AIMing higher

·         Accelerating growth – AIM is fundamentally important to business creation, scale-up funding, job creation and economic growth in the UK.

·         Mixed views – AIM faces several challenges and has a mixed reputation, understandable given its track record and underperformance vs other indices. However, there are a large number of success stories, and it remains the pre-eminent growth market for smaller companies.

·         Time for a recharge – We believe there should be a fundamental review of the importance of AIM and how to make it the growth market of choice. Doing nothing is not an option, in our view.

Carpe Diem – We believe a new government with a growth mandate can deliver the necessary changes to make AIM the growth market it should be.

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Key proposals

·         Utilise the NatWest stake to develop a listed National Wealth Fund to invest in UK Small & Midcaps.

·         Expand the remit of the British Business Bank to include equities

·         Increase funding for the Business Growth Fund

·         Pension reform to ensure a minimum level of investment in UK assets

·         Mandate pensions to invest a proportion of funds in AIM

·         Develop cornerstone financing for IPOs

·         ISAs and SIPPS to have a minimum level of UK ownership

·         Support tax incentives to drive growth (eg VCT, EIS and BPR)

·         Address the cost of being listed

·         Encourage alignment of NEDs with shareholders through equity

AIM in numbers

There are 610 companies in the AIM All-Share index, with a total market capitalisation of £68bn and an average of £111m. This makes AIM the key smaller-company market, as the FTSE Smallcap (ex investment trusts) has seen rapid de-equitisation and now has only 110 companies, with a total market cap of £29bn.

Companies have raised over £130bn of capital on AIM since it launched, which has provided material funds for growth companies and liquidity for investors. However, the number of companies on AIM has been reducing rapidly in recent years, as has their combined market cap. In just the last year, the number of companies on AIM has reduced by 88, and the market cap by 11%. Many more companies, particularly at the smaller end of the market cap spectrum, are questioning the value of being listed, with numerous management teams citing low valuations, low liquidity, limited appetite to support fundraisings, excessive corporate governance requirements, and a high cost of being listed. We believe these issues need to be addressed to ensure that AIM functions effectively as a source of long-term funding for growth companies. Central to the issue is fund flows – below we show both the problem and a range of potential solutions.

AIM advantages

AIM was established in 1995 and started with 10 companies and a total market capitalisation of £82m. As such, the growth of AIM over the last 30 years looks an unbridled success; however, there have undoubtedly been a number of companies along the way that should never have been listed, and that coloured opinions and reduced investor appetite. Some of the winnowing out has been cathartic, and the average business is now of far higher quality. Although AIM has its challenges, it is also important to recognise the benefits of listing on AIM and investing in AIM companies.

·         ‘Lighter’ regulation: AIM is technically an ‘unregulated’ market segment, and so was not subject to EU directives. This has allowed AIM to operate with a more proportionate set of rules, and enabled the Nominated Advisor (NOMAD) system of oversight.

·         More flexible listing requirements: For example there is no minimum market cap requirement on AIM, and ‘lighter-touch’ corporate governance.

·         Tax incentives for investors and founders looking to float: Government recognises the importance of investing in smaller growth companies, as well as the inherent risks. As such, in order to encourage investment, there are a number of benefits, such as exemption from Stamp Duty (implemented in 2014), AIM shares being IHT free (if qualifying for business relief, and held at death and for longer than two years). There are also a number of schemes providing incentives for investment (eg EIS and VCT). AIM shares can be held in an ISA, which means that investment in qualifying companies can be exempt from income tax on dividends, stamp duty, CGT and IHT (if applicable).

All of these advantages have been helpful in supporting AIM’s growth, but they are not sufficient at a time of aggressive fund outflows, with the trends to global portfolios and passive funds. This has led to a significant  reduction in the number of companies listed on AIM, the dearth of IPOs, the limited number of fundraisings, and the underperformance of the market (see Figure 1 below) relative to other UK indices, which themselves have underperformed global comparator benchmarks.

Figure 1: AIM relative performance, three years

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Figure 1 shows the relative performance over the last three years, when the total return from the AIM All-Share was -40%, compared to +21% for the FTSE All-Share and +1% for the FTSE Smallcap (ex investment Trusts).

We see multiple reasons for these trends:

·         Consistent outflows from smaller company funds, as risk teams at asset managers have actively reduced exposure to high-volatility, low-liquidity listed companies

·         Globalisation of portfolios (by retail investors, wealth managers, pension funds and charities)

·         Growth in passive investing (which largely bypasses AIM)

·         Past performance driving investor appetite

·         Regulation reducing appetite for risk and investment in smaller companies, driven by measures such as MIFID2 and Consumer Duty

·         Increased M&A activity from overseas buyers and private capital helping the performance of the larger companies

·         UK economic performance and political uncertainty

·         Risk of tax changes reducing investor appetite

·         Investment incentives failing to update over time (eg EIS and VCTs)

·         Growing perception of onerous regulation and the cost of being listed

The importance of fund flows

Share price performance is largely driven by a combination of the performance of the company, views on its potential growth, and comparisons with other companies. That sounds great in theory, but the weight of money has a fundamental impact, not only on a company’s share price, but also on its ability to undertake a fundraising or invest in an IPO. There is constant competition with other market segments for fund allocations, and one of the key drivers is scale. The larger a company or market, the more money it attracts – and this is materially enhanced by the growth of passive investing.

The rise of US markets, and particularly the ‘Magnificent 7’ over the last decade, has sucked in an increasing proportion of investors’ money, denuding other markets. This is one of the drivers for the underperformance of UK markets overall, but is manifest even more in AIM, which has the disadvantages of being focused on smaller companies, as well as not being included in indices for the majority of passive investing. Furthermore, scale works both ways – as a market shrinks in size, investor appetite diminishes and outflows accelerate. This really matters, as it is a core driver of low valuations in UK small and midcap stocks, resulting in many companies being acquired that had excellent long-term prospects as listed companies.

Figure 2 below shows the flows in UK smaller company funds over the last two years, as collated by EPFR.

Figure 2: EPFR flows in UK smaller companies funds, $m

This tots up to a total outflow of c.£4bn over two years, equating to a reduction of 22% of the funds’ assets. This demonstrates precisely why there is such a big problem in UK capital markets for smaller companies. Actually, it is worse than this – Figure 3 below adds in the fund flows for UK mid-cap funds.

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