What next for AIM?

The junior stock market is now at an all-time low, but can it survive?

Battered and bruised after a spate of delistings, a liquidity freeze and an alarming fall in share prices, the AIM market has seen better days. But is it about to recover, stall or die?

“There have been an awful lot of negative stories about AIM and I think the motivation behind those stories has been a bit spurious at times,” complains Marcus Stuttard, head of the market. “They’re often just motivated by a desire to get name-checked in the press.”

The articles he’s referring to have made reference to a combination of alarming indications about the health of the market, including several delistings, which have risen by a third in the past year, a 62% fall in the shares on the market in 2008, and a worrying escalation of a perennial AIM concern: the lack of liquidity.

Stuttard believes the brickbats that have been directed at the market, while technically correct, are misleading and out of context. “The fundamentals are sound,” he says. “Everyone has been so used to reeling off the next record in AIM’s growth cycle for so long now, it’s become a bit of a shock that things can possibly downturn.”

It’s easy to forget that as recently as three years ago, AIM commentators were more used to reporting record levels of initial public offerings (IPOs) and unprecedented amounts of new and further money raised.

Unsurprisingly, Stuttard points to wider market conditions when read the charge sheet detailing AIM’s decline. “Delistings are a capital market issue, not an AIM issue,” he argues. “Equally, pretty much every market around the world has seen a reduction in market caps and liquidity.”

Indeed, the New York Stock Exchange recently reduced its delisting criteria in order to prop up the market.

However, Stuttard can’t blame all of AIM’s problems on macro-economic causes, and he might well find that reviving its fortunes will not be as simple as playing a waiting game.

John Kearon, chief executive of £9.3m turnover market research firm BrainJuicer, is running what could be considered a model smaller AIM company. It grew by 42% last year, with profits up 55%, is working with nine of the world’s top 20 global advertisers and consistently beats the City’s expectations. Despite all that, its market cap is down to under £12m.

It listed in December 2006 at £1.08, peaked at £2.20 in 2007, and currently sits at 95p. “It’s symbolically painful to drop below the launch price, despite the fact that we have more than doubled the size of the business and profits are 10 times the first year’s,” says Kearon.

Yet, like many entrepreneurs on AIM, he remains broadly sanguine. “One of the realities of going on the market is that there are cycles,” he says. “The market tends to exaggerate everything, both up and down.”

Frozen out

Kearon went public to provide an exit for Uniliver Ventures, which holds a 35% stake, and give BrainJuicer credibility with blue-chip clients. While the listing was successful on the second count, on the former, Kearon says he’s happy to rely on his investor’s patience, believing his is one of many undervalued companies on the market that potentially represent good value for investors.

He’s not so upbeat about liquidity. This is best measured by the ‘bid-offer spread’,  the difference between what an investor pays to buy a share and what a seller gets in return for disposing of it. On AIM, it’s appallingly wide, frustrating investors and company owners. It’s possible to buy shares in an AIM-quoted company and pay more than double what you’d make from selling them.

“It’s the brokers playing it too safe and there’s no pressure to do anything else,” says Kearon. “In a market where the institutions are sitting on their hands, there’s nothing happening and we’re a classic example. Our share price stays completely still for weeks on end. We think we’ve got a story wealthy private investors might be interested in, but the spread on AIM just prevents them from buying in, or [at least] makes it much more expensive.”

Mark Turrell, chief executive of AIM-listed innovation software firm Imaginatik, is broadly positive about his experience of the market, but agrees that the spread is a major issue. “The structure at the micro end of the market is a problem,” he says. “Micro-cap investors lose 30% of their money as soon as they invest due to the spread of the buy and sell prices quoted by the market makers [the firms that quote both a buy and a sell price in the hope of making a profit].”

The alternatives

To allow private investors to buy in to BrainJuicer more easily, Kearon has taken a dual-listing on Sharemark, an alternative junior market with inexpensive admission charges and ongoing fees, the ability to operate in an open or closed market and an eBay-style auction trading system that eliminates spreads. “We hope it’s the ideal place to attract a long-term following of wealthy investors and give them a realistic price at which to buy in,” he says. “I’m interested to see if it will have any affect on the spread of our share price.”

Sharemark’s managing director, Iain Wallace, says that rather than having a market maker having to quote a large premium, the auction approach simply matches stock at a single price. “We cater for small companies better than AIM. We offer the flexibility which a number of senior markets can’t offer,” he says.

Stuttard isn’t convinced by Sharemark, or by AIM’s main rival, PLUS. “The numbers were down last year, but it’s important to recognise that last year we generated more money on AIM for smaller, growing companies than was raised on NASDAQ.”

While the IPO market is effectively closed, AIM has proved relatively resilient for securing further money, with more than £560m raised in the first three months of 2009. Meanwhile, for those that can afford the listing and ongoing fees – BrainJuicer spent £550,000 on the listing and it costs a further £220,000 a year to maintain it – AIM is likely to remain first choice.

What’s next?

“I never think short sharp shocks like this are, in the end, a bad thing,” says Kearon, returning to the delisting issue and the depression around the market. “If 300 companies have delisted, frankly, most have gone bust. That’s not AIM’s fault. But if AIM wanted to do something positive, it would ask how it could adapt to what’s going on.”

Stuttard does recognise that liquidity is an issue and stresses that steps are being taken to improve the situation. Measures such as providing tools for issuers to communicate their story more effectively to a wider set of institutional and retail investors, plus regional road shows to reach more of them might help. However, most investors believe AIM needs to reform its venture capital trust (VCT) regime.

A number of the criteria that enable VCTs to invest in companies have been reduced, including the gross asset limit, from £15m to £7m. Meanwhile, restrictions imposed in 2007 mean qualifying companies must employ fewer than 50 people and no more than £2m can be invested per company. Worse still, VCTs are essentially unable to buy shares in the secondary market.

Since many AIM companies have restricted share registers, dominated by founders and institutions, including VCTs, the restrictions dampen access to capital to float on the market and liquidity. While the London Stock Exchange lobbied hard to push these changes through in last month’s budget, the chancellor’s failure to heed the calls is a blow, and no doubt Stuttard and his colleagues will be knocking on the Treasury’s door again next year.

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