After half a decade in the wilderness, the unloved corner of the UK market is finding its voice again. While the FTSE 100 has hogged the headlines on the back of Shell, AstraZeneca and the big banks, a quieter rotation is under way beneath the surface. Smaller listed companies, long ignored by global allocators and battered by domestic outflows, are once again being scrutinised by professional investors hunting for value, growth and Acquisition optionality.

The poster child for this shift is not a tech start-up or a buzzy biotech. It is a 39-year-old defence Holding Company called Cohort plc (LSE: CHRT), an AIM-listed group whose share price has more than doubled over the past two years and which now finds itself increasingly mentioned in the same breath as BAE Systems and Babcock. With a Capitalisation/">Market Capitalisation of roughly 760 million pounds, Cohort is a fraction of the size of those giants — but its growth profile, order book and exposure to NATO defence spending have made it the case study of choice for fund managers arguing that UK small-caps are about to have their moment.

This article uses Cohort as a window into the broader small-cap thesis. We look at why the FTSE Small Cap and AIM All-Share have underperformed the blue-chips for so long, what is changing in 2026, and where the risks still lie for investors tempted to wade in.

Background: UK small-caps in 2026

Five painful years

The numbers tell a brutal story. Over the five years to the end of April 2026, the FTSE 100 has delivered a total return well into double digits, helped by sterling weakness, energy and a re-rating of UK banks. The FTSE Small Cap (excluding Investment trusts) has barely kept pace with cash, while the AIM All-Share, the junior market beloved of growth investors, is still sitting roughly a third below its 2021 peak in price terms.

Several forces explain the divergence. The post-Pandemic surge in Inflation and the Bank of England's tightening cycle hit long-duration, growth-tilted small-caps disproportionately. The mini-Budget of late 2022 sent gilt yields spiralling, dragging down Equity valuations at the riskier end of the spectrum. UK domestic-facing pension funds, once the natural buyers of mid and small-caps, continued their multi-decade march into bonds and overseas equities. According to research from the Capital-markets/">Capital Markets Industry Taskforce, UK pension scheme allocations to UK equities have fallen from over 50 per cent in the late 1990s to barely 4 per cent today.

The result has been a yawning valuation gap. By early 2026, the FTSE Small Cap was trading on a forward price-to-Earnings multiple of around 11 times, against roughly 17 times for the S&Amp;P 500 and 13 times for the FTSE 100 itself. Strip out the loss-makers on AIM and the discount is starker still.

Why investors are looking again

Three catalysts are bringing Capital back to the Asset Class.

First, valuation. After such a sustained de-rating, even the most cautious analysts now describe UK small-caps as "priced for disappointment". When the bar is set this low, modest Earnings beats can produce outsized share price moves.

Second, M&Amp;A activity. 2024 and 2025 saw a wave of take-private deals, with private Equity and Overseas Trade buyers picking off UK-listed minnows at premiums of 30 to 50 per cent. Direct Line, Hargreaves Lansdown, Dechra Pharmaceuticals and Spirent Communications were the marquee names; behind them, a long tail of smaller deals signalled that strategic and financial buyers see deep value where public markets do not. According to Peel Hunt, UK Equity de-equitisation reached record levels in 2025.

Third, policy. The Treasury's continued promotion of a "British ISA" or UK-focused ISA allowance, alongside Mansion House reforms encouraging defined contribution pension schemes to allocate more to UK growth Assets, has put domestic equities back on the policy agenda. Of more immediate consequence is the long-flagged change to AIM Inheritance Tax relief, which from April 2026 will be capped rather than uncapped — qualifying AIM shares held for two years now attract 50 per cent IHT relief rather than 100 per cent. The reform initially spooked the market when announced in the 2024 Budget, but with the change now bedded in, much of the forced-selling pressure has cleared.

Case study: Cohort plc, the challenger in the cockpit

A federation of niche specialists

Cohort is not a household name, and that is partly the point. Headquartered in Reading, the group operates as a federation of six employee-led businesses spanning electronic warfare, sonar, secure communications, naval Training and crewed and uncrewed maritime systems. Subsidiaries include MASS, Chess Dynamics, MCL, EID in Portugal and ELAC Sonar in Germany.

Founded in 2006 by ex-Racal and Thales executives, Cohort has grown by bolting on small specialist defence and security businesses, leaving founders in place and using the group's listed currency to fund expansion. Revenues in the most recent financial year were around 245 million pounds, with adjusted operating profit of roughly 30 million. The order book stood at a record 631 million pounds as at the half-year results, providing visibility well into the late 2020s.

Why it is a credible challenger

Cohort is not, of course, going to displace BAE Systems, whose market cap exceeds 50 billion pounds, or Babcock, the FTSE 250 services giant. But the small-cap challenger thesis is more nuanced than head-to-head competition. Three points stand out.

First, exposure to the same secular tailwind. NATO members have committed to lifting defence spending towards 2.5 per cent and, in some cases, 3 per cent of GDP. The UK's Strategic Defence Review has reinforced the direction of travel. Cohort's electronic warfare and sonar businesses sit squarely in the procurement priorities of the Royal Navy, Bundeswehr and several other European customers.

Second, agility. Cohort can pursue programmes too small to interest the primes but too specialised for generalist engineering houses. Its EID Subsidiary, for example, supplies integrated communications systems for frigates, an area where larger groups have largely withdrawn.

Third, M&Amp;A optionality. With the primes hunting for capabilities in unmanned systems, electronic warfare and cyber, Cohort's portfolio reads like a shopping list. Whether or not a bid materialises, the strategic value of the Assets caps downside risk in a way that pure organic growth stories rarely do.

The numbers

At a share price hovering around 1,830 pence at the time of writing, Cohort trades on roughly 22 times forward Earnings — a premium to the wider small-cap market but a discount to BAE Systems and to defence peers in the United States and continental Europe. Net cash on the Balance Sheet provides headroom for further deals, and the Dividend, while modest in Yield terms at around 1.6 per cent, has grown every year for over a decade.

Brokers including Investec, Panmure Liberum and Deutsche Numis are constructive, with target prices clustering between 2,000 and 2,300 pence. Sceptics point to lumpy contract phasing, customer concentration with the Ministry of Defence and the German government, and the inevitable execution risk of integrating a string of acquisitions.

Market and economic impact

A test case for the UK growth market

Cohort matters beyond its own Shareholder register because it is exactly the kind of company that the UK listing regime is supposed to nurture. AIM was launched in 1995 as a less heavily regulated venue for ambitious growth businesses. Its critics argue it has become a graveyard of failed micro-caps; its defenders point to companies like Cohort, ASOS in its early years, Fevertree, Jet2 and Greggs as proof that the model can produce world-class businesses if given time.

The wider economic stakes are real. The London Stock Exchange has lost net listings every year since 2018, with high-profile defections to New York from Flutter, CRH and ARM. If the UK is to reverse that trend, it needs visible small-cap success stories that demonstrate the public market can fund growth, reward founders and provide an exit for venture Capital.

Liquidity: the quiet drag

For all the optimism, the structural challenge of trading UK small-caps has not gone away. Daily turnover in many AIM stocks is measured in the low hundreds of thousands of pounds. Bid-offer spreads of 1 to 3 per cent are common, and even modest institutional buying or selling can move prices by several percentage points.

This Liquidity premium is one reason the Asset Class trades at a discount, and it is also why Investment trusts, with their permanent Capital structures, are often the cleanest way for retail investors to gain exposure. Selling a fund unit is a simple market transaction; selling 50,000 shares in a 200 million pound AIM company can take days.

Investor implications

Funds and trusts to know

For investors who would rather outsource stock-picking, the UK small-cap fund universe is unusually deep. Among the most followed names:

  • Aberforth Smaller Companies Trust (ASL) — Edinburgh-based value specialist, focused on the Numis Smaller Companies index ex-Investment companies. Currently trading at a double-digit discount to net asset value.
  • BlackRock Smaller Companies Trust (BRSC) — long-tenured manager Roland Arnold runs a quality-growth portfolio with a strong long-run record.
  • Henderson Smaller Companies (HSL) — Neil Hermon has managed the trust since 2002, blending growth and value across the FTSE 250 and small-cap universe.
  • JPMorgan UK Smaller Companies (JMI) — emphasises higher-growth names with international Revenue exposure.
  • Schroder UK Mid cap (SCP) — straddles the FTSE 250 and small-cap segments, useful for investors wanting a step up the cap scale.
  • Slater Investments — Mark Slater's open-ended Slater Growth and Slater Recovery funds remain go-to Options for those favouring a PEG-ratio-driven approach inspired by his father, Jim Slater.

Many of these trusts trade on discounts of 10 to 15 per cent to NAV, providing a double layer of cheapness for investors who believe the Asset Class will re-rate.

The Numis lesson

Investors weighing the Asset Class should not lose sight of the long-run evidence. The Numis Smaller Companies index, compiled originally by Professors Elroy Dimson and Paul Marsh of London Business School and now branded as the Deutsche Numis Smaller Companies index, has tracked the bottom 10 per cent of the UK market by Capitalisation since 1955.

Over that 70-year span, smaller companies have outperformed the broader UK market by an average of around 3 per cent per year. The premium has not been smooth — there have been long periods, including most of the past decade, when small-caps lagged badly — but the cumulative compounding effect is powerful. A pound invested in 1955 in the Numis index would now be worth several multiples of a pound invested in the FTSE All-Share equivalent.

This is the academic backbone of the small-cap case. Whether or not the past decade's underperformance proves to be a generational buying opportunity will only be clear in hindsight, but history is on the bulls' side.

Risks: don't romance the minnows

Liquidity and concentration

Small-caps are Illiquid, and that Liquidity can vanish exactly when investors most want it. In stressed markets, spreads can widen to double digits, and the clearing price for a forced seller can be punishing. Many small-caps also depend on a single product, customer or end-market — Cohort's reliance on government defence budgets is a textbook example.

Key-person risk

Founder-led businesses are a feature of the small-cap landscape, and while founder commitment is often a source of edge, it is also a concentration risk. The departure, illness or simple distraction of a key executive can destabilise a small Business in ways that rarely affect a FTSE 100 incumbent.

Take-private exits at low premiums

The same M&Amp;A wave that supports the bull case also has a darker side. Several recent takeovers of UK small-caps have completed at premiums that long-term shareholders considered derisory, exploiting depressed share prices to deliver cheap deals to private Equity. Investors should be prepared for outcomes where their best ideas are bought out before reaching full value.

Regulatory and tax shifts

The April 2026 changes to AIM IHT relief have already prompted a wave of selling among estate-planning investors, and further policy changes cannot be ruled out. Capital gains tax rates for higher-rate taxpayers have risen in recent fiscal events, eroding the after-tax appeal of high-turnover small-cap strategies held outside ISAs and SIPPs.

Outlook

The macro tailwind

The single most important variable for UK small-caps over the next 12 to 24 months is the path of UK gilt yields. Smaller companies typically carry more floating-rate Debt, are more sensitive to domestic Demand and trade on lower multiples that re-rate strongly when discount rates fall.

Markets are currently pricing in further Bank of England rate cuts through 2026, with Bank Rate expected to settle in the 3.25 to 3.5 per cent range by year-end. The 10-year gilt Yield has eased back below 4 per cent. If that disinflationary picture holds, the conditions for a small-cap revival look more supportive than at any point since 2020.

The flow story

Equally important is whether domestic flows return. Pension consolidation, the long-awaited British ISA, and any further measures to nudge defined contribution schemes into UK growth Assets could materially shift the marginal buyer of small-caps. Even a modest 1 to 2 percentage point reallocation by UK pensions back into domestic equities would dwarf current small-cap Capitalisation/">Market Capitalisation in flow terms.

The Cohort coda

For Cohort itself, the outlook is tied to NATO procurement cycles, the integration of recent acquisitions and the group's ability to convert its record order book into reported Earnings. Whether the share price doubles again or attracts a bid from a larger defence prime, the company illustrates the broader thesis: well-run, niche UK businesses, listed on a market that has been left for dead, can still deliver.

Conclusion

The story of UK small-caps in 2026 is not one of overnight reinvention. The structural challenges — thin Liquidity, shrinking domestic ownership, regulatory complexity — remain real. But after five years of underperformance, valuations are undemanding, M&Amp;A is providing a floor, and policy is finally pointing in a more constructive direction.

Cohort plc encapsulates the opportunity and the risks. A specialised, profitable, growing Business in a sector with multi-year tailwinds, trading at a discount to its larger peers, with both organic and strategic upside. For investors prepared to do the work, accept the Volatility and take a multi-year view, the small-cap aisle of the UK market may once again repay the patience that the academic record suggests it deserves.