Listing on AIM (London’s Alternative Investment Market) can be dangerous

Let me say before I start that I very much welcome the arrival of AIM on the London scene over the last few years.  It offers liquidity and fundraising options to companies that simply weren’t available in this country (and to an extent Europe) before.  That became even more important when NASDAQ was clobbered by Sarbanes Oxley.

BUT

I have long felt that it has been over-hyped as a home for small companies.

So I thought I’d share a statistic from the FT this morning:

In a typical month this year about 40 per cent of the market’s 1,789 stocks saw turnover equal to just 1 per cent or less of their market capitalisation.

40% with less than 1% turnover – that is huge, and I would expect this 40% of companies with low liquidity are overwhelmingly concentrated at the  bottom end of the market in terms of market cap.

Without liquidity on a stock market you don’t have much, IMHO.  Certainly you won’t have much share price movement.  You may get some publicity simply from being public, but that is about it.

You will have extra costs though, and restricted flexibility in your future actions when compared with remaining private.

I obviously have a vested interest here, in that AIM can be a source of competition for us at DFJ Esprit, but at the small end – say below £50m market cap – my advice would be to think very carefully about the pros and cons of AIM as a financing strategy for your business.  High valuations don’t mean much if there is no liquidity.

There have been a number of companies that have listed with low valuations and successfully traded up.  I am generalising here and AIM can certainly work for some small companies, but for me there is a much larger number that are better off staying private.

  • Anonymous

    When it comes to VC, Aim is for dogs, or underachievers.
    Either
    1) dying portfolio companies (that should actually be put of their misery) that VCs want to keep alive on the very long shot that there is a chance they may turn around.
    Or
    2) Companies that have underperformed their target size and are washing their face but aren’t really going to set the world alight.

    In the words of Danny Rimer: “What will make the difference on AIM is whether we have some really stellar companies going public on AIM, or if it’s just the problem children of various portfolios. And that is yet to be determined. You have some examples of great companies and some really dodgy companies that are going public more as a private placement alternative.”

    The thing that I don’t get: 1) When do institutional investors continue to accept this crap (answer would be to look at AIM IPO fees as a total of Collins Stewart’s revenue)

  • Joe T.

    I think you’re exactly right about this, Nic. I think when they set AIM up, rightly or wrongly, they intended it to be a sort of “substitute” for private equity deals and venture capital for many firms. If a company isn’t interesting or dynamic enough to attract private investors, then they ultimately won’t excite anybody on the stock market, even an ‘alternative’ one like AIM.

  • Joe T.

    I think you’re exactly right about this, Nic. I think when they set AIM up, rightly or wrongly, they intended it to be a sort of “substitute” for private equity deals and venture capital for many firms. If a company isn’t interesting or dynamic enough to attract private investors, then they ultimately won’t excite anybody on the stock market, even an ‘alternative’ one like AIM.

  • Clay B.

    As a neophyte re: issues on AIM, I am concerned with what I read about liquidity and single market makers. I am being offered stock in a new spring ’08 issue(know the U.S. founder well). My intention would be a short term trade. Is there any way to gauge the demand or “heat” for the issue such that I could trade out at a premium to offer or are “hot issues” nonexistent on AIM? Thanks

  • Clay B.

    As a neophyte re: issues on AIM, I am concerned with what I read about liquidity and single market makers. I am being offered stock in a new spring ’08 issue(know the U.S. founder well). My intention would be a short term trade. Is there any way to gauge the demand or “heat” for the issue such that I could trade out at a premium to offer or are “hot issues” nonexistent on AIM? Thanks

  • Jack Floor

    Try http://www.aimlisting.co.uk for more info….

  • Jack Floor

    Try http://www.aimlisting.co.uk for more info….

  • John Holland

    Welcome back AIM

    Since 1995, AIM, the London Stock Exchanges market for small and growing companies, has provided a valuable source of investment capital for companies here in the UK and overseas.

    True, AIM is not, and never really has been a low cost option, and companies should think carefully about the benefits and drawbacks of joining the market before beginning the process.

    However the most important reason why most companies join AIM is to undertake fundraisings. In this regard AIM’s credentials as one of the world’s leading growth stock markets remain intact. Throughout one of the most challenging economic periods for many decades (from 2008 up to 2013) companies on AIM raised in excess of £27b. This at a time when banks and other lenders largely withdrew from supporting smaller and medium
    sized growing businesses.

    In terms of trading, 2013 has already seen AIM record the highest number of shares traded since AIM’s inception. The average number of daily shares traded in AIM throughout the year has exceed 1million for the first time.

    As for new issues, Brokers report a healthy pipeline of new companies set to join AIM in the months ahead.

    http://www.hbcg.co.uk