UK: The AIM bounce back

Last Updated: 31 March 2014
Article by Edward Craft

Having endured some testing times since the economic crisis, Edward Craft, partner at Wedlake Bell, argues that the Alternative Investment Market (AIM) is back on form.

News that the number of SMEs admitted to trading on AIM is set to double was recently issued by investment house Close Brothers, as part of its quarterly Business Barometer.

Close Brothers' survey of 601 SMEs found that 15 per cent of those surveyed were already admitted to trading on AIM and a further 15 per cent intend to seek admission.

This finding concurs with the most recent Quoted Companies Alliance/BDO Small and Mid-Cap Sentiment Index which identified public equity to be currently the easiest method by which companies can raise capital.

It is excellent news that, after years of AIM in the doldrums, becoming admitted to trading on AIM is now generally perceived by companies to be a positive experience. The inclusion of AIM shares in ISAs and the stamp duty exemption will also both attract more investor interest. However, clearly listed status is not appropriate, or possible, for all.

The AIM market today

As at the end of February 2014 of the 1,088 companies with AIM-admitted securities, 625 have the UK as their main country of operation. These companies have a combined market capitalisation of over £49 billion. The average market capitalisation of an AIM company based in the UK is around £150 million. The sector employs approximately 1 million people. AIM companies have become an important engine for growth for the UK economy.

AIM as a transitional market

The London Stock Exchange faces a particular challenge with AIM by very reason of its structure and status as a transitional market. AIM gives an issuer a first taste of life in the equity capital markets, but without the strict requirements of an EU-regulated market. In particular, (in most cases) there is no need on AIM to issue a prospectus and the market rules are less complex than on primary markets.

A large number of the companies which thrive and grow on AIM will eventually leave it as they move to the other markets (albeit AIM can also be a feed to the London Stock Exchange's Main Market) or become the target of acquisition. At the other extreme, the smallest companies struggle with liquidity, cost of compliance and analyst coverage. Similar challenges are faced by ICAP in respect of ISDX Growth Market.

Accordingly, AIM therefore requires a supply of new issuers in order to constantly revitalise its stock range.

More on AIM:

Advantages and disadvantages of listing on AIM for SMEs

Having shares that can be easily traded unlocks doors and opportunities, most notably allowing for transferable securities for which there is a market demand to be used as consideration for transactions. However, a flotation alone does not of itself create a market or market interest in the company on a long term basis. It is for the company to write and promote its equity growth story for its life on a public market.

The greatest challenges for a company's owner/managers when considering a flotation is the loss of control that will necessarily result, most notably, that the share price performance will be subject to the vagaries of the market and the power of the voices of major investors (be those for good or otherwise, they cannot be controlled).

The outlook for AIM in 2014

The IPO is re-established as a powerful force within the UK financial markets. The early months of 2014 have evidenced a notable upturn in IPO activity involving British companies on a range of markets, including AIM. The news of new issues on all markets is currently flowing thick and fast, but is probably not going to continue at such a rate for the whole of the year. The new issue market is very seasonal, with particular windows in the spring and autumn.

The economic recovery remains delicate, but is gathering in strength. IPOs are more exposed than companies already on the market which might still be able to raise funds through secondary placings. Accordingly, if the economy sneezes, it is the IPO market that will first catch a cold.

Originally published by Growth Business.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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