By Abby Glennie

Covid-19 has created numerous challenges for companies of all sizes all over the globe. In this environment, small and mid-sized companies were the biggest casualties of the stock market sell-off, underperforming their larger peers. However, behind the headlines, we saw areas of real strength within those small and mid-sized companies. In particular, those with resilient revenue streams, nimble and adaptive business models and solid demand characteristics held up well. The UK market is not the UK economy, and even in the lower end of market capitalisation you can access interesting global growth trends. Bigger is not always better.

In recent years, video gaming has become a more dominant sector within the UK small and mid-cap markets. Through the recent market turmoil, the sector has shown great resilience with robust share-price performance. An increased desire for at-home entertainment drove a sharp acceleration in year-on-year spending on video games, confirming that revenue dynamics would remain strong.

Video gaming is a prime example of smaller businesses having strong relationships with global market leaders in their industry. The strength of these relationships was critical during the Covid-19 transition, notably around trust and the need to adapt working practices in what is a high-security industry. Businesses in this sector proved extremely adaptable; generally well-invested in technology infrastructure and quickly catered to employees working remotely. At the helm, strong management teams rapidly implemented agile working streams.

Turning to food producers, they have been equally resilient during the crisis. Normally, consumers spend around 30 per cent of their overall food and drink expenditure in restaurants and food outlets. This has not been possible during lockdown, and more food has been consumed at home. Fulfilling this increased demand has not been easy for the sector though, and once again this has been testament to the high-quality management teams who have adapted their operations in tough environments. This included supplying PPE and initiating social distancing in manufacturing facilities. They’ve also had to handle distribution challenges and adjust supply chains to capture those sources usually directed to the restaurant and fast-food industry.

Prior to Covid-19, Cranswick, a UK food producer, had significantly increased exports to China, where African swine fever decimated domestic pork supplies. Another example, Hilton Food Group operates in many regions around the world, and it was able to maintain these strong supply-chain dynamics throughout the crisis – proof of the strong relationships the company has formed over the years. These are examples of UK-listed mid-sized firms with a global reach. Once again, they show that relationships matter. The quality of service these food producers have provided their customers with through the crisis confirms their status as trusted and critical suppliers for the long term.

Lastly, we have technology. There’s more to the tech sector than the FAANGs (Facebook, Amazon, Apple, Netflix, and Alphabet). The UK market has long been a good source of technology companies, with many delivering revenue visibility through subscription models. Through Covid-19 the strength of the more service-related tech businesses was a prominent feature. Companies across all industries were vastly lacking in their readiness for a "work-at-home" situation, a move that happened more quickly than any anticipated. Companies such as Softcat and Computacenter, however, were well placed to assist this transition – not just with the delivery of critical hardware, but importantly with the advice and guidance on software and digital infrastructure. Again, this allowed each business to develop and strengthen trusted relationships.

Although a company is small, its importance should not be underestimated. For example, when the UK government held an emergency meeting, Kainos, the mid-sized software business and a specialist in digital transformation, took a seat at the table alongside the more famous FAANGs. Kainos already had a strong relationship with the Government, having digitalised many services such as MOTs and passports. It was therefore a natural supplier to which policymakers turned during the height of the crisis. In an incredibly short timeframe, Kainos produced systems to implement the furlough scheme, ensuring the UK’s workforce was able to access these essential funds.

The aforementioned small and mid-sized UK firms and sectors have shown strength and resilience in a tough environment. Many were already on solid long-term growth pathways – recent events should accelerate these journeys. Management teams have demonstrated their quality, while businesses have been adaptable and responsive in fast-moving markets. Critically, many companies have grasped these opportunities and strengthened their relationship with their existing customer bases.

So, while investors have been quick to de-rate the small- and mid-sized sectors, we think it’s important to look below the surface. When you do, you find an investment universe rich with high-quality, growing and resilient businesses.

Abby Glennie is deputy head of smaller companies at Aberdeen Standard Investments