For many years young entrepreneurial companies have struggled to find
support in the City, but were considered too small or too risky to warrant
attention from the stockbrokers and fund managers who ruled the roost.
Academics, politicians and businessmen have tried various initiatives to
drum up support, and provide a worthwhile framework. Special tax
incentives for private investors and several junior markets have been
launched but after early enthusiasm such schemes have withered and
died.
With this in mind, many observers treated the launch of the Alternative
Investment Market (AIM) with a fair degree of skepticism. Opened on
June 19 last year, AIM took over from the then-dying second market, the Unlisted Securities Market.
The critics were out in force at the start, predicting the new market
would attract poor quality small companies and become a haven for
so-called “cowboys”. Institutional investors turned away, and the opening day
was hardly a big success. Only 10 companies joined AIM that day, all
transferring from the Rule 4.2 market, another junior market that closed
last year. The 10 had a market capitalization of just 52 million Sterling, and none
raised any new money.
Since then, the pessimists have been proved wrong. Last month the 200th
company joined AIM, taking the market’s total value past Stg 4 billion. As
intended, the majority of entrants are young, fast-growing companies
looking for funds for expansion, and a way of valuing themselves.
AIM is already proving a popular destination for technology, media and
biotechnology companies, but the market has also attracted a diverse
cross-section of companies ranging from oil explorers to football clubs,
as well as a number of foreign companies attracted by the cheaper
costs of listing and raising money.
The rapid growth of the market has surprised many people in the City,
who expected AIM to take much longer to establish itself. Analysts
estimate there will be more than 300 companies by the middle of next
year, and some talk of 1000 companies by the year 2000.
The growing popularity has also prompted comparisons with the Unlisted Securities Market (USM),
which was launched in 1980 to provide a forum for developing
companies. It too, started with just a handful of companies (11 to be
precise), but at its peak had 446 companies quoted and raised
almost Stg 6 billion for businesses.
However by 1995 the USM had become virtually indistinguishable from
the main market in terms of entry rules and costs of obtaining the quote. AIM’s founders have been careful to try to prevent this happening again,
and wish to ensure that AIM remains a more accommodating forum for small
companies.
The entry requirements are less demanding, with no need for a three
year trading record or, in some cases, up to date financial information.
There are also no restrictions on company size or the number of shares
in the market. There is one abiding rule for any new entrant: it must be brought to the
market by a Stock Exchange approved nominated adviser. These
advisers, mainly small stockbrokers, merchant banks or law firms, are
responsible for the due diligence, and integrity of the prospectus.
The stream of new companies has now started to attract some of
the City’s bigger players and also its fair share of media and analytical
coverage. Merrill Lynch, the US investment bank, has started
to make markets in many of the bigger AIM stocks. The growing
acceptance of AIM as a platform to raise money has seen more
companies look to AIM for funds. Indeed, in the first year, more than
Stg 300 million has been raised, with the figure running as high as Stg 60 million a month
in the spring.
The total is small in comparison to the main market, which raised 37 billion Stlg.
last year, but it is enough to whet the appetites of fund managers.
In the last few months, a number of specialist funds have been launched to
track AIM, and many leading institutions are starting to look at the
market for the first time.
These institutions have been attracted by the relatively low valuations
put on many companies, compared to rivals on the main market. Indeed, in
the first year, a number of companies saw gains that far outstripped
anything seen on the main market.
Investors in Financial Publications, which own the broker Durlacher,
have seen their shares jump from a launch price of 38p to 260p - a
staggering 584% gain. Other star performers have been Pan Andean
Resources, the oil explorer which has soared from 18p to 90p, Ask
Central, a pizza chain, which has quadrupled from 35p to 141p and View
Inn, which has designed a new information system for hotel rooms, whose
shares have risen from 100p to 555p.
But despite its good start, AIM still has several issues
to overcome in the long run. First, low trading volume and liquidity in
the market could be a problem if the economy turns down. Some companies
have as few as 10% of their shares in public hands. As a result, a
little demand can send them soaring when times are good, but if buyers turn
sellers, the shares can plummet as quickly as they rose.
The other potential problem for AIM’s founders is the rising cost of
joining the market. Recent surveys have found that companies are nearly
paying as much in fees to advisers as they would if the joined the main
market. Advisers say this is a result of the strict screening many are
now undertaking before floating companies.
But AIM’s supporters say the market does retain several other
advantages that outweigh the initial costs. First, the ongoing running
costs are cheaper than the main market, the regulatory requirements are
much lower, and the cost of raising money can be as little as 3%.
The biggest test for AIM is yet to come. So far among the flurry of new
entrants, there have been just a few profit warnings and a handful of
poor performers to worry investors. At some point this is bound to
change and an AIM stock will stumble. This will be real test of investor
confidence and their faith in the new market.
The writer is a senior partner in Olswang, one of Britain’s legal consultancy firms, which specializes in promoting private and public floatations on British financial markets in general, and the AIM in particular. The “Letters from London” series is authored jointly with City-based financial journalists.