This article originally appeared on LondonLovesBusiness.com on 18/09/2012
Companies are fleeing in their droves and established entrepreneurs say they wouldn’t touch it with a barge pole. What’s going on at AIM?
What’s gone wrong with AIM? You may have noticed a steady stream of firms delisting. In fact, there are nearly two exits for every newcomer.
At the time of writing, 49 companies had listed on AIM this year, while 82 companies cancelled their listing.
Is the market withering? We thought we’d investigate.
Marcus Stuttard has been head of AIM since 2009. He says the nature of a growth market like AIM means it’s subject to a constant “churn” of companies. “Some companies come with the intention of making acquisitions and acquiring other businesses. Sometimes a company will come with a view to continue its development but at some stage be acquired.
“So there is always a churn of companies joining the market.”
Companies delist for numerous reasons. For some, the company’s success means it naturally outgrows the market and graduates to the Main Market. Others may be subject to reverse takeovers and thereby returned as private companies.
But even Stuttard admits that in recent years AIM hasn’t been “topped up by quite as many companies” as before.
AIM’s modus operandi, its USP, has always been its limited regulatory structure – a point integral to keeping the “churn” of businesses fluid. And once floated, shares enjoy many tax reliefs too – including inheritance tax relief, gift relief on capital gains tax, enterprise investment scheme reliefs, reliefs for losses, for VCTs and for corporate venturing schemes.
But crucially, once afloat firms can raise further finance from their shareholders without going through the procedures enforced on those listed on its big brother, the Main Market. And in a bid to ensure the flexible ambitions of SMEs are served even further, acquisitive companies and those looking to be acquired, are subject to far fewer controls than those on the Main Market.
A SHORT HISTORY OF AIM…
In 1995 a hot new stock market was launched on the London Stock Exchange. Unlike the LSE’s Main Market, this new bourse would target smaller businesses and ambitious entrepreneurs.
It was called the Alternative Investment Market, offering, as it did, an alternative market for investors and companies. Businesses with market cap projections of under £1m could list, and so could much larger companies keen to exploit the exchange’s relaxed regulatory environment.
This was the beginning of the glorious good times. After the recession of the early nineties the UK was on the brink of an unprecedented technology and property boom – what better time to offer mid-sized companies a chance to float on a shiny new exchange?
So what’s gone wrong? If it’s so easy why aren’t more firms listing?
In 1995, the same year LSE launched AIM, a 24-year-old Al Gosling launched The Extreme Sports Company (ask your kids for details). For those of you not parents to teenagers, or adrenaline junkies, Extreme is a “gnarly” brand that typifies the extreme sport culture that quite literally took off (buildings, bridges, cliffs etc.) in the nineties and noughties.
In 1997, with the sportswear brand growing fast and Gosling preparing to launch the Extreme Sports Channel, he considered an IPO on AIM.
“It was too expensive,” says Gosling matter-of-factly. “We needed to do so much PR and the quotes we received were in excess of £400,000 – and we just weren’t in that league. It was too expensive and too bureaucratic.”
Indeed, analysts predict that floating on AIM can cost anywhere between £400,000 and £1m – and that for companies with a projected market cap of lower than £25m it’s probably not worth their while.
Gosling looked to private equity instead and raised 25 million euros. Now the Extreme Sports Channel is broadcast into 48 million homes around the world. So would he consider listing now the company is in the AIM league?
“No. I haven’t spoken to anybody about it for years, it’s just lost the boil – it’s not something that entrepreneurs think of anymore.”
Gosling is not alone isn’t alone in his views. Denys Shortt runs DCS Europe, a pharmaceuticals distribution company with annual sales of £128m. He started his business in in the early nineties too, and has since accumulated sales of more than £1bn.
Would he list on AIM? “I would not dream of listing on AIM”, he says. “Aim was sexy, but I’m not sure entrepreneurs nowadays want to lose control in that way. The current climate is one of restrain.”
Shortt plans to raise capital through bank funding instead, preferring not to have the “headache” of shareholders to answer to.
Unlike Shortt, Hiro Harjani , founder of the fashion brand The Aftershock Group, did want to list on AIM and went so far as to find a shell company that would take the shares.
But it’s the same story, he says: “The whole process was too expensive and too bureaucratic, with too many fees from brokers and market men. There were too many compliance issues, it’s not worth it for small companies looking for a break.”
So that’s why they’re not listing, but why are they delisting? Tim Watts is chairman of Pertemps Ltd and Network Group Holdings – an AIM-listed company until March this year. Unlike most businesses, Watts’ prime motive for floating wasn’t to access capital (though the 2008 IPO did raise £20m), but to help bring all unify the companies within the group, “they would then grow and one day step up to the Main Market,” says Watts.
Watts then watched the initial share price rise from 26p to 42p. So far, so good. Until it started dropping. “Our broker blamed it on poor liquidity, and because I already held over 30% I couldn’t but any more shares”.
When the share price dropped to 17p, the board called a halt and the listing was cancelled. “The AIM market just doesn’t have the proper structure to maintain itself,” insists Watts. “It suffers from a shortage of fund – it’s a Catch 22 situation.”
Stuttard rejects these claims and argues that the market is still liquid. As for the size of companies listing, while the current mean-average market cap of an AIM-listed firm might be £53m, the median is still £25m – “So AIM is absolutely true to its original goal of being a smaller companies market.”
That maybe the goal, but the reality is that in 2010, companies with a market cap of less than £25m made up 62.5% of the market. This year they make up 56.4%. 2010 was a somewhat of a golden year for raising finance too, with £7bn made. So far this year just £2bn has been raised.
At first Stuttard struggles to explain this when I point out the fluctuation. Eventually he points to the economic climate and argues that in 2010, many companies were looking to raise further finance to pay down debt and repair balance sheets, and that two years ago bank finance was even harder to acquire than it is now.
As for the criticisms surrounding the cost of floating, Stuttard argues you simply can’t just look “at an IPO in isolation”. In fact, the team of professionals (nominated advisors, aka Nomads, and PRs), and the commercial and financial due diligence that puts so many businesses off, Stuttard argues have invaluable long term benefits.
A company has a more visible and professional profile and can often win more business as a result. Many companies, once public are able to negotiate better bank financing too. But he insists it’s as a means to raising finance that an AIM IPO is still comes out on top: “Plenty of companies have been able to raise further finance, at relatively short notice, and without much cost. They’re raising equity often at 2.5-3%. Now, show me any other forms of finance that’s available at that sort of rate?”
And there are undoubtedly success stories on AIM. The online retail giant ASOS has grown into international powerhouse. Founded in 2000, one year later it listed on AIM and has remained there despite its market cap growing to a massive £1.6bn.
Then there’s Mike Goddard. He founded the estate agency, Belvoir Lettings, in 1995 (again, the same year LSE bore AIM). His company has since grown to a successful franchise business with 140 offices across the country. In 2010 Goddard began preparing to float on AIM. Like most businesses, the primary aim was to raise funds to expand further, while current shareholders were looking for an exit opportunity.
For Goddard the float was worth it. He raised £7.3m but, excluding stamp duty, the IPO still costhim around £1.1m. Today Belvoir Lettings stock is trading higher that its initial float price and activity on the shares are relatively active – for now.
Let’s just hope he proves the naysayers wrong.