UK: Lessons To Be Learned - The State Of Aim

Last Updated: 10 August 2008

Quoted Business sought the views of four professionals working within the small cap market to gauge current sentiment – a managing director, a non-executive chairman, an investor relations specialist and a Nomad.

  1. In your experience, are investors still upbeat about Aim or have you seen a tightening of investors' belts?

    David Bramhill

    Without doubt there's been some 'belt tightening' in the last few months. However, many investors are sectorspecific and those brave enough to make investments in Aim-listed oil and mining companies have been well rewarded.

    In my opinion there are also still many Aim companies in other sectors about which to remain upbeat.

    Frank Lewis

    Generally, investors have not had a good experience on Aim, with certain exceptions. I believe there is still an appetite for natural resources, oil and gas. The change in tax law for venture capital trusts (VCTs) has also not helped. In the current economic climate, institutional investors are being very careful as they need to support their current investments, which may need secondary fundraisings.

    Azhic Basirov

    The number of new Aim issues was significantly down for the first six months of this year compared to the same period last year. New issues have been running at an average of about ten per month, but of these, nearly half are reverse transactions, and many of the rest have been introductions raising little money. The only primary new issues raising significant sums have tended to be natural resources companies, so investors are being highly selective at present.

    Tarquin Edwards

    I think we are seeing a much more cautious response from the investment community, with both institutional and retail investors being significantly more 'picky' over which stocks and sectors they will look at. Volumes have been much reduced, and the little volume there is appears to come largely from the retail investor – larger institutional investor interest looks to have been very quiet. On the new issue and secondary issue fronts, a much greater risk premium is being applied, with support veering away from those smaller companies with unproven business models and emphasis being placed on tangible sales, low-cost bases and minimal debt.

  2. Does the current economic situation offer opportunities for Aim companies?

    DB

    A difficult question. I suppose in tough times, those Aim companies with cash resources and supportive institutions can make selective acquisitions.

    FL

    The current economic climate does offer opportunities for Aim companies. It allows the successful ones to acquire or merge with the weaker ones (who should not have listed in the first place) at reasonable prices, using paper or a mixture of paper and cash, and thereby strengthen their position in the marketplace.

    AB

    Valuations for smaller companies are down significantly as a result of general investor sentiment and concerns over the economic slowdown. As a result, there is value emerging in the small companies market and there are acquisition opportunities to be grasped by well-funded companies. We're seeing a lot of interest in acquisitions or public-to-private deals, but, in many instances, implementation remains challenging because of a scarcity of debt funding.

    TE

    Yes, particularly if you are ungeared and have cash. With valuations down, I wouldn't be surprised if we see increasing consolidation across a number of sectors as well-financed companies take advantage of low valuations to acquire or merge with their less well-placed competitors. The Nomad The investor re The non-executive chairman lations specialist

  3. Are there lessons to be learned from the hiatus of the last eight months?

    DB

    An emphatic yes − make sure you're cashed up for the unforeseen. Remember Dickens' cautious accountant Mr Micawber in David Copperfield.

    FL

    There are always lessons to be learned. The main one is that there are economic cycles. Because of the benign interest rates over the last few years, people have tended to forget or ignore that there are economic cycles. Also, institutions have the 'herd instinct' − they all invest together or they shut up shop together, so timing is an important issue.

    AB

    The most striking lesson is the effect that easy and cheap credit has had on driving the bull market and the rapid reversal of this trend once the credit tap has been turned off. The regulators are already looking at this, particularly in the US, where the increasingly blurred boundaries between investment and commercial banking have made it harder for the Federal Reserve to intervene where necessary. As far as the smaller companies are concerned, the lesson has been to design and maintain a capital structure (in both debt and equity terms) which will remain resilient in a downturn.

    TE

    I would have thought there are certainly lessons to be learned, but to my mind, the bigger question is: will we learn from those lessons? History suggests not!

  4. Are there any grounds for optimism in the near term?

    DB

    Yes, of course. In any scenario a wellmanaged company will nearly always see the tough times through. If management can't remain optimistic then the investors will sense this. From my experience the best time to convey the company message is during the tough times. Investors, both retail and institutional, will remember this in the good times. I'm the managing director of an oil company, so it's not difficult for me to have grounds for optimism.

    FL

    I do not envisage a major improvement in new listings until the autumn. It would also depend on no further shocks hitting the financial and banking system. I am more optimistic about 2009.

    AB

    We need to see that the full impact of the credit crunch has taken its course before optimism returns to the market. As such, further write-offs by major financial institutions in the current and next quarters will be highly relevant to market sentiment. Some comfort can be drawn from the fact that regulators have moved decisively, although, in some cases, not quickly enough to ensure the stability of financial markets. We won't really have a clear picture until the end of the summer on whether the credit squeeze has triggered a major slowdown in the world's leading economies or whether we're through the worst.

    TE

    Who knows if we are approaching the end of the credit crunch, but I suspect that we will continue to see high street consumer nervousness for some time, as sentiment there tends to lag recovery in other spheres. Those well-run companies with a particular niche or differentiating angle to their investment proposition should be able to buck the trend.

  5. Which sectors do you think might buck the current trend?

    DB

    The natural resources sector is a must, but then, of course, I have to say that. Also, possibly property and those companies stuffed with assets. If one looks hard enough, there are a few of these to be found on Aim. Again, without being sector-specific, most well-managed companies should do well in the next upturn.

    FL

    As I mentioned earlier, I believe, with certain exceptions, that mainly the mining, oil and gas companies and companies servicing them will buck the trend. There is still an unprecedented demand for these commodities from the likes of China and India.

    AB

    Clearly, natural resources and some commodities have struck a chord with investors in recent times. There's also an associated interest in clean, renewable energy sources using proven technologies. The fast-growing emerging market economies continue to attract investor interest, but on a much more selective basis. Infrastructure projects in India are a recent example of where there's clear potential for good returns.

    TE

    The oil, gas and mining sectors have clearly bucked the trend and been popular. With the current price of oil at record highs, the alternative energy sector should benefit. I also believe that the waste management sector will grow in importance on the back of recent increases in landfill taxes and the growing success of environmental lobby groups.

  6. Where will Aim be this time next year?

    DB

    Once the feel good factor returns, corporate advisers will have companies knocking on their doors again and the bad times will be forgotten very quickly. I'm an Aim veteran, having had a hand in the flotation of two of the first ten companies on Aim. The press was scathing and many observers suggested that Aim wouldn't survive. But 13 years on, I'm not sure of the exact numbers, but we have about the same number of companies on Aim as on the Full List − what a success story. I do believe, however, that institutions are probably more selective than in the past. What must be remembered is that Aim was designed to provide a simple vehicle to enable management of smaller companies to raise capital. I believe that this has worked. Not all companies make it − as we all know to our cost. On balance I think the evolution of Aim has been excellent and that the London Stock Exchange (LSE) deserves recognition for providing the Aim platform. Well done in my opinion.

    FL

    This is not an easy question to answer, but I believe the smaller companies will list on PLUS markets. Only the stronger companies with a track record and capable management will be brought to Aim by advisers and Nomads. I believe that overseas companies will still come to list on Aim because of the prestige it offers. However, advisers will be more selective. There are still major issues because of cultural differences. The boards of these companies, as well as the non-executive directors, need to be improved. I don't believe fewer institutions will invest, but they might be more selective and focus more on the management of these companies.

    AB

    On the basis that the credit crunch has stabilised by then, the expectation should be a semblance of normality returning to the market. A year ago, we were seeing average monthly fundraisings of around £400m for new issues, compared to an average monthly figure of just under £95m so far this year. The level of activity in the market needs to increase somewhat from these low levels before normality is restored. I remain hopeful that the market will have stabilised by this time next year.

    TE

    Hard to tell, but I hope back on an upward trend. If that does not happen however, over the next six months or so, I believe we will see an increasing number of de-listings, a rise in the number of companies looking at reverse transactions and, quite possibly, a tangible and, to my mind, positive reduction in the number of companies quoted on Aim. In today's climate, smaller companies are increasingly feeling the burden and cost of being publicly quoted. The cheaper, less rigorous regime on PLUS markets is perhaps set to benefit.

  7. What's your advice for smaller listed companies in the current climate?

    DB

    It's difficult to advise smaller listed companies because, in most cases, the management are individuals who have their own way of doing things. Overall, perhaps keep the cash balances up and keep in contact with your investors.

    FL

    Focus on improving the balance sheet and liquidity, become more efficient and meet the forecast that is out in the market. Don't worry about your share price in the current market. Review your board and non-executive directors to ascertain how effective and experienced they are for the current climate.

    AB

    Companies need to weigh up the benefits of coming to the market now rather than later. There are a number of existing Aim companies raising further funds in the current climate, but the majority of new entrants are raising comparatively small amounts to avoid diluting their existing shareholders significantly. They would also be wise to look at alternative methods of funding. Banks are obviously not falling over themselves to lend, but there are other options such as private equity or Private Investment in Public Equity style funding. But, for most, it's a question of playing the waiting game until market conditions improve.

    TE

    Keep hold of your cash, make sure you are doing what you said you would do, place a high premium on communication with your shareholders and, if possible, ignore your share price.

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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