Flotation

Where next for AIM?

Mar 10 issue
 

Although the Alternative Investment Market has shown itself to be a great springboard for hugely successful companies over the years, concerns are mounting that the exchange has lost its way by deserting growth companies and disappointing investors.

From its foundation in 1995 to the present day, AIM has seen a remarkable boom followed by an equally remarkable slump. AIM’s total market cap, number of admissions and companies listed, IPO funds raised and secondary fundraising all peaked in 2006 or 2007 at levels that many would never have anticipated at the market’s birth. But since then the decline has been painfully sharp (see charts on page 30).

To gauge the mood of the market and its future prospects, the AIM in Review 2010 report from our sister title Growth Company Investor conducted in-depth surveys and statistical analysis among CEOs, investors and advisers. The consensus is that, although conditions are likely to improve for companies seeking money on AIM, the market still has its problems, which, combined with external forces, have contributed to its recent decline.

The first of these, and the most important for the entrepreneur, is that it’s just too hard to raise money. Initial public offerings (IPOs) of trading businesses have slowed to a trickle – the two largest IPOs on the market last year were for investment funds. Secondary fundraisings have held up better but they are still less than half what they were at their peak.

Numbers game

Bob Morton is chairman of AIM-listed RSM Tenon Group. The up-and-coming accountancy firm recently raised £40 million on the market, but that doesn’t make Morton any less sceptical about fundraising prospects in general.

‘I don’t think one would be very optimistic at all [for 2010],’ he says. ‘All right, we just raised money for Tenon, but that was on the promise of moving up to the Full List.’

He’s equally downbeat on IPO prospects: ‘Quite frankly, I wouldn’t bother to float a company on AIM this year because at the moment valuations are so low. We’re talking about price-to-earnings ratios of five to seven, and who would want to give away equity at that price? It’s better to stay independent.’

Bob Holt, chairman of support services business Mears Group, which recently left AIM to join the Main Market, agrees that now is not the time to float: ‘I probably wouldn’t float a private company this year, whether on AIM or any other market. I would look for the market to be more favourable than it is today.’

David Alexander, executive chairman of AIM-listed security systems company Eruma, joins the chorus: ‘If you need access to working capital, there are many other routes now. If you need £1 million or £4 million, you’d be better off going to private investors, or a venture capital firm.’

Cold feet

Though institutional investors hold a 50.2 per cent share of AIM, entrepreneurs lament that it’s hard to get them interested in the market. Says Morton, ‘AIM is still not the flavour of the month with institutions. A lot of them have withdrawn from AIM altogether.’

Roger Parry, executive chairman of Media Square, echoes the point: ‘Institutions seem either reluctant to invest, or in some cases even have rules to prevent them investing. There are concerns about the lack of liquidity, and people worry that, unlike in the Main Market, it is possible for AIM stocks to get manipulated: an investor can more easily achieve an outcome that is not in the interest of all shareholders.’

Three in five CEOs believe that liquidity is a problem, according to AIM in Review’s poll, and even investors who are fans of the market concede that it’s something of a party pooper. ‘The main issue [with AIM] has to be that not all of these companies are very liquid, and that means that I can’t buy and sell as freely as I would like,’ says Gervais Williams, head of UK smaller companies at Gartmore.

There are also serious issues with AIM’s market makers. When asked what single change would enhance the quality of AIM, improved market making was the most common reply from chief executives polled (see chart below), with the wide spread between bid and offer prices highlighted as a particular worry. Private investors agree: 55 per cent of those surveyed for AIM in Review say that spreads are ‘sometimes too wide’, with an additional 30 per cent complaining they are ‘always too wide’.

Hard to take

The market also appears to be poorly served by some of its advisers, with a large minority of CEOs (40 per cent) rating their nomad as average or worse. Says Morton, ‘I’d rate AIM’s advisers as poor. Without being rude, advisers are very keen to float things, earning big fees on IPOs and fundraisings, but there is not much after-service. I’m afraid that they all tend to be guilty of that.’

The consensus is that AIM’s nomads and brokers are, at best, a mixed bag. Media Square’s Parry comments, ‘There are absolutely first-rate brokers operating on AIM. But there are also some racy ones. Certainly some advisers on AIM cause eyebrows to be raised about what they’re up to.’ Nigel Snook, CEO of Education Development International, sums it up: ‘Advisers sometimes forget that they are looking at a customer rather than a fee.’

The gripes about advisers merge into another complaint, especially common among AIM’s smaller companies, that raising money and maintaining a listing on the market is simply too expensive. On average, it costs around £500,000 to float and then a company will pay roughly £100,000 a year in adviser fees, although this will depend on its size. Eruma’s Alexander calculates that at least 20 per cent of the money he raised on AIM ‘ended up going out of the door in what can only be described as non-productive investments’. For him, that includes advisers, who are ‘disproportionately expensive in relation to the value provided’.

Jumping ship

The cost of listing, depressed valuations and companies’ inability to raise money have led to an exodus from AIM. There were 161 delistings in 2007, rising to 216 in 2008 and 274 in 2009, while the number of AIM companies has tailed off from a peak of more than 1,600 during 2007 to fewer than 1,300 today (see chart, below left).

However, not everyone would agree that this is such a bad thing. For some fund managers and advisers, the glory days of AIM saw a flood of easy money wash companies onto the market that should never have joined at all. Nick Tulloch, head of corporate finance at AIM adviser Tulloch Securities, makes this point: ‘AIM gives younger and more entrepreneurial companies access to the capital markets, but this has meant that some companies have joined that should not be there, with limited liquidity and shares in public hands.’

Size matters

There are CEOs who agree that some companies’ experience of poor liquidity may have more to do with the shortcomings of those companies than the market in general. Holt of Mears opines, ‘Liquidity is one of those things you earn. It is not a right, it doesn’t automatically happen.’

Kate Bleasdale, executive vice chairman of medical recruitment business Healthcare Locums, agrees: ‘A lot of the smaller AIM companies are 60 per cent owned by the people who float them; they’re mom and pop operations.’ Poor liquidity is the natural consequence.

There is certainly little appetite among investors for small companies with a low proportion of shares in free float (see box above). Harry Nimmo at Standard Life ‘doesn’t go much below £30 million to £40 million’ in the market capitalisation of the companies he invests in, while Chris Bamberry of Scottish Widows feels that AIM companies should have ‘no less than £100 million free float’. Roger Parry of Media Square says that for companies with an implied enterprise value of less than £20 million, ‘there is a real question mark over whether you want to be public at all’.

As for the market’s regulation, two-thirds of CEOs feel it’s about right, according to the AIM in Review survey, while only 17 per cent think slashing red tape is a priority (see chart, page 29). Says Holt, ‘I believe that regulation on a market helps companies. More regulation means higher standards.’ For Jonathan Straight, CEO of recycling products company Straight plc, AIM’s regulatory standards and association with the LSE give it ‘credibility and profile’.

While attracting more institutional investment may be a cherished goal for companies, those fund managers who are fans of AIM are undaunted in their enthusiasm for the market. Nimmo, whose two largest holdings are AIM stocks, ‘can’t wait to get stuck into’ new issues when they arrive, while Williams calls it a ‘highly attractive market’ that is particularly enticing to fund managers as stockpicking can add real value.

Positive sentiment

The feeling among advisers and chief execs is that AIM is on the move again as more money becomes available for fundraisings and even IPOs. The CEO survey finds that four in five chief execs on AIM are ‘optimistic’ about their ability to raise funds this year, while 68 per cent would float a private company in 2010 if they ran one (and a few do). Tulloch of Arbuthnot says the firm has a ‘pretty good’ pipeline of IPOs, and receives ‘about five [enquiries] a week’ from overseas companies about joining AIM, while Mark Brady, head of corporate finance at Brewin Dolphin, declares, ‘Everyone seems to be dusting off IPOs that they’d mothballed, and we’re also seeing more interest from private equity companies to use AIM as an exit.’

Admittedly, this upbeat talk has yet to be manifested in hard cash, but the overriding view of AIM is that what’s gone down must come up. Says Brady, ‘I don’t think the market is broken. It could have done with a shake-out – and that is what it got.’

The point to keep in mind is that the market is essentially a place for entrepreneurs. In other words, risk takers. For Snook of Education Development International, AIM is still the best source of growth capital around: ‘If a company can demonstrate a professional relationship with the City and if it earns its spurs, then you can start to imagine raising funds in a simple and straightforward way that would be impossible anywhere else.’

The official reaction

Marcus Stuttard, Head of AIM

I was encouraged by the findings of AIM in Review 2010. Given how tough last year was, the fact that 82 per cent of CEOs are confident of raising funds on the market this year shows a remarkable level of optimism.

Like many of the advisers interviewed for the report, we’re seeing increasing evidence of an IPO pipeline building. A lot comes down to investor confidence, of course, and it’s no surprise to find that in uncertain times investors favour businesses that are already in their portfolio, compared with new ventures where they haven’t seen the business deliver or built confidence in the CEO. That explains the low level of IPOs on AIM last year, compared with robust secondary fundraising (see chart, page 30), but I’m absolutely certain that that balance will shift.

To promote liquidity and greater involvement of institutions in the market, we’ve been doing our utmost to create an investor-friendly environment on AIM. Measures we have taken include the launch of research service PSQ Analytics, making sure companies are allocated to the most appropriate trading platforms, reducing fees for market makers and holding investor roadshows.

We’ve also done a lot of lobbying about fiscal incentives, for example arguing for the inclusion of AIM shares in individual savings accounts (ISAs).

When we introduced the rule book for nomads in 2006, we did a very thorough analysis of the critical role they play. As a result of the rules, there is a greater consistency across the market in the way nomads work. Another effect of the rules is that advisers have been looking at their client list and assessing the ongoing appropriateness of their clients being on AIM. That is one reason for the uptick in cancellations we’ve seen in recent years.

There will always be a fixed cost to raising funds on a public market. Without proper due diligence and regulatory work you wouldn’t get the investor confidence that led to £5.5 billion being secured by AIM-listed companies last year. No other growth market in the world raised that amount of capital.