AIM

Source: Financial Times

By Ellen Kelleher

Published: April 16 2010 15:53 | Last updated: April 16 2010 15:53

After returning an impressive 66 per cent in 2009, the Alternative Investment Market (Aim) is seeing renewed interest from private investors who are seeking the chance to make further gains – and shelter them from inheritance tax.

Companies are also returning to Aim to raise funds. A flurry of companies offered shares on Aim in the first three months of the year – ranging from Bellzone Mining, which raised £33.6m to develop an iron ore mine in Guinea, to CSF Group, which supplies data centres to Malaysian companies. In March alone, the four initial public offerings – from Emis, CSF, Sherborne and Digital Barriers – raised a total of £203m, well up on the £19m raised in February and the £14.4m in January.

Analysts say that this uptick in enthusiasm confirms that Aim is still a sought-after launch pad for companies looking to raise capital – in spite of its patchy performance of late. Aim outperformed the wider UK market by a significant margin last year, but over five years it lost 34 per cent while the FTSE 250 rose 44 per cent.

Azhic Basirov, head of capital markets with advisory firm Smith & Williamson, says: “The Aim market, as a whole, hasn’t been performing too badly, certainly compared with other stock markets around the world. Aim was one of the best-performing markets last year.”

Although the appetite for share issues remains weak elsewhere, Aim companies also raised more than £4.7bn through secondary issues last year – a 50 per cent improvement on 2008, according to financial advisers Baker Tilly.

At the same time, the size of companies listed on Aim has been increasing. Statistics from the London Stock Exchange show that, at the end of March, there were 160 companies with a market capitalisation of more than £100m, compared with only 77 at the end of 2008.

This has been partly due to some smaller companies leaving the market. Last year, 293 companies left Aim, including many towards the bottom end of the capitalisation scale. As a result, by the end of March, there were only 122 companies with a market capitalisation of less than £2m – well under half the number a year ago – and only 515 with a market capitalisation of less than £10m, compared with 806 at the end of 2008.

“The number of delistings last year was a small positive,” said Sean O’Flanagan, an investment adviser with Collins Stewart. “It was part of a self-cleansing process and the overall quality of the Aim market has improved as a result.”

Today, the average market capitalisation of a company listed on Aim is £44m compared with just £24m two years ago.

In Baker Tilly’s report on Aim, Chilton Taylor, the firm’s head of capital markets, writes: “Now that the dust has settled on 2009, one can see that Aim’s aggregate membership is undoubtedly of a higher quality than before. This can only be good news for the market. As economic stability returns, and the UK economy benefits in the post-election period, there is cautious optimism for Aim’s primary market expansion in the second-half of 2010.”

But Richard Plackett, who runs BlackRock’s UK Smaller Companies and UK Special Situations funds, says weeding out the good companies is still difficult.

“You have to look hard at the fundamentals,” he says. “We look to invest in companies with experienced managers, strong market positions, the ability to generate cash and sound balance sheets. Many Aim companies fail those tests because they are too immature.”

However, all Aim companies offer tax breaks, as they are deemed “unlisted” for tax purposes. This makes them 100 per cent exempt from inheritance tax (IHT) once held for two years, under the business property relief (BPR) rules.

Investors can therefore transfer assets into managed Aim IHT portfolios to quickly reduce the value of their taxable estates, while potentially protecting, or growing, their capital.

Aim IHT portfolio services are now offered by nearly 20 UK asset management firms, to allow investors to take advantage of the tax relief on “unlisted” securities. A portfolio run by Octopus Investments, for example, includes stakes in 25 Aim companies and requires a £30,000 minimum.

For investors, another boost was provided in the Budget last month, when chancellor Alistair Darling announced that the government will consider allowing Aim shares to be held in individual savings accounts (Isas). A possible relaxation of the rules on venture capital trusts (VCTs), now under consideration, could also make it easier for VCTs to invest in Aim shares.

Small companies listed on London’s AIM market are unable to attract investors as they shift emphasis to mid-cap and large-cap companies. With the proportion of micro-cap companies on AIM growing and number of de-listings rising, it might be the right time to look at AIM differently. In his recent article – “Small firms bail out of AIM Market” – Matthew Goodman reports that the costs might outweigh the benefits of a listing as investors shun the AIM market.

Institutional investors including pension funds, insurance companies and certain hedge funds continue to remain illiquid in these market conditions and view mid to large cap companies as safe havens as compared to small-caps. This puts further pressure on some 600 companies out of the 1,450 listed on AIM that have a market capitalization of £5 million or less. Global redemptions in open ended funds has had a near permanent effect in that many AIM supportive funds have had to close or downsize significantly e.g. RAB Capital, a well known investor in more than 400 AIM companies, faced redemptions that took its total portfolio from £8bn invested to around £2bn.

When such investors exit they cause havoc for the investee company. One particular unnamed company saw its share price dive from £4 to 80p. This shows that the overall macro economic situation and the financial crisis are shaping opportunities rather than company driven events. Today there are around 200+ companies trading below cash according to Hemscott.

Those companies with a stable share price are usually ones with better liquidity and shareholders without severe redemption issues.

AIM looks broken and this creates opportunities for investors who are prepared to view it as a private equity opportunity. The AIM market as a whole will recover but it will take time.

Source: Small Firms Bail out of AIM Market

Britain’s Alternative Investment Market (AIM) market is being severely tested this year. There have been very few flotations - only £3m was raised in the first quarter of 2009 compared to £300m in the same period of 2008; 77 companies have delisted compared to 45 in the same first quarter of last year; and the market appears to be being dominated by micro cap companies which deter general investor interest (out of 1,500 listed AIM companies there are 600 with a market value of less than £5m – a 100% increase over the last 6 months). Moreover, March 2009 represented the lowest point of AIM’s valuation with its highest point being over 9 years ago.

This all begs the questions – should and can AIM survive as a sub market of the London Stock Exchange?

Let us first look at what AIM can offer investors:

Since its launch in 1995 AIM has raised nearly £34b for over 2,900 companies; its main selling point was to allow smaller companies to float shares with a more flexible regulatory system than found on the main London market. Less regulation is also complemented with no requirements for capitalisation or number of shares issued. Furthermore, admission to AIM was and remains a relatively simple process. On the investor side, purchasers of AIM stocks benefit from significant tax advantages and are offered a choice of companies from around the world in a multitude of different sectors.

The present world is one where capitalism is now under threat from overzealous regulators now aided by politicians and policy makers eager to placate angry electorates who place blame for the present economic crisis on the financial system to include capital markets.

I write as a firm advocate of capitalism as the best way forward for wealth creation. One should remember that one can only distribute wealth (for schools, hospitals and welfare) once one has created it! Therefore capital markets are essential in bringing together providers and users of capital to expand the planet’s wealth. The AIM market remains a successful medium for capitalist endeavour. Therefore in answering my first question – Yes, it should survive.

The second question is less easy to answer:

The number of small cap companies mentioned above is a major problem. It is also a paradox for the cost of an average listing is £150,000 / year. This surely weighs against the advantages of being listed and will no doubt lead to a shake out of many of the smaller companies. Such delisting will be aided by so-called vulture funds eager to pick up viable businesses, take them off AIM and fund them via private equity cash. Obviously such funds will benefit from those AIM companies whose net cash on balance sheet is in excess of their market value! There are estimated to be more than 200 of such companies.

Another issue is that the advantage of less regulation can lead to problems for investors in that AIM has been likened to gambling. In fact, in March 2007, Roel Campos, the US securities regulator, condemned AIM as a casino by criticising the high number of new issues which liquidate each year.

Linked to this is the problem of liquidity and wide spreads. On any day up to 40% of AIM companies do not trade. Indeed liquidating large tranches of AIM stock can prove difficult for nimble investors.

The promise of addressing these issues has been given by AIM’s new Chief Executive, Marcus Stuttard, who was appointed this April and who also supports an AIM shakeout.

This appointment, and the recent rise in the value of the AIM index along with a recent renaissance of new funds being raised, gives investors hope that AIM can survive and continue as a useful lubricant for capitalist endeavour.

Source: Heading for the Exit

The writer is a former Conservative Party candidate and presently works as a Company Doctor restructuring and rescuing companies in severe financial and sales difficulties.

The AIM market has seen a dramatic change of fortune as the global financial crisis has unfolded since 2008.In the last year the AIM index dropped almost 70% and in the process wiping £50bn-£60bn of the total market cap of AIM listed companies. The Financial Times recently reported that there is now a growing move towards delisting which is a controversial issue.

It is understandable that the management teams and strategic shareholders of AIM companies are trying to optimize their businesses by cutting costs in difficult times and focusing management resource on value creation rather than regulatory issues.

Understandably the London Stock Exchange is these days busy highlighting that the rules and regulations of AIM are not particularly onerous and that there are negative consequences of delisting which should be kept in mind when evaluating the "going private" option.

Many business professionals in the City of London are preparing for a flurry of activity in taking AIM companies private. In all this there will be a major role for private equity to satisfy both management and institutional shareholders by offering to take out institutional shareholdings, offer new growth capital for the business and a new reward structure if management performs well. There is a real opportunity for new investors to acquire substantial shareholdings in attractive companies at reduced prices. Existing investors are eager to exit before companies delist and management refocuses on creating upside under a different framework.

AIM companies will increasingly spend more time with such private equity investors who are focused on the SME market and see the opportunity to consolidate and grow companies after acquiring them at significant discounts.

Link to Original Article: http://www.ft.com/AIM_Article