BusinessCorporate FinanceAIM – the viable alternative

AIM - the viable alternative

Over the last decade, AIM has gone from strength to strength - even luring US companies away from Nasdaq. It is the destination for bullish investors who dare to be different

Ten years ago, the creators of the Alternative Investment Market could barely have imagined London’s junior market would grow, much to the envy of foreign onlookers, into a world class equity market for fast-growing companies.

But grow it has. By the end of January 2005, 1,035 companies were listed on the market, of which 120 were international companies, compared to 1,021 just one month earlier.

Since AIM opened, almost 10 years ago to the day, more than 1,800 companies have joined, raising over £15bn collectively through a combination of new and further issues.

And what better way to celebrate its tenth anniversary than with the news that AIM outperformed every single world market for IPOs in 2004. Last year, the market accounted for 68% of all initial public offerings in Western Europe, raising a total of £4.6bn.

And according to research released by Ernst & Young at the end of May, the UK attracted the largest number of listings internationally, with AIM driving that growth.

It’s no small achievement for a market that is often scoffed at furtively by those on larger markets. But these achievements must also be considered against a backdrop of falling equity markets, the dotcom crash, difficult trading conditions and the rise and rise of private equity.

True to the UK’s roots of fostering entrepreneurs, the market was established in June 1995 by the London Stock Exchange to help startups tap into equity otherwise out of their reach. Essentially, that is what AIM is all about ð a leg up on the capital markets ladder for fast growing, acquisitive companies needing to raise funds.

AIM’s popularity can be attributed to the strength and support of the UK’s financial community, tax breaks, the diversity of industry sectors and its flexible regulatory framework, says Mat Wooton, deputy head of AIM.

Where other junior markets have languished following the dotcom crash because they were top heavy with technology companies, AIM was able to ride the rough waters thanks to its mix of industry sectors.

‘The quality of companies that we have, the diversity of individual sectors and the support and involvement of institutional investors meant it [dotcom crash] didn’t affect AIM as it did others,’ says Wooton.

AIM’s light-touch regulatory framework is another big asset. To join the junior market, a company doesn’t have to provide a trading record, obtain shareholder approval or have a minimum number of shares in public hands.

This saves companies a heap of money, not to mention the man hours that go into satisfying all the requirements of a full listing – including a three-year trading record and the offer of at least 25% of shares to the public.

This is not to say, however, that achieving an AIM listing is without its headaches and expenses. There is the due diligence and legal process to go through, which can be tortuous. But potential benefits include access to a wider pool of capital, an enhanced profile and increased credibility.

Jonathan Kemp, FD at Shed Productions, considered several options including merging with HatTrick and using venture capitalists before deciding to float on AIM, because the company wanted to grow to attract more talent but didn’t want to become laden with debt.

‘We could have all the benefits of being on AIM ð profile raising, access to money ð without the burden of debt,’ says Kemp.

The growing pool of investors supporting AIM has, in recent years, helped make it even more attractive.

Greg Aldridge, corporate finance director at Bridgewell, a City-based investment banking and securities business, says: ‘Over the last five years AIM has become extremely well recognised and accepted in the mainstream institutional investor market.

‘AIM companies can be assured of getting the same quality and quantity of investors coming to the market as the official list.’

Aldridge points to the February flotation of Adamind, an Israeli media adaptation software company. ‘If you look at the share register of Adamind, 15 to 20% of the investors were blue-chip investors. That’s a great start if you’re a company heading for a full listing,’ he says.

The introduction of stricter corporate governance rules in the US might also inadvertently have made AIM even more successful.

Aldridge suggests the new laws could even be encouraging US companies towards a UK listing over a domestic one.

‘We have started to see US-based companies looking to list on AIM rather than Nasdaq. The costs of Sarbanes-Oxley is pushing companies to AIM,’ says Aldridge. David Wilkinson, UK IPO leader at Ernst & Young, says that this is another point that the owners of AIM have used to their advantage.

‘There haven’t been many UK companies listing in the US, but we have seen US companies coming to AIM,’ says Wilkinson.

But Wilkinson suggests the junior market might not be able to continue avoiding the pressure for stricter regulation as it looks increasingly likely that the European Union will pass a law similar to that brought in by Messrs Sarbanes and Oxley.

‘While AIM is well positioned to avoid this pressure, the markets might push in that direction,’ says Wilkinson.

In the meantime, however, it is the EU prospectus directive, which will be introduced from 1 July 2005, that has really got people scratching their heads. ‘One black cloud is the prospectus directive. That does have some consequences for AIM,’ says Aldridge.

The directive requires companies to issue a prospectus for any public offer over m2.5m (£1.7m) to more than 100 private investors. This would then have to be approved by the UKLA and would have to comply with a very detailed set of disclosure requirements.

But there are ways around these requirements, as long as there’s backing from institutional shareholders. ‘Companies could instead raise funds or carry out a takeover through institutional shareholders, rather than with private investors,’ explains Aldridge. Institutional shareholders count as one investor.

The rule changes are unlikely to cause an exodus from AIM. Most companies that join the junior market have big growth plans and want to prove to the market that they go beyond what is required of them.

Kemp says had the new rules been in place before Shed floated, it wouldn’t have put them off, although it might have taken longer than the five months that lapsed between their decision to float and actually joining.

‘We are trying to be the best in the class anyway. We want our corporate governance, financial reporting and news-flow to be that of a FTSE company,’ he says.

The interest and support from institutional and private investors, the quality and mix of companies and critical mass of advisers means AIM is well placed to continue its success, but regulators aren’t about to ‘take their foot off the gas’ and capital markets can be fickle.

If AIM wishes to be as proud in 2015 as it is today, it must remain flexible. But grow it has. By the end of January 2005, 1,035 companies were listed on the market, of which 120 were international companies, compared to 1,021 just one month earlier.

Since AIM opened, almost 10 years ago to the day, more than 1,800 companies have joined, raising over £15bn collectively through a combination of new and further issues.

And what better way to celebrate its tenth anniversary than with the news that AIM outperformed every single world market for IPOs in 2004. Last year, the market accounted for 68% of all initial public offerings in Western Europe, raising a total of £4.6bn. And according to research released by Ernst & Young at the end of May, the UK attracted the largest number of listings internationally, with AIM driving that growth.

It’s no small achievement for a market that is often scoffed at furtively by those on larger markets. But these achievements must also be considered against a backdrop of falling equity markets, the dotcom crash, difficult trading conditions and the rise and rise of private equity.

True to the UK’s roots of fostering entrepreneurs, the market was established in June 1995 by the London Stock Exchange to help startups tap into equity otherwise out of their reach. Essentially, that is what AIM is all about ð a leg up on the capital markets ladder for fast growing, acquisitive companies needing to raise funds.

AIM’s popularity can be attributed to the strength and support of the UK’s financial community, tax breaks, the diversity of industry sectors and its flexible regulatory framework, says Mat Wooton, deputy head of AIM.

Where other junior markets have languished following the dotcom crash because they were top heavy with technology companies, AIM was able to ride the rough waters thanks to its mix of industry sectors.

‘The quality of companies that we have, the diversity of individual sectors and the support and involvement of institutional investors meant it [dotcom crash] didn’t affect AIM as it did others,’ says Wooton.

AIM’s light-touch regulatory framework is another big asset. To join the junior market, a company doesn’t have to provide a trading record, obtain shareholder approval or have a minimum number of shares in public hands.

This saves companies a heap of money, not to mention the man hours that go into satisfying all the requirements of a full listing ð including a three-year trading record and the offer of at least 25% of shares to the public.

This is not to say, however, that achieving an AIM listing is without its headaches and expenses. There is the due diligence and legal process to go through, which can be tortuous. But potential benefits include access to a wider pool of capital, an enhanced profile and increased credibility.

Jonathan Kemp, FD at Shed Productions, considered several options including merging with HatTrick and using venture capitalists before deciding to float on AIM, because the company wanted to grow to attract more talent but didn’t want to become laden with debt.

‘We could have all the benefits of being on AIM – profile raising, access to money – without the burden of debt,’ says Kemp.

The growing pool of investors supporting AIM has, in recent years, helped make it even more attractive. Greg Aldridge, corporate finance director at Bridgewell, a City-based investment banking and securities business, says: ‘Over the last five years AIM has become extremely well recognised and accepted in the mainstream institutional investor market.

‘AIM companies can be assured of getting the same quality and quantity of investors coming to the market as the official list.’

Aldridge points to the February flotation of Adamind, an Israeli media adaptation software company. ‘If you look at the share register of Adamind, 15 to 20% of the investors were blue-chip investors. That’s a great start if you’re a company heading for a full listing,’ he says.

The introduction of stricter corporate governance rules in the US might also inadvertently have made AIM even more successful.

Aldridge suggests the new laws could even be encouraging US companies towards a UK listing over a domestic one.

‘We have started to see US-based companies looking to list on AIM rather than Nasdaq. The costs of Sarbanes-Oxley is pushing companies to AIM,’ says Aldridge.

David Wilkinson, UK IPO leader at Ernst & Young, says that this is another point that the owners of AIM have used to their advantage. ‘There haven’t been many UK companies listing in the US, but we have seen US companies coming to AIM,’ says Wilkinson.

But Wilkinson suggests the junior market might not be able to continue avoiding the pressure for stricter regulation as it looks increasingly likely that the European Union will pass a law similar to that brought in by Messrs Sarbanes and Oxley.

‘While AIM is well positioned to avoid this pressure, the markets might push in that direction,’ says Wilkinson.

In the meantime, however, it is the EU prospectus directive, which will be introduced from 1 July 2005, that has really got people scratching their heads. ‘One black cloud is the prospectus directive. That does have some consequences for AIM,’ says Aldridge.

The directive requires companies to issue a prospectus for any public offer over m2.5m (£1.7m) to more than 100 private investors. This would then have to be approved by the UKLA and would have to comply with a very detailed set of disclosure requirements.

But there are ways around these requirements, as long as there’s backing from institutional shareholders. ‘Companies could instead raise funds or carry out a takeover through institutional shareholders, rather than with private investors,’ explains Aldridge. Institutional shareholders count as one investor.

The rule changes are unlikely to cause an exodus from AIM. Most companies that join the junior market have big growth plans and want to prove to the market that they go beyond what is required of them.

Kemp says had the new rules been in place before Shed floated, it wouldn’t have put them off, although it might have taken longer than the five months that lapsed between their decision to float and actually joining.

‘We are trying to be the best in the class anyway. We want our corporate governance, financial reporting and news-flow to be that of a FTSE company,’ he says.

The interest and support from institutional and private investors, the quality and mix of companies and critical mass of advisers means AIM is well placed to continue its success, but regulators aren’t about to ‘take their foot off the gas’ and capital markets can be fickle.

If AIM wishes to be as proud in 2015 as it is today, it must remain flexible.

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