Alternative Investment Market: still bullish

AIM describes itself – with some justification — as the most successful
growth market in the world. At £90.7bn, its total market capitalisation at 31
December 2006 was higher than every other growth market, with the exception of
NASDAQ, the US equivalent.

And with 1,634 companies listed on AIM by the end of 2006, it was exceeded
only by the NASDAQ and the TSX Venture Exchange. That said, more companies
joined AIM in 2006 than any other market and initial public offerings on AIM
raised a similar amount of new capital to that raised on the whole of NASDAQ
last year.

AIM’s blistering pace in attracting new admissions and in achieving record
fund-raising levels took a major pause for breath during the first quarter of
2007 when just 54 new companies were admitted raising between them in excess of
£1.1bn – not quite the standards the market had been used to of late.

The first three months of 2007 ranks as the worst new admissions performance
in three years and while raising over £1.6bn in three months remains a
respectable result, in terms of fundraising, this first quarter recorded the
worst performance in two years.

While the numbers are far from the levels we have grown accustomed to over
the past couple of years, the doom and gloom merchants should hold fire.

Granted, this latest quarter’s slowdown appears brusque but the pipeline of
deals remains healthy with the next few weeks and months expected to deliver a
performance more in line with AIM’s usual standards. The first quarter of the
year is notorious for taking a while to warm up. January and February have
historically been quieter with most admissions completed in the pre-Christmas
rush. This year’s performance owes much to a quieter March that was affected by
the ripple effects of the Asian markets tumble earlier in the month.

Picking up

Most companies on the brink of flotation back then will have been wise to
delay admission by a few weeks. But activity levels are already looking far
busier with no apparent lasting damage having been caused by the recent hiccups
across international markets.

The view that AIM’s Q1 IPO activity was just pause for breath rather than
symptomatic of anything more serious, is perhaps demonstrated by secondary
fundraising activity which remained healthy with existing AIM companies raising
almost £1.7bn, consistent with the previous quarter and very significantly ahead
of the first quarter of 2006.

Looking ahead to 2007, AIM undoubtedly remains a credible and attractive
proposition. There are many reasons why the market has been so successful and
has continued to grow so fast. In 2006, the market attracted 462 new companies,
including 124 from overseas. They are lured by costs that are lower than
NASDAQ’s; by the active marketing of AIM to overseas businesses by the London
Stock Exchange and by its fast-track admission process.

AIM has also benefited from London’s status as a leading international
investment centre. What is more, AIM’s flexible regulatory framework has, since
the beginning, been an incentive for companies looking to float in London. This
flexibility alone was also a key factor in 31 companies transferring from the
official list to AIM during 2006.

Strong sector trends continue to shape the profile and performance of the
market. Mining and natural resource companies continue to represent the most
significant component of AIM with closed end funds fast catching up. Indeed in
early 2007, property and private equity closed end funds continued to be flavour
of choice following activity levels in 2006 when around 50% of all new issue
cash raised (£3.42bn by real estate companies and £1.67bn by equity investment
instruments) was accounted for by this group. Early 2007 saw that proportion
rise to almost 70% of new funds raised (approximately £790m). The knock-on
effect has been an increase in the size of the average AIM company – up from an
average £40m market capitalisation at the end of 2005 to £55m in 2006.

Increased competition

While there is little cause to believe that the success of the last few years
cannot be replicated in 2007 the market is not short of challenges. AIM now
faces competition from over 30 other growth exchanges in more than 25 different
countries. While this clearly did not deter 26 companies from China and seven
from India from joining AIM last year, the market failed to achieve a similar
level of success with European companies. Indeed a minority of UK companies
sought to list overseas rather than at home.

Moreover, the size threshold for EIS and VCT investment companies was reduced
in 2006 and further changes were announced in the Chancellor’s March Budget. The
changes will cause a reduction in the pool of funds available to some AIM

AIM must continue to market itself worldwide and to balance its lighter
regulatory touch and lower costs (that appeal to smaller and growth-minded
businesses) with the need to maintain and improve quality (for attracting
institutional investors and high quality advisers). The Treasury needs to play
its part too. At the very least, it needs to protect AIM’s current tax-favoured
position, crucial to attract growth companies that might otherwise look for
private equity or to overseas markets.

If AIM can continue to preserve and enhance the features that have made it a
success, growth minded businesses will continue to regard the market as an

Philip Secrett is a partner at Grant Thornton Corporate

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