The Alternative Investment Market uncovered

Mar 25 2008 By Jez Davison

MORE than 2,900 companies have joined London’s Alternative Investment Market (AIM) since its launch in 1995, including more than 250 international companies represented by 22 countries and 33 business sectors.

Regionally, it has attracted around 85 North-east firms with a combined market value of £3bn and, during the next two years, more Tees Valley companies are likely to join them.

It’s not bad going for a market once likened to a wild west in the financial landscape.

Last year, a senior US stock market official, Roel Campos from the Securities and Exchange Commission (SEC), is reported to have referred to the AIM as “like a casino” with 30% of new firms listing on AIM “gone in a year”.

But the London Stock Exchange, which owns AIM, is adamant the market poses more of an opportunity than a threat. “Although a large proportion of AIM companies are early-stage businesses, the failure rate on AIM is very low - running at around 3% over the last four years, equivalent to that on the main market,” a spokesman said.

Either way, AIM has had a bumpy ride. After the fanfare of its initial launch, it lost around 20% in the first three years before enjoying a renaissance. Then, after reaching a record high of almost 3,000 in March 2000, the index slumped as investors who had piled in on the back of the dot.com bubble got their fingers burned when it burst.

But the emergence of larger companies on AIM has helped to stabilise and reinvigorate the market. AIM stocks climbed steadily by almost 5% in the first three quarters of 2007 as the emergence the listing helped to stabilise the market. During the last three years, the value of stocks on its top 100 index have stayed roughly the same, while the FTSE 100 has experienced a moderate rise. But in the last six months, AIM 100 companies have ridden the tough economic conditions rather better than those listed by its more illustrious counterpart, suffering losses of around 60% of those incurred on the FTSE 100.

Despite the risks, AIM has thrown up hidden gems with infinitely more growth potential than the FTSE heavyweights.

Hartlepool-based Stadium Group floated on the main market in 1996 before moving across to AIM in 2001 and chief executive Nigel Rogers believes the switch helped at a time when the group was undertaking a restructuring process, including the sale of its plastics business.

He explained: “Under a full listing, we would have needed prior approval from shareholders but under AIM rules we could make an announcement to shareholders after the transaction had been completed.

“AIM is more suitable for smaller, fast growing companies - less costly, less regulatory, more flexible. It also provides better access to capital”.

It took Stadium 18 months to gain a full listing and a further two to three weeks to transfer to AIM. It usually takes around three months for a standard admission to AIM, but can take up to six months if the company wants to raise capital from institutions.

Mr Rogers said: “The transfer from a private company to a public one is quite onerous and can be quite a culture change. Suddenly, you must be completely accountable and every aspect of your business is made public knowledge.

“You must be very clear in your reasons for moving to AIM and ensure you are going in for the right reasons. A professional management structure is so important.”

There are three main reasons for considering AIM. The first is to raise capital to fund ventures such as acquisitions; second, to gain a quantifiable market value via a listed share price; and finally, to increase brand awareness to gain quicker access to new markets, particularly overseas. Although applicants are typically in the £5m-£50m category, the Exchange has dealt with larger firms with a value of up to £500m.

Mark Fahy, the London Stock Exchange’s senior manager for the North, said: “One of the best advantages of AIM is that it doesn’t stipulate minimum requirements for company size, track record, the number of shares in public hands or market capitalisation.”

Mark believes the suitability of a company for AIM is determined by factors such as the experience of the management and an ability to keep records “to international accounting standards”. But there are risks. “Expanding quickly is all well and good, as long as the growth does not exceed the ability of the company to manage costs,” he said.

Enlisting the help of a good lawyer is vital. Philip Ashworth, partner in Teesdale’s Dickinson Dees' corporate team, says one of his key roles is to protect directors against making statements that could leave them - and their company - vulnerable.

“Even one statement could lead to a director being sued by the 'nomad' on behalf of investors or prosecuted by the Financial Services Authority (FSA)”, he warned.

“Nomads” or nominated advisers are sector specialists who play the role of gatekeeper, adviser and regulator of AIM companies. They help co-ordinate the admission process alongside lawyers and accountants, conduct due diligence and brief the company on its obligations when disclosing investment activities.

Nomads have been criticised for creating a conflict of interest, since they receive fees from the companies they purportedly supervise yet have the power to act on behalf those companies.

But Simon Briton, tax solicitor at Ward Hadaway, believes that in reality this situation rarely occurs. He said: “The nomad takes on the ‘big brother’ role and other parties usually follow orders. It is in everybody’s best interest to keep on cordial terms and the nomad acts as a mediator.”

The journey onto AIM is unlikely to be hassle-free and certainly doesn’t come cheap. It is estimated that the registration, legal, accountancy and nomad fees is around £200,000 - and potentially much more if the company needs to raise capital. An annual fee of £4,750 is payable and the admission fee varies depending on the size of the market capitalisation. For example, a company valued at £10m would expect to pay around £8,800, while £5,870 would be the fee for a £5m firm.

To boost investment in AIM-listed firms - particularly the smaller ones - shareholders in AIM-listed companies are given generous tax incentives not available on the full market. The Government’s Enterprise Investment Scheme (EIS) allows individuals with up to a 30% stake in the company to reduce their income tax liability by 20% (the maximum investment threshold rises from £400,000 to £500,000 in April). In addition, no capital gains tax is payable on disposal of shares after three years, while investments are usually exempt from inheritance tax after two years.

AIM has been widely criticised for having attracted too many poor-quality businesses, which has led to some smaller firms de-listing. Lucy Armstrong, chief executive of The Alchemists - which helps companies manage critical developments including acquisitions or a change in management and worked most recently with Cleveland Biotech - believes some companies have been the victims of their owners’ ego and were not suitable.

“Listed companies have to react to events very quickly,” she said. “Shareholders and analysts want change and want it immediately.

“Company owners on an ego trip might find they are less in control of the business than they were before.”

James Rainbow, North-east-based divisional director and investment manager for stockbroker Brewin Dolphin, believes a listing can be a great profile-raising exercise - but with a dangerous flip side. “Private companies don’t come under the same amount of scrutiny,” he said.

Ultimately, some companies are suitable for AIM, while others never will be. Most analysts believe the market hasn’t yet reached saturation, despite an increase in the number of de-lists (116 left AIM in the first half of 2007), and despite the risks, Tees companies have proved that the model can reap big rewards. But those in it for a quick buck could just turn their venture into a lottery.

PAGE TWO: Tees firms cash in