Global Economics

AIM's Woes Could Slow Small Firm Growth


Troubles with London's Alternative Investment Market—a haven for small-cap stocks—could hamper investment and job creation by small U.K. companies

Economic recovery will need much faster growth than the 0.1 per cent quarterly expansion reported last week. To get real growth going again requires investment by small companies, which account for most of the UK's jobs. But these firms need money to invest, and the stock markets aimed at smaller companies are failing to fill the gap left by banks reluctant to lend.

The number of companies quoted on AIM, the London Stock Exchange's (LSE:LN) Alternative Investment Market, is now just 1,276 compared with more than 1,600 three years ago. More than one company a day delisted from AIM throughout last year. Accuma Group, UMP and Hallin Marine were among those which ended their days as quoted companies last week.

And despite AIM share prices soaring by 66 per cent last year, outperforming the main stock market, just 36 new companies joined AIM – the lowest annual total since the small-firms exchange was launched in 1995 and a tiny fraction of the 462 companies that joined in 2006.

Many small firms see AIM as a cost to be shed during a recession rather that a source of capital. Brian Winterflood, the founder and president of the largest market-maker in small-value companies, Winterflood Securities, says: "When they come to market they do not realise the amount of management time and responsibility involved and the nomads [nominated advisers] give them up."

Tim Ward, the chief executive of the Quoted Companies Alliance, which represents small firms and their advisers, is so concerned at the risk to listed small companies that he has written to the Chancellor, Alistair Darling, complaining of their treatment by the European Union, the Financial Services Authority and the British tax regime, which clearly favours debt over equity investment.

And if AIM is losing companies, it is also losing market share. The rival Plus Markets (PMK:LN) has been a recognised exchange since 2007 but has attracted fewer than 200 companies to list there. Plus even lists on AIM rather than its own market. However, since last September it has been allowed to trade AIM shares too and almost a third of deals in small value companies are now on Plus rather than AIM.

Plus's finance director, Nemone Wynn-Evans, plans to take more business from AIM saying: "There's no limit on ambition." But she concedes Plus has been less successful in attracting companies to list on its exchange. "We are seeing a shake-up with smaller companies coming off market," she admits. "I can understand why small companies will be looking at costs and delisting."

Companies did raise £5.5bn on AIM last year but that was just a third of 2007's total, even though major companies on the main market issued a record stream of rights issues. And £620m of that AIM total was raised by one company, Songbird Estates (SBD:LN), owner of London's Canary Wharf office complex. Songbird is now valued at more than £1bn, as is the Playtech (PYTCF) software group, and other stocks including Bankers Petroleum (BNKJF) and African Mining are close behind, provoking criticism that AIM is overlapping the main market at the expense of smaller companies.

AIM's head, Marcus Stuttard, defends his market, saying: "It's easy to underplay the £5.5bn because of the record years we had in 2006 and 2007, but no other growth market comes close to that. AIM is not just a flotations venue but a source of funding for small companies."

He denies that AIM is ignored by the LSE, whose main markets, which generate almost all its profits, are under attack. He insists it is a core component of the business and a nursery for growing companies. However, only nine of the 293 companies that left AIM last year moved up to the main market and the loss has been among the smallest firms.

"The number of companies under £5m or £10m has halved in two years," says Mr Ward. Two-thirds of AIM's companies are capitalised at less than £25m and 10 per cent are valued at below £2m. The delisting of the small firms has caused the average AIM company's valuation to double to £43m since 2006, despite share prices falling.

Mr Winterflood, who was instrumental in founding AIM's predecessor, the Unlisted Securities Market, in the early 1980s, is worried that so many companies are quitting the quoted sector and thus reducing their ability to raise equity capital. "That's where the job creation starts," he says. "And they won't get money from the banks."

The Treasury is so concerned at small companies' difficulties in raising finance that it is looking for ways to open the bond markets to these firms. Traditionally, only big companies have issued fixed-rate bonds, but with bank lending tight, ministers started a study this month of how smaller firms could follow.

The Treasury minister, Lord Myners, says: "Large corporations have had a great deal of success in accessing finance directly from credit markets with a surge in corporate bond issuances. Smaller firms, however, have not been able to similarly replace bank lending by directly tapping financial markets or non-bank financing. A more diverse funding market would clearly be an advantage to the economy, not just in economic slowdowns."

The LSE plans to extend bond trading to retail investors next month but ministers concede small-company issues would in effect be junk bonds – high-yielding, high-risk instruments. However, the cost could still be below bank borrowing rates. Ways to standardise bond terms, preferably on a European-wide basis, and the need for the bonds to be given credit ratings are being investigated by the Treasury, which also agrees that a secondary market must develop to allow investors to trade the bonds.

That market could be AIM or Plus. Yet Mr Ward is critical of the Treasury for not promoting those exchanges. "Who is looking after the markets?" he asks. "Who 'owns' them? The European Commission puts out laws, the Financial Services Authority makes regulations and the tax rules are a mishmash, but civil servants at the Treasury say it is the Department for Business's problem."

His complaints to the Chancellor concern proposed changes to the European directive on prospectuses that would give concessions to companies joining the main stock market but not AIM or Plus, and about tax rules that prevent shares on those markets being put into ISAs or Sipp pension plans.

He is also concerned that the FSA's new standard listings regime extends waivers for foreign companies to UK groups joining the main market, allowing them to offer shares without a sponsor, ignore corporate governance codes and permit takeovers without shareholders' approval. These measures all damage AIM and Plus, he says.

But there is a fear too that the continued loss of small firms from AIM while some of Britain's top 200 companies remain there will make it just another version of the main market with no alternative way for smaller businesses to be quoted. That is already making it harder for small firms to raise capital to invest in Britain's economic recovery.

Mr Stuttard is reluctant to expel big companies. "We'll always find some companies that grow and stay on AIM," he says. "They can make acquisitions more cost effectively." But Mr Ward says: "When the Quoted Companies Alliance was founded there were worries about the blurring of markets. There was no distinction between the Unlisted Securities Market and the main market. What goes around comes around." Luckily for us, Brian Winterflood – the doyen of small companies – has just become the QCA's new president.

AIM Facts

Trading began on 19 June 1995.

Only 10 companies listed on the first day of trading.

AIM was London's first new market since the Third Market opened in 1987.

The market is split into two indices, the AIM 50 Index which includes the biggest names on the junior market and the AIM 100.

It initially sought to attract young, expanding firms unable to access the main FTSE lists.

Experts hoped the market would make it easier for smaller businesses to raise capital, though some were critical of the costs.

The new bourse faced criticism from a so-called "4.2" list of infrequently traded companies, which was closed in September 1994. Under AIM rules, companies faced costs up to 20 times higher than under the old regime.

Despite this, the cost of raising capital was estimated to be an average of about £100,000 for an AIM company, compared with up to £1m for a company on the main market.

US investor Wilbur Ross accused the market of being "clearly dangerous" shortly before it was revealed that the former directors of an AIM-listed company, Langbar, had defrauded shareholders of £365m.

There are now 1,276 AIM-listed companies.

Greg Walton


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