The viable alternative

Are AIM’s shoulders strong enough to stimulate the UK’s recovery and boost the status of London as a global financial centre? We look at some recent trends and successes

In the aftermath of the recession, confidence in the capital markets across the world has taken a knock. Added to this, there is an endemic British lack of self-esteem, heightened now that we are seen to be digging ourselves in, while the Germans are growing their way out of trouble.

But the fear that London will lose its status as a global financial hub is really not well founded – and the Alternative Investment Market (AIM) is playing a pivotal role according to Marcus Stuttard, head of AIM:  “I may be biased, but it is vitally important to the UK’s recovery that there is a vibrant growth market like AIM,” he says.

Breadth and traction

AIM has important strengths compared with growth markets in other parts of the world.

It has breadth: sector-focused markets have run into problems when those sectors are under pressure, Stuttard says:  “We have tried to ensure that AIM remains attractive to the broadest set of sectors, companies and jurisdictions, so investors have a wide choice.”

And London has a unique network that supports the market. Nominated Advisers (Nomads), brokers, investors, law firms and accounting firms form a community that is not matched anywhere else in the world, Stuttard asserts, but all of them are necessary to have a fully functioning market.

The depth of institutional funding is a big draw for growing companies. It means that while the funds raised at the IPO stage may be relatively insignificant, there is an opportunity to get serious investors interested: investors who will continue to support the company as its requirements increase.  “Plenty of companies have raised £1m or £2m, and six months later have come back to the market and raised much more. AIM companies raised £5.5bn in 2009, 90% through further issues. Most other growth markets, certainly those in Europe, were unable to raise anything like that much,”  says Stuttard.

The Aberdeen-based oil and gas exploration company Faroe Petroleum is a classic example, according to Paul Tetlow, partner at law firm Hunton & Williams, who first acted for Faroe in 2001.  “It raised £7m though private equity before it came to the market in 2003,” he says.

The IPO raised £13m, and since that time Faroe Petroleum has returned to the market to raise successively larger amounts: £15m in 2005, £25m in 2007, £40m in 2008 and this year £70m in a rights issue.

“The company’s assets and portfolio are developing well. It has grown through acquisition, and organically,”  says Tetlow.

“This is a good demonstration of how the market can work if you use it properly.”

Commercialising research

Interestingly, this year has seen a surge in takeover activity in the technology sector on AIM, Tetlow says.  “In the past six months, more than 10 AIM-quoted technology companies have been the subject of takeover bids, mostly by North American companies.” These include the £32m bid by Broadcom Corporation in June this year for wireless specialist Innovision Research & Technology; the acquisition by Constellation Software of health club membership software specialist Gladstone Plc for £18.1m and the purchase of Cybit Plc by private equity group Francisco for £22.8m.

Perhaps the most promising trend is the return of technology companies to the market, says Stuttard:  “We are seeing increased interest, though investors want to back companies that are a bit later-stage than five years ago, or where the management teams have a track record or are serial entrepreneurs coming back to the market with the next company.”

The first to list this year was Oxford Nutrascience, which develops delivery systems that make medicines easier to swallow. It raised £1.1m at its February IPO and plans to expand rapidly.  “When the time comes to ramp up production I want to be in a position to raise money from institutions, and that is basically why we went to AIM,” says chairman Marcelo Bravo – but it wasn’t only the investors he was out to impress.

“We are using our listing to raise our profile,” adds Bravo.  “Our customers and partners are all major corporations and the fact that we are a public company, and they can check our accounts and see we have all the disciplines you need to get AIM listed, put us on the table with those companies. It brings gravitas to the conversation.”

A classic offering

Ilika, which develops specialised materials for industry, is the most recent technology company to join the market. A spin-out from Southampton University in 2004, it obtained seed funding of £380,000 through the IP Group. “That was enough to see us through the first couple of years,”  says CEO Graeme Purdy. “Then in 2006 we raised a round of £1.5m from Artemis and Invesco. These were the type of investors that could support the business through subsequent fundraising requirements, but would also support us at IPO and beyond.”

In 2007, Artemis and Invesco were joined by Nomura Bank in raising a further £7m for Ilika. However, at the end of 2009, when it became clear that to realise its commercialisation plans it would need a further £5m, it decided with its broker Nomura Code that AIM would be a natural fit.

“We are still pre-profit but it is a fast maturing commercial story. We have major multinational partners including Toyota, Shell and NXP. Because we have these blue-chip partners, and revenues were developing according to plan, we felt it was a classic offering for AIM,”  he says.

Purdy also felt that listing would give Ilika leverage in the market, as well as attracting more business from international customers. “90% of our revenues come from abroad. It was felt that being publicly quoted would give our partners more confidence in interacting with us and that would be an important part of our commercial story,”  he says.  “That turned out to be the case.”

Leaner equals stronger

The global financial crisis was particularly harsh on small to mid-cap companies, as investors concentrated on the larger end of their portfolios. Some 490 companies delisted from the market between September 2008 and August 2010, many of them no longer able to justify the cost and regulatory burden associated with a listing.

Does this worry the head of AIM?  “Not really,”  he says.  “We have a smaller market but a better quality one. When we introduced the new rulebook in 2007, we were already telling Nomads they should be doing reviews with their companies to be sure the market is still the right choice for them.”

Paul Tetlow agrees: “It appears that, far from losing ground to its competitors, AIM is emerging from the recession as a more robust and stronger market.”

Float, don’t sink

Ilika’s Graeme Purdy highlights key issues for an IPO

Communication. Keep a sustainable pipeline of news flow that is going to retain and engage investor interest. Investors think no news is bad news, so reassure them that you are following though on the business plan you went into in great detail in the prospectus.

Transparency. A lot of early stage technology companies like to develop competitive advantage early in their company development and not disclose the details of what they are doing. But as a public company investors need to know what you are doing.

Effective corporate governance. You need the right individuals on the team to remain credible as an organisation. We spent a lot of time setting up the structure and processes of Ilika so we stand up to scrutiny. The latest annual report makes us look like a large, professionally managed organisation.

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