A Review of the Taking AIM Survey 2010

The findings of last year's "Taking AIM" annual survey suggested that AIM was still recovering from the bruising that it, like every other stock market around the world, suffered in 2008. The experts who contributed to last year's survey were keen to express that they felt AIM would be able to bounce back, not least because of its reputation as a leading growth company market and its flexible regulatory regime. But were they right? It would seem, to a large degree, that they were.

Whilst 2009 was a year of continued economic hardship and investor caution, AIM ended the year a much stronger and significantly leaner entity, thanks in large part to the continued delisting of the market's smallest companies.

Leaner and Meaner

Only 13 companies joined AIM last year by way of an initial public offering ("IPO"). Going the other way, the attrition rate was slightly higher than in the previous year (293 delistings in 2009, compared with 259 in 2008). This followed a similar trend to 2008, which saw a reduced number of IPOs and inevitably led to a shift in emphasis towards secondary funding for more proven stocks rather than unproven early-stage companies.

The contrast between the size of AIM's membership and its strength can be summarised in two statistics. Whilst the AIM population at 31 December 2009 was below 1,300 for the first time since August 2005, the average market value of an AIM company at that date stood at £44 million, compared with £24 million at the end of 2008. These statistics coupled with the amount raised by AIM companies by way of secondary fundraisings (£4.8 billion in 2009, compared with £3.2 billion in 2008), illustrate that AIM is a market of durability and strength.

Market Performance

AIM's resilience in 2009 was a welcome relief to the woes of 2008. With a continued dearth of IPOs, investors' continued support for secondary issues confirmed their faith in the market and support for its companies.

Investment stabilised in the market over the course of last year, evidenced by a 66% increase in the AIM All-Share Index. Nearly two-thirds of investors surveyed said that AIM's performance during the year had a positive effect on their own funds.

The continued delisting of smaller companies has reinforced many of the benefits that AIM companies have realised. Around three-quarters of companies have seen some benefit from access to capital, and 36% say this has been a major benefit (up from 22% last year). 90% say that they have realised benefits in profile and credibility by being on AIM and the advantages it provides, including facilitating exits for investors and strategic acquisitions.

Regulation

AIM's light regulatory touch has always been a key feature to its success, but has attracted its fair share of criticism in the past from overseas competitors. However, the tightening up of the AIM Rules over the last three years, including the publication of a rulebook for Nominated Advisers ("nomads"), is seen as a contributory factor in the market's resilience during the downturn, not to mention largely silencing its critics and reducing the call for further regulation.

When asked how effective they thought self-regulation is for AIM, the companies surveyed agreed that it is working well (86% of companies say that it is effective), a view which was shared by the expert panel. Whilst there is still some support among investors for further regulation, the strong market performance of the past year has perhaps eased their demands in this respect. A majority of investors now say that self-regulation is at least fairly effective (60% up from 47% last year) and only 50% support the view that further increases in regulation are still required (down from 67% last year).

Similarly, it would seem that the pressure has eased on corporate governance: 73% of investors say that good corporate governance is more important in the current economic environment (down from 91% last year), and most believe the standards of corporate governance in AIM companies to be at least acceptable. Little more than one in three now believe they are not good enough (37%, down from 58% last year).

Advisers and Investor Relations

Unsurprisingly, the stronger performance last year may have relieved a little of the pressure on investor relations ("IR"). Weathering the economic storm with good IR continues to be an important requisite for AIM companies, which was specifically highlighted in last year's survey, but not nearly as important: 59% of companies (down from 76% last year) still say that IR is more important in the current difficult environment. However, it continues to be a much more important factor from the perspective of an investor (70%, down from 76%).

There is some suggestion that companies may be putting a little less senior management time into IR now than they were a year ago. However, in an improved market, they believe they are getting a better return on this investment, which may have something to do with the pressure exerted by AIM companies on their advisers' fees over the last two years. A majority believe that their efforts are reasonably well reflected in the City's understanding of their company (58%) and in the level of interest in their company and its shares (59%, up from 46% last year).

Most investors (60%) see companies' IR activities as at least fairly effective (no change from last year). They look for full, clear, honest and timely communication from companies, and some call for more personal communication and better web accessible information. As stated in last year's survey, it is at times such as these that quoted companies really need their investors' support. Perhaps AIM companies should heed the suggestion of investors and look to improve on the information made available and the means of doing so.

Companies remain most satisfied with the quality of advice they get from their corporate lawyers. 92% of companies are generally pleased with the advice from their nomads (up from 86% last year), 88% with their auditors (up from 81%) and 94% with their corporate lawyers (up from 92%).

Looking Forward

Both companies and investors alike face 2010 with greater confidence, expecting further recovery from AIM as world markets pick up. This has been true in some part, evidenced by the increased number of IPOs that have taken place compared to this time last year, but the world's economic woes show little sign of abating. At the time of soliciting responses for this year's "Taking AIM" survey, a majority of both institutional investors (63%) and AIM companies (53%) anticipate an improvement in AIM's performance over the next 12 months, with many expecting a full recovery in market valuation and levels of activity. Investors are perhaps a little more cautions than companies, anticipating that full recovery may not be seen until 2011 or later – an opinion that looks quite accurate given the current economic outlook.

In particular, investors and the expert panel believe that there will only be a slow recovery in IPO activity, as investors continue to favour known companies with an established track record until confidence full returns. Secondary issues are likely to continue to be well supported, and two-thirds of the UK AIM companies surveyed say that they have considered or would consider AIM for further funding in the next 12 months.

With few IPOs anticipated, it is expected that there may still be some contraction in AIM over 2010. Some smaller AIM companies may reconsider the cost and viability of remaining on AIM while they find it more difficult to attract investor attention. 60% of investors still believe that some smaller companies should consider delisting, although the proportion of AIM companies seeing any likelihood of going private in the next 12-18 months has fallen from 22% in last year's survey to only 8%.

There may be some return to a higher level of risk in investments, with investors looking for the best growth opportunities in last year's survey, they were staying close to home. However, with the UK expected to lag other markets in recovery, specifically the emerging market economies, they see opportunities in UK companies with good overseas earnings and in overseas companies from strong growth markets. Investors believe that interest will be particularly high in China (37%) and India (23%). Sectors most favoured are mining, resources, oil and gas (37%), which has a high overseas focus, and technology and IT (33%).

The Longer Term

Taking the longer term view, this year's expert panel generally agrees that AIM is largely back on course and does not expect any fundamental change in its nature or structure over the next three to five years. Most believe that there will be some controlled increase in the number of companies on AIM, with a minority believing there would be a little further contraction.

With AIM's maturity and resilience being cited throughout this year's survey, it goes hand in hand to assume that generally larger, more substantive companies, will flourish; leading to greater liquidity and investor interest, raising the index and company valuations.

It is clear that the characteristics that have positioned AIM well in the past, and seen it develop into the world's leading growth company market, are the same characteristics that will encourage its revival and growth as world markets recover. Its role as a market for growing companies will stand AIM in good stead as the economic environment improves, and its low costs and regulatory flexibility make it an attractive home for those companies.

This article first appeared in the Company Secretary's Review on 26th May 2010.