Has the AIM bubble burst?

While 2006 marked another new high for London’s AIM stock market, which raised more capital than ever and chalked up almost as many new issues as in the record year of 2005, it started this year in notably cautious mode. Has the AIM bubble burst? Not in our view.

The market is simply undergoing a necessary but temporary pause after its phenomenal recent growth.

Recent data showing a significant rise in profit warnings from AIM-listed companies during the first quarter of 2007 is certainly unwelcome, as is the slowdown in new listings. And new restrictions announced in the recent UK budget on venture capital trusts, an important category of AIM investor, are also unhelpful.

But none of this alters AIM’s increasing maturity. In recent years, it has emerged as a credible alternative to the main London Stock Exchange market and as a growth market for the world, listing close to 500 overseas businesses, with Australia, Canada and the US furnishing most.

Foreign flow

Excessive regulation elsewhere, especially in the US, has contributed to the notable flow of foreign companies into AIM, but the market has also grown up with them. The world’s leading investment banks are now bringing new issues to AIM as nominated advisers (Nomads).

Last year AIM passed an important landmark, listing more companies than the main market (around 1,600). And on key measures like market cap and turnover, as well as the number of new issues, it is outperforming not only the main London market but its European and US peers too.

Four key themes have emerged from the latest Baker Tilly and Faegre & Benson Taking AIM Survey: performance, regulation and quality of companies, competition with other sources of finance, and future outlook.

The survey is based on interviews with 201 companies quoted on AIM, 50 private companies and 51 institutional investors, and was carried out by an independent research consultancy. It recorded mixed performance last year.

Although the previous capital-raising record was smashed, the main AIM indices all declined. A shift in US legislation hurt the heavily weighted internet gaming sector and the substantial natural resources area suffered from volatile commodity prices and some failures. Sentiment was damaged by concerns over the quality of some new entrants – 41% of investors believed this was a significant factor in AIM’s performance.

It is heartening, then, that AIM has demonstrated its commitment to upholding standards, without abandoning the lighter regulatory touch that is one of its key assets. The Nomad rules introduced at the start of this year insist that advisers document decisions. The rules codify best market practice and should help raise standards.

Other recent rule changes include enhanced disclosure requirements, such as maintaining a website of relevant documents. And new entrants to the resources sector must now be supported by a competent person’s report on extraction potential or availability.

Investors want a further tightening of the self-regulatory environment: 61% of those surveyed believe more regulation would benefit the market’s reputation and for investor confidence.

AIM’s rivals can seem unchallenging. European growth markets are still at an embryonic stage, Nasdaq is constrained by regulatory and minimum issue size considerations, and smaller UK exchanges pose little threat. Only one in five of the AIM companies interviewed considered listing elsewhere.

The toughest competition may come from private equity. While few AIM-listed companies plan to go private, 36% considered private equity or venture capital before listing, and only 4% of private companies interviewed see any likelihood of an AIM listing in the next 12-18 months.

March of private equity

As this aggressive sector pursues an ever broader range of targets, AIM will need to reinforce its case for the public arena. AIM’s attractive benefits (capital, profile, credibility, acquisition currency, low cost, liquidity and ability to make acquisitions without shareholder consent) make us confident about both the near and long-term outlooks.

Already this year the main AIM index has regained much of its 2006 losses and appetite for new issues has picked up. That’s important because many listings of UK and international companies are in the pipeline.

These deals are likely to reinforce AIM’s increasing ability to offer investors exposure to the key emerging markets of Brazil, Russia, India and China. Several Indian issues alone are scheduled for 2007.

With AIM’s company base so successfully internationalised, we now look for a comparable broadening of the investor base. Increased investment in AIM shares and new issues by foreign institutions would help take the market to the next level.

Chilton Taylor is head of capital markets at Baker Tilly

For more go to www.bakertilly.co.uk
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