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.