There isn’t as much talk as there used to be about AIM (London’s junior stock market) which is a shame. Entrepreneurs and their employees and investors need liquidity and a secondary stock market can and should be a good vehicle for servicing their requirements when they have small to mid-size companies.
Not for companies that are too small though – and therein lies the point of this post, which I started writing after reading an article in the FT whose headline I took as my title – AIM can prove an unsuitable catalyst for the unready. Being a blogger rather than a journalist I changed it though, to be a little stronger, because in my experience for every runaway success on AIM like Abcam there are tens of companies that get stuck. (For those that don’t know, Abcam has been a runaway success since it’s $15m listing in November 2005 and recently topped $1bn in value.)
These unfortunate companies find themselves with unhelpful disclosure requirements, significant ongoing costs associated with being publicly listed (anyone know what these are, on average?), and more importantly a shareholder base that doesn’t understand their company and a set of listing rules that often make it difficult to go private or take other radical action.
The FT article was written in response to a PwC survey which concluded that many of the dozens of companies which left AIM last year ‘may not have been suitable, or at least ready for an IPO’. In other words, they would have been better off staying private for longer.
Their alternatives would have been (and, in case anyone hasn’t noticed, I have a clear self interest here) to raise venture capital, raise some other form of private money, or fund growth through profits. I appreciate that none of these routes are easy, and not all of them will be accessible or appropriate for every company, but as the PwC survey makes clear, just because money is available on AIM it isn’t necessarily wise to take it. That said, venture capital is no panacea either, but the restrictions it comes with are less onerous than those that come with a public listing.
So when should companies go to AIM?
I think the answer to that question has two parts:
- Value – for a listing to be successful a company should have a large enough market cap and free float that fund managers will be able to take reasonably substantial positions without owning too much of the company, that there is liquidity in the stock, and that analysts want to cover it. A £100m market cap is a good rule of thumb for ‘large enough’.
- Predictability – consistent performance is critical for public shareholders who generally speaking aren’t in a position to get to know their investments well enough to understand whether bad periods are blips or indicative of deeper malaise. Unfortunately, most small companies have small numbers of customers and volatile revenues and/or are dependent on one or two partners who may themselves catch a cold – businesses with these characteristics or which are unpredictable for other reasons should think twice before listing.
To close I want to explain that I have concentrated on AIM as a vehicle for finding new shareholders and raising capital to fund growth rather than for providing an exit for existing shareholders because in my experience that is what AIM is mostly about. That is different from a full listing where secondary components are much more common at the point of IPO and greater liquidity also allows shareholders to sell shares more easily post IPO.