Judith Mackenzie says opportunities in the UK small-cap sector are the best for more than 30 years. Growing interest in IPOs and an increase in pension fund enquiries are creating the conditions for strong growth.
Judith MacKenzie, Partner and Head of Downing Fund Managers, believes the number of profitable and well-run UK small-cap firms with strong growth prospects, coupled with what she believes to be artificially low valuations, has created the most exciting investment opportunity in the space during her 30-plus-year career.
She dismisses talk of a ‘doom loop’ for UK markets and expects a ‘kicker’ within the next six to twelve months, which will trigger the next small-cap market growth phase.
Despite a challenging period in recent years, over the long term, UK small caps have provided higher returns than large caps. Analysis1 from a highly regarded Numis survey shows small caps delivered 13.9% annual returns from 31 January 1955 to 30 September 2025 compared with 11.2% for large caps.
Judith MacKenzie says her firm is seeing more small-caps making initial enquiries about coming to market through an initial public offering (IPO). In the last six months, Downing has seen nearly ten companies either intending to IPO or as part of an IPO fund raise. This is a significant increase in activity levels seen last year.
The Mansion House Accord, which encourages pension funds to channel capital specifically towards UK businesses, including growth companies and those listed on AIM, has boosted interest. Local authority pension fund enquiries have increased, and MacKenzie says Downing has seen many organisations across the UK reaching out for information and education on this area of the market for the first time in Downing’s near 40-year history.
However, she says pension funds of all types are looking to increase their allocation to the UK small-cap sector because of the growing, attractive investment opportunities it offers, and not just on account of the focus Mansion House has placed on this area of the market.
Judith MacKenzie said: “The UK small-cap growth market is an excellent place to invest, and the current conditions are probably the most favourable I have seen in my career.
Within six to twelve months, we expect the sector to see a dramatic positive transformation – and although it doesn’t need a catalyst, there are sufficient potential triggers that could spark this. That could be ISA reform, the scrapping of stamp duty on IPO’s, the government
providing certainty around pensions and look-through treatment, or reaffirming Business Relief for AIM. These are immediate levers that would boost confidence and unlock capital.
Increasingly, institutional investors are returning to the sector, and we are seeing so many pension funds currently that a few years ago were not as aware of the great opportunities to be found on AIM and the small-cap space.
We are also seeing more smaller private firms making initial enquiries about IPOs, indicating that there is growth in that market and demand as companies are seeking a UK listing. Julian Morse, CEO at leading investment bank Cavendish, says there has been an attitudinal sea change in the past year, and we agree.
Gradually, investors are switching away from the sugar rush of investing in the US and the Mag7, which are potentially hugely over-valued, and realising there is good value in the UK small-cap sector.”
Although the small-cap and AIM markets have seen more modest returns than the broader UK market in recent years, renewed policy focus and investor interest could lead to significant long-term growth potential and Downing’s track record shows significant returns can be achieved with appropriate stock selection. The Downing AIM Estate Planning Service has achieved returns of 196% since launch in 2012 against returns of 16% for the FTSE AIM All Share during that period2. For more information, go to Downing Fund Managers | UK Fund Management | Downing
