-risk asset class

Compared to other types of investment, the SME asset class is very much low risk. SMEs offer a diverse yet stable investment with predictable growth, meaning there’s less risk of low or neutral expected returns. Minimum investments are rarely scandalously high and, as the backbone of the UK economy, the value of the SME market is unlikely to drop significantly.

3. Investors enjoy the benefits of operating in a private market

The diversification value private market investing has on a portfolio and SMEs are no different. Like many private markets, the SME market can assist during difficult market periods by potentially minimising total portfolio volatility. They suffer less during hard times and recover better and faster than their public market equivalents.

4. SMEs are agile and innovative

The resilience of the SME market is due to the agile makeup of successful small businesses. Big businesses must tackle inertia if they want to change, but SMEs repeatedly show the ability to adapt and thrive. Whether that’s challenger banks taking on the financial sector, or SMEs that use the latest tech to provide better customer experiences.

An agile nature also breeds efficiency. SMEs don’t like carrying big overheads and can leverage digital tools and hybrid working to keep costs down and profits up.

5. Investment in SMEs supports communities

SME investment provides a rare opportunity to combine returns with a positive impact on society. SMEs exist in every town in the UK. The livelihoods and lifestyles they support help local communities stay alive in a world of increased globalisation. It’s now possible to make sure that a home-run business that employs over 100 people doesn’t vanish when the owner decides to retire.

With the right co-ownership framework, it’s possible to expand social impact by supporting initiatives within an SME that promote social improvement. This could include:

  • Paid days for charity work
  • Organising community events
  • Sponsoring local clubs

These small actions, in addition to offering the opportunity to become employee co-owned, empowers you to help make SMEs powerful engines for social good.

SMEs are ready for investment

The SME market is an exciting yet often overlooked investment space. UK SMEs are innovative and agile. They thrive in all kinds of markets and are the beating heart of their communities. Today, you don’t have to choose between social impact and investment performance – all you need is an investment partner with a strategy that combines both.