It is not surprising that AIM, like many other small cap markets, is suffering due to the current economic climate. Even though the downturn is a global phenomenon, there seems to be much criticism of AIM and its perceived shortcomings as cause rather than effect of a company’s present difficulties. It was not that long ago that AIM was the global market of choice for raising capital and profile for small cap issuers, and yet many are of the view that AIM’s days are numbered. Are the rumours of AIM’s imminent demise accurate or exaggerated?
As 2009 represents the bicentennial of Charles Darwin’s birth and the 150th anniversary of the publication of “On the Origin of Species”, an apt metaphor for assessing AIM’s future existence is one of natural selection. Companies, advisers and the AIM market itself will each have to adapt in order to survive. What is clear is that AIM is shrinking, with the virtual absence of new listings combined with increasing de-listings sending numbers spiralling downward.
It is worth reviewing the causes behind the current de-listing epidemic. Many AIM companies have struggled to deliver on their business plans, such as property fund Wyndham York plc, and have opted to de-list with a view to liquidating its assets in the near future. Some companies have failed not just as a result of the challenging commercial trading environment and lack of available equity financing, but also due to the increasing reluctance of high street banks to renew loan and overdraft facilities crucial to maintaining working capital (which would have been automatic in previous years). The recent administration of the parent company of Southampton Football Club is one high profile example.
And what of those companies which are still financially viable? A natural consequence of the downturn is that every AIM company is reviewing its cost-base. The drastic fall in share prices has resulted in a corresponding drop in the value of a company’s shares as a source of raising equity finance or as currency for acquisitions, and employee share options will inevitably be underwater. With many of the perceived benefits of maintaining an AIM listing presently eroded, whether the annual costs a ballpark estimate for which is at least £100,000 per annum, including fees of the nominated adviser (“nomad”), broker, auditors, solicitors, PR and others are justified will be fiercely debated in many boardrooms.
Consequently, many companies have de-listed, or are considering de-listing, from AIM for cost reasons alone, choosing either to become private companies, rely on an existing listing on another market, or move to PLUS Markets where compliance costs are perceived to be cheaper. While de-listing will make commercial sense for many companies, for many others, it may prove to be a short-sighted solution to the long-term survival and growth of the company if it is likely to have to raise funds in the near to medium term. Capital markets are cyclical in nature and AIM will be no different.
De-listing, which requires 75% shareholder approval under the AIM Rules, can potentially also be prejudicial to minority shareholders. For example, property company Metnor Group plc’s recent announcement of its intention to de-list caused its market cap to fall by almost two thirds in three days as institutions which couldn’t hold unquoted stock were forced to sell, severely depressing the price, in the process giving the controlling shareholders an unwarranted opportunity to acquire the rest of the company on the cheap following de-listing.
A further cause of de-listing of a number of AIM companies is the resignation of their nomad, which under the AIM Rules leads to suspension and then de-listing if not replaced, which becomes difficult when a company is in financial difficulty. These resignations have in many cases been precipitated by the collapse of the nomad itself. Indeed, it is not just AIM companies which are struggling a number of nomads, including Dawney Day and Landsbanki, have disappeared, and there will be more to follow before the game of musical chairs is complete.
Ironically, the de-listing of so many small cap companies on AIM is arguably no bad thing for the AIM market as a whole. During the boom times of recent years a large number of companies were brought to the market which in hindsight should not have been. This “addition by subtraction” evolution in the current climate has only served to reinforce this view. Similarly, although the demise of some nomads causes considerable disruption in the short term, the longer term benefit to AIM of only the more robust nomads surviving this downturn means that lessons will have been learnt and they will be more selective as to which companies they bring to market.
What about AIM itself, what can it do to adapt in order to secure a positive future? It is worth saying at the outset that the rationale for AIM is still very strong: AIM has been the world’s most successful growth market and it benefits from being located in London, and its flexible regulatory regime which is generally less prescriptive and costly than other growth markets. Notwithstanding the recent fall in numbers, AIM retains a critical mass of quality companies which means that a complete extinction is unlikely. However, this would be a good time for the LSE to respond to calls for regulatory changes to help stimulate activity on the AIM market and restore interest as and when economic conditions improve.
Whilst the AIM rule book was revised in February 2007 with the introduction of a separate set of rules for nomads there are still a number of concerns with respect to the AIM regime which should be addressed, including the following:
- Improve Liquidity. The lack of liquidity in AIM companies is a primary concern often voiced, notwithstanding this is an inherent problem in a majority of small cap companies. As a start, the LSE established PSQ Analytics, offering equity research to smaller companies, which deserves time to get established and bear fruit, but more can be done. In particular, it is time for the LSE to review the absence of a requirement for companies to maintain a level of free float by requiring there to be a certain minimum number of non-management shareholders who each hold a minimum number of shares.
- Increase VCT thresholds. The LSE to continue to petition for changes to be made to tax legislation to make it easier for VCT’s to invest in AIM stocks by increasing the qualifying gross assets test level of a company from £7 million to around £25 million. Together with increasing the number of employees that a qualifying company can employ from 50 to 200, it is estimated that an additional 170 AIM companies could benefit from access to such capital.
- Codify Corporate Governance. This codification need not be comprehensive but must at least contain a basic level of key requirements to ensure expectations of shareholders and boards are aligned. A sliding scale depending on a company’s size could be considered, such as is the case on the TSX Venture Exchange.
- Combat Insider Dealing. While the FSA’s increased focus on this issue will help, AIM could also be proactive by mandating an escrow-release mechanism for shares of directors and substantial shareholders subject to lock-in provisions. This would reassure the market more than the often toothless contractual undertakings typically used as there have been many cases where these are observed in the breach.
- Review de-listing requirements. Consideration should be given as to whether only independent shareholders, i.e. those not connected with a company’s management, should be entitled to vote on a resolution to de-list, to ensure that de-listing is not used as a mechanism to prejudice minority shareholders.
With increased regulation comes increased costs so a balance will need to be struck, but one which results in a stronger market. Those companies and advisers that do survive the downturn should emerge better suited to the new and improved economic and regulatory landscape in which they will operate. In the meantime, conditions will remain challenging and there will continue to be casualties, so the AIM market will be anything but dull in the coming months.