When AIM was launched in 1995 it was hailed as a market where small, fastgrowing companies could raise equity finance from the large pool of capital available in the London financial markets. AIM quickly established itself and it wasn't long before institutional fund managers began to view the market as a source of high-growth investment opportunities.
The evolution of AIM
Seventeen years on and AIM has progressed to become the international market of choice for fast-growing companies and is a real success story for the London Stock Exchange.
At its peak in 2007, a total of almost 1,700 companies were listed. But challenging market conditions since then have meant that there are now just over 1,100 companies. Despite this, with 90 new admissions in 2011, many exchanges around the world still look to AIM with envious eyes. In fact, there have been numerous attempts to replicate it in other territories – albeit with little success.
AIM has moved from being a domestic exchange for small, fast-growing companies to an international market dominated by resource companies and investment funds, which make up more than 60% of the market between them. This transformation has been driven largely by institutional investor appetite, with resource companies favoured in anticipation of the rapid industrialisation of China and South-East Asia.
Greater incentives for private investors
Small domestic trading companies are less favoured by institutional investors unless they have a market capitalisation of at least £25m, which is far in excess of the average capitalisation of AIM-listed entities of £14m. The Government is looking to these companies to generate the growth the economy so desperately needs, so it has introduced significantly enhanced incentives to enable private investors to fill the gap left by institutions.
Most AIM companies will qualify for these enhanced incentives provided that they have gross assets of less than £15m and employ fewer than 250 people. They will be able to raise up to £5m from Enterprise Investment Scheme (EIS) investors and Venture Capital Trusts (VCTs).
The incentives for individual investors are considerable. Tax relief of 30% is given upfront on the investment, capital gains tax liabilities can be deferred, and if the investment is crystallised at a loss then this will qualify for relief against the highest marginal rate of tax for the investor, quite often 50%. Additionally, the investment limit per individual will be raised from £500,000 to £1m provided sufficient taxable income has been earned in the year. All this depends on the investment being held for a minimum of three years, so that the investee company can benefit from stability in its shareholder base and can take a more strategic and mediumterm view of its business activities.
Will these measures help to reinvigorate the AIM IPO market? They certainly have a chance. No doubt private client brokers will look forward to offering their clients some interesting IPOs within the next few months.
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