The problem with AIM

2nd August 2012

The new affection comes from investors in Lighthouse Group who rejected a boardroom call to delist from AIM where its shares have fallen from 30p to 4.2p over the past five years.  The proposition needed the agreement of 75 per cent of stock holders voting but only 47 per cent cast ballots in favour.

Besides the cost and effort involved in the listing, the directors had claimed that "the requirement to provide regular updates to the market is potentially 'commercially disadvantageous' at a time of significant regulatory change."  Lighthouse had also said "the current listing hinders the group's ability to look at acquisitions."

Equity investors say no

But shareholders rejected this in favour of a market place where they could sell their shares, despite Lighthouse's offer of a matched bargain arrangement with a stockbroker to allow investors to trade their equity holdings.

Addressing shareholder concerns about governance that have been expressed in the media, Lighthouse had promised the group would continue to hold regular shareholder meetings, maintain non-executive  representation on the board and operate audit, remuneration and risk committees. Neither pledge satisfied enough investors.

Yet Lighthouse could prove to be the one shining beacon in an otherwise unwelcoming AIM ocean. Set up in June 1995, AIM is looking increasingly aimless. The number of companies quoted has fallen, companies are leaving it other than to join the main market, and the light touch rulebook has encouraged many investors to shy away from it on confidence grounds. There have been too many highly speculative issues – often but not always foreign – where corporate governance has been found wanting.

A powerhouse for tomorrow

The London Stock Exchange official line is that AIM is an unqualified success. It says: "AIM is the most successful growth market in the world. Since its launch in 1995, over 3,000 companies from across the globe have chosen to join AIM. Powering the companies of tomorrow, AIM continues to help smaller and growing companies raise the capital they need for expansion."

But its own statistics tell a different story. The entire AIM market is worth just £60bn, roughly the same as Unilever. The AIM total is some £37bn below its 2007 peak after which the then £97bn value slumped to £37bn in 2008 before recovering and then slipping back again.

The numbers of quoted participants fell from 1,694 in 2007 to a current 1,114 with most of the fall in UK based companies. That's one in three of the companies that have listed. Of recent delistings, only a small minority have graduated to the main market.

The amount of new money raised is currently running at £4bn, down from £16bn a year in 2006.

Image and confidence

The AIM market has two major problems. One is image. The light touch regulation which set out to attract companies has often backfired. Firms have been so loosely governed that many have slipped on to AIM with a scant business plan and sometimes no business at all. A number of companies seem to have primarily existed to serve bucket shop brokers, often no better than boiler rooms.

Many failed AIM companies in the first years were so-called "incubators". They would take money from investors on the promise they would place it in start-up and second stage companies. Unfortunately, much of this money never reached would-be entrepreneurs.

While those running the AIM set-up would doubtlessly consider it wrong to label the companies either as failures or as unsuitable for public investment – and while it is true that the majority were well-run even if many were ultimately unsuccessful, the market has never recovered from the earlier dents to its reputation, it has never regained the trust of investors.

 The second difficulty that it now faces is the number of alternative ways of raising finance – AIM always stressed this role, often above marketability of shares.

Sourcing cash online

Early stage money can now be sourced online – Seedrs, for example, is a method of joining those with money to invest with those who need capital for their project. This promises to "raise capital for your startup from friends, family and the crowds." And because of the nature of these companies, most qualify for tax relief under the Enterprise Investment Scheme. Investing in AIM companies can come with tax breaks as well. Funds of AIM firms qualify for Venture Capital Trust tax relief.

And it can only be a matter of time before something similar applies to more mature companies – those with three to five years' trading which need more finance. And online communities could replace stock market led buying and selling of shares. The matched sale and purchase facility promised by the Lighthouse board before its defeat should and could be replicated across the entire smaller company market.

 

More on Mindful Money:

What investors need to know about market correlation

Reforming and restoring big finance

Mindless With Money: How to be a mindful investor

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