Are small cap public markets ‘open’ again?

Why AIM and PLUS could be back on the business agenda

Two years of volatile markets and a spate of de-listings have ambitious companies questioning the merit of public market flotation. But as AIM celebrates its 15th anniversary, Growing Business finds good cause for optimism

It’s no secret that stock markets around the world have taken a battering in the last three years. The global economic squeeze and the credit crunch sent share prices into a spin, no more so than in markets that smaller businesses call home. In the UK, the Alternative Investment Market (AIM), the junior slope of the London Stock Exchange, and small cap specialist PLUS Markets have experienced a drop in new admissions, tepid investor interest, wobbling share prices and companies de-listing because of money troubles. As a result, PLUS announced operating losses of £8.5m for 2009. This may be a significant improvement on the 2008 figure of more than £10m, but it is still a mighty black hole that must be plugged if confidence in the market is to return. A management reshuffle took place at PLUS this spring, together with the promise of profits in the near future. That, said new chief executive Cyril Theret, would come from a £6m cost-cutting exercise and new revenue from growing numbers of initial public offerings (IPOs) in 2010.

AIM celebrates its 15th anniversary this year, a period during which it has established itself as the premier destination for ambitious companies. As a business itself, the market is partially insulated from goings on in the UK, because of its significant numbers of international listings, coupled with the fact that it admits larger and, therefore, more stable growth businesses – or so conventional wisdom dictates. Yet the money dried up at AIM too, and many companies looking to raise capital were persuaded to delay their IPO plans or look for alternative cash supplies. In 2005, in the middle of AIM’s pomp, the market attracted 519 IPOs. Last year that figure plunged to just 36. So all has not been well in the small cap markets, but there are tentative signs in company reports, as well as statistics from the markets themselves, that a bit of colour is returning to the proverbial cheeks, particularly in the case of AIM. So, should you revisit your IPO plans now?

Holding steady

“A lot of markets around the world have essentially been closed to new listings in the last two years, because of a lack of investor interest,” says Marcus Stuttard, head of AIM. “But we have strong support from institutional investors, which has kept liquidity up especially in terms of secondary fund raisings. “We have had some relatively large admissions this year across a variety of sectors. There’s clearly much more confidence in the market than there was 18 months ago and strong companies continue to do well.” Dr Azhic Basirov, head of capital markets at AIM advisers Smith & Williamson, points to signs of green shoots, too. The first quarter of this year has seen 25 IPOs on AIM. It would be coarse mathematics to derive a likely annual figure simply by multiplying that by four, but 100 listings would represent a big swing from 2009’s derisory total. “Last year was very shaky,” admits Basirov. “There wasn’t any form of confidence in the market and AIM had a difficult year. But by the final quarter of 2009, there was a small shift in sentiment, from ‘the world is going to end’ to ‘it’s not going to end, so let’s think about the future’.” PLUS and AIM remain volatile, meaning that investors are understandably wary, but the darkest days of the recession appear to be behind us. Consequently, investors, both institutional and private, are starting to think seriously about easing the purse strings.

Cause for optimism

However, imminent recovery is still not guaranteed. Currency concerns in Europe and ‘swingeing budget cuts’ at home could still derail the upturn. Meanwhile, analysts are far from unified on the likelihood or otherwise of a double-dip recession. But once these questions are answered, stable market conditions should follow, which could prove ripe for new listings. “This year is set against the background of last year, which was challenging for everyone,” says a cautious Vivienne Cassley at PLUS. “However, the start of 2010 has been better than we anticipated, and it’s a lot healthier than the first half of 2009.” Downturn notwithstanding, AIM has been successful at attracting growing numbers of increasingly large businesses. The exchange plays host to around 1,250 businesses with an average market capitalisation of around £50m. This should open a gap at the smaller end of the scale for PLUS to exploit. During the downturn PLUS’ main source of income came via trading non-PLUS stocks on its platform, which diverted attention away from the primary market. But the management reshuffle has refocused plans on attracting more IPOs from UK companies, as well as those from abroad. The market is seeking to attract businesses with a potential market cap of between £5m and £40m, according to Cassley.

If firms are looking for funding, then they can expect to raise £1m to £2m, although the record for the market is £10m. But PLUS is yet to prove itself a viable place for ambitious growth companies seeking funding, according to Basirov. It’s still in its infancy and has fewer than 200 companies listed. This is a lower figure than in 2008, thanks to a spate of de-listings – something that was also experienced by AIM. Although a steadily growing number of advisers, market makers and institutions see PLUS as a genuine place for plcs, many more ignore it. It, therefore, relies on retail investors, but these have dwindled in the crunch years. “PLUS hasn’t really been a source of great liquidity for companies – it raises very little new money,” says Basirov. “If you look at AIM, in 1996 it took a little while for it to establish itself as a credible market. The key was to attract the right number of institutions, but very small market cap companies rule out a lot of funds that lay down minimum investment thresholds.” AIM has no such problems. A combination of big new international firms joining and companies from the main market dropping down to take advantage of AIM’s lighter regulatory touch has added to its weight in the eyes of investors. This has had the effect of improving liquidity and helping it through the darkest days of the recession.

Growing confidence

Regardless of the prevailing economic winds, investors are willing to back IPOs by companies with a good management team, solid accounts and a plan for the future, especially if they pay close attention to their advisers. There is less money than before, but confidence in AIM is growing despite, or indeed because of, the large numbers of firms that have dropped out. Those remaining are hardy businesses committed to the market and their investors – just the sort of prospects investors want to work with. If it’s an inflated reputation you are after and funding is a secondary issue, then PLUS is a viable alternative. Its costs remain considerably lower than AIM’s and it provides a similar level of kudos in the eyes of clients and partners. “Think more about whether the timing is right for your business rather than pondering if the market is willing,” says Sean Riddell, managing director of EMIS, which floated on AIM this year, raising £50m (see ‘Preparation is everything’ on page 45). “In 2005, we were not ready to float, but this year our sales are strong and there is confidence in our potential. “It comes down to individual companies in the end. Some are suited to public life and some are not. Don’t forget there are three or four other routes to funding which might be more suitable. If it still looks like an option after due consideration, then go for it.”

Preparation is everything

Software business EMIS, which created an online system for medical practitioners to store healthcare data, floated on AIM earlier this year. It raised £50m through a combination of newly issued shares (29% of its total) and exits by founder shareholders, valuing the business at £200m. For managing director Sean Riddell, the listing allowed EMIS to become operationally debt free, while bolstering the company’s reputation as a primary software vendor in the notoriously regulated, competitive and occasionally chaotic UK health industry. “For us, the listing process was onerous without being painful,” explains Riddell. “AIM is well placed for companies that have all their ducks in a row. We have been around for 20 years, and our financial and legal structures are solid. We made full use of our advisers, too. If you come into this with your eyes shut, then it’s likely to be a painful experience.”

Aiming high

Since its launch in 1995 as an alternative to the main London Stock Exchange, some 3,113 companies, including 519 international firms, have joined AIM. The market provides an exit route for earlier stage investors and a platform for companies to raise their profiles and credibility with key stakeholders, allowing them to grow. Expanding rapidly from the early to mid 2000s, listings slumped in the recession, but have rallied at the start of this year.

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