Since its launch in 1995, AIM has become one of the City's greatest successes, but the global recession hit this market hard. As financial markets crumbled, investors withdrew from AIM and by the end of 2008 its share index value had plummeted. So what does the future hold for AIM? If, as economists are suggesting, we are seeing greater stability in financial markets, will AIM rebuild itself as the place to be for growing companies looking to raise capital? What will the market look like post-recession? And what will companies joining AIM be looking for?
Companies looking to join the AIM market now should be asking themselves if the benefits are still there. As Brendan Hynes, CEO, Nichols plc explains: "The AIM market was traditionally seen as a place for smaller companies to raise funds for expansion or seek a partial exit, without the inherent costs and complexities of joining the full list. Larger investment funds had restrictions regarding the size of companies they could hold shares in so AIM was attractive for smaller, quality companies with good business plans which fell under the radar of larger fund managers. The tax advantages of Taper and IHT were big motivators, but these have been steadily eroded over time.
"I believe the attraction of the AIM market will remain in the short-term, but will be increasingly segmented into the top 50 and 100 with solid cash generative, high dividend yield business providing a tax efficient safe haven. The higher risk 'tail' of the market could struggle for air time. Conversely, this is also its biggest risk. If the tax breaks are taken away and the costs and hassle of being publicly quoted are not properly understood by new entrants, its raison d'être would be less clear cut," Brendan continues.
There will, of course, still be demand from companies looking for investment to join AIM. Indeed, in an environment where finance options are limited, some might say the need to be part of a reputable market which attracts global investment has never been greater. Martin Graham, Former Director of Equity Markets & Head of AIM, London Stock Exchange has this to add: "AIM enables smaller growing companies to gain access to public equity at an early stage but with a regulatory and market structure specifically tailored to the needs of smaller companies. Over the last 12 years, AIM has become a key part of the risk capital financing chain. It has established an unchallenged global profile as the world's leading growth market even raising more money than NASDAQ in each of the last three years. Although in the short-term, market conditions for smaller companies looking to raise equity finance are tough, in the medium-term, there will be a trend towards more companies utilising equity finance rather than debt to support their growth."
But just how will AIM change in the wake of the economic downturn. It clearly won't just continue as it was, not least for the fact that investors are going to be more cautious and potentially more inclined to focus on the main market instead of AIM. Ian Bowles, Chief Executive Officer, Allocate Software plc says: "My personal belief is that AIM will become smaller, simply because many of the current companies should not have gone public. For successful companies on AIM investors will return as they seek superior returns on investment. Those that are looking to join AIM will need to be more certain of sustained operations and growth if they are to attract investors. So I believe that AIM will see fewer, but better quality companies coming to market."
Peter Blezard, CEO, Plant Impact plc, expands on this: "I still feel AIM in the current market provides equity finance for companies focused on development and traction. The days of financing R&D or blue sky are gone as the appetite for risk is diminished. The future is a smaller AIM market for the next few yars as IPO placings are very quiet. There is an appetite for growth in commodities as many investors witness that the world is short on commodities, this includes mining stocks for a variety of materials. Specialist funds are being formed to invest in water, land, power, agriculture, all events linked to larger population exposure as well as the many green and socially responsible funds which are being formed."
There is also the issue of what type of companies we are going to see coming to AIM going forward. A safe, swift return is going to be on most investors' priorities lists so organisations looking for long-term investment may not be as successful on this market as those with the capacity to trade in the short-term. As Rakesh Patel, CEO, Goldshield Group plc explains: "Raising equity in the current climate will be difficult for all companies, especially on the AIM market where money flow will, I believe, lag behind the larger markets. What's clear is that those looking for long-term finance initiatives will struggle compared to organisations which can provide short-term return on current trading activities. Investors weighing up the benefit versus risk of investment decisions will almost certainly favour companies that can take advantage of market share in the short-term rather than waiting for future returns."
We have two upcoming breakfast events focusing on AIM. These will take place on 25 September and 19 November. Look out for details soon to be published on our website and please get in touch with your Relationship Manager for more information.
If you are thinking of joining AIM and need advice, our AIM-listed CEO breakfast Write-up provides top-level information from the pros and cons of being on AIM to the challenges of this market in the downturn, growth and funding options. Also see one of the films from our previous breakfast Forum, The Growth Dilemma: To FLoat or to Sell? featuring speeches from Julian Culhane, Managing Director - Head of European Media Relations, Jeffries International, Doug Richard, Founder and Chairman, Library House and Robert Cressy, Professor, Facutly of Finance, Cass Business School. You may also be interested in an upcoming event we have for small businesses looking for growth entitled Positioning for Growth - Strategies for SMEs. Please note that these events are open to Criticaleye Members or by invitation only.
Please get in touch if you have anything to add to the issues raised in today's newsletter. I hope to see you soon,