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Value & Quality Increasingly in View
The start of 2009 finds AIM down, like almost every equity market globally—but far from out, as this thirteenth edition of Baker Tilly and Faegre & Benson's Taking AIM Survey underscores. On the contrary: while last year's unprecedented volatility and market turmoil sent the AIM all-share and other indices plunging by more than 60% and curbed IPO volume by an even greater percentage, other parameters show that AIM is still worthy of its unique role as the world's growth company market.
A year as challenging to financial markets as 2008 inevitably hurt headline performance on every exchange. But, although much reduced, AIM's IPO total outpaced comparable markets in Europe and elsewhere (as well as the main London market). Indeed, the year's tally shows it only a couple of offerings behind the much larger Nasdaq.
Channeling Capital
Moreover, secondary issues remain one of the market's key strengths. While many institutional investors chose to withdraw from IPOs last year, their willingness to support existing AIM companies was a notable contrast: as much as GBP3.2bn of further equity funding was completed in 2008.
In a period when access to credit evaporated—particularly for younger, higher-risk companies—the significance of AIM's capacity to keep channelling capital to credible growth stories cannot be over-stated. The emphasis on adequate funding and balance sheet strength that echoes through this survey's interviews with AIM companies reinforces the point.
Global Reach
The market's global reach was also undiminished in 2008. Three-quarters of the year's IPOs were for companies whose main areas of operation are outside the United Kingdom. This flies in the face of 2008's huge rise in risk aversion.
It also demonstrates AIM's credentials as the key platform for growth companies around the world to access risk capital: it continues to fill a gap that few local equity markets are able to address effectively.
Regulatory Reflection
As in previous years, we structure this report around four key themes that emerged from interviews with experts on AIM. Besides 2008 performance, these comprise the outlook for 2009, regulation and advisers/investor relations. Note that the fourth theme has been slightly modified from last year.
Demands for increased regulation on AIM will probably grow this year. Some investors' survey responses point in this direction. But, as our other experts indicate, hasty moves risk being over-prescriptive and losing the light regulatory touch that has been a key element in AIM's past success.
The imposition of a minimum market cap offers some superficial attractions, for example. But after the market's sharp fall in the last quarter of 2008 the GBP5m threshold sometimes proposed would capture as much as 40% of all AIM companies—twice the number three months earlier.
Raising the bar for new entrants could be beneficial, though. A mechanism such as minimum capital to be raised might improve perceptions of AIM.
In any case, the market is already addressing these issues. Investors' recent preference for secondary funding signals a shift away from the riskiest business models and towards proven management and track records.
Advisory Responsibility
In the near-absence of IPO income, some Nomads are struggling. We recognise this and the gains that codifying best practice into the Nomad rulebook has brought, but nonetheless hope to see increased efforts by these key market players to nurture and encourage the companies they have brought to market.
Companies surveyed this year agree that Nomads can do more in this regard.
Conversely, in an environment where investors are more key than ever and their preferences are for safety and strength, AIM companies will need to heed the survey's message that their investor relations can improve.
Consolidating for Quality
Last year's reduction in the number of AIM companies has a positive dimension. Nearly 10% of the market's end-2007 corporate base departed over the year as a result of takeovers and mergers, delisting, switching market and administration (though AIM's overall failure rate remains strikingly low).
With recession biting, we expect more of the same in 2009. Lack of investor focus and the obligations of being a public company will no doubt lead some of the market's stronger names to trade in the benefits of their listing; some weaker ones may have less choice in the matter.
We see this as a necessary passage to a smaller, but higher-quality and more mature market. AIM's very rapid expansion and internationalisation of recent years was a vital stage in its development. But the time has clearly come for a move from quantitative to qualitative growth.
A reduced tail should help increase focus on AIM's core of excellent companies. For too many, continued operational success (hitting growth targets, completing transformational acquisitions) is far from reflected in their much reduced share prices.
Exceptional Value
The year ahead looks challenging for AIM. IPO volumes are likely to remain subdued. The broader economy is weak almost everywhere. Investors' confidence in companies and markets is limited.
Any pick-up in share prices will begin in large cap stocks and only move on to AIM once initial froth subsides and focus on value emerges.
Clearly, a strong rally is an unlikely prospect for 2009. But the quality of the market's core and the exceptional value available mean that stock-picking—always the key to successful AIM investing—should be increasingly rewarding.
