UK video games – Heterogeneous not homogeneous

Over the past two to three years, we have seen the re-emergence of a listed small- and mid-cap games sector in the UK and Europe, with a wave of IPOs supported by a period of sustained outperformance of the industry majors against the backdrop of a healthy equity market. The more recent reversal of performance in the sector has been equally dramatic and largely indiscriminate. Mixed trading results from the industry majors reflect, in our view, the re-basement of expectations from unrealistic highs and the disruptive impact from digital distribution channels and more recurring monetisation models. The small-cap games sector mainly comprises companies with business models designed to exploit this new economic model, and trading for the most part has been robust. The dynamic nature of the market will continue to create disruption, offering opportunities and risks, but we believe that the small-cap European sector now offers exposure to a number of well-run, innovative businesses and those that execute well will generate significant value.

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