The Alternative Investment Market offers rewards for fast-growing firms but investors can be unforgiving if a listing is botched. Follow our guide for a smoother ride
Companies weighing up a listing on the Alternative Investment Market (AIM) have only one chance to get it right. About 1,200 businesses on the London Stock Exchange's junior market are seeking the support of investors so competition is tough. Life on AIM can be rewarding but there are frustrations, too. As a small-company investor and also as a journalist covering the sector, I regularly hear that many directors of AIM businesses feel they do not receive enough recognition.
Investors have a short attention span. They typically know a little about many different industries while being an expert in none, and they are unforgiving when something goes wrong. If they feel that a company has failed to deliver on promises its share price can suffer, wiping out many of the reasons for being on the exchange in the first place. It is a long road back, so if you are thinking of bringing about an AIM listing you need to do three things: prepare thoroughly, be able to offer a clear proposition to investors, and vow to under-promise and over-deliver.
There are several reasons why companies may wish to float on AIM. These have implications for investors and so can determine stockmarket success. Some companies arrive on the exchange because they feel that a public listing will give confidence to customers. Some enter the market to motivate staff through the award of shares and options. Others choose AIM so that owners can turn some of their stake in a business into cash by selling it to outside investors. All of these sound sensible from the view of business owners, but none make a compelling case for new investors. Why would they want to invest in a company at the same time that one of its founders is happy to sell a stake? For investors, the most attractive flotations are those where a company has spotted a genuine business opportunity, but needs capital to pursue it. Directors should not forget that the main point of the stockmarket is to raise capital through the sale of equity. If investors can buy and sell the resulting shares freely, then this capital will cost less than otherwise. But this trading function of the stockmarket is secondary to the capital-raising activity.
When investors are asked to put cash into AIM companies they must be convinced that the business can achieve a high return on the capital. From the trough of March 2009 when the AIM index dipped to 373, the market had risen to around 950 in the first half of last month. Much of this is due to the buoyant mining sector, which illustrates AIM's purpose well. Mining businesses need heavy capital investment long before they can be profitable. Investors in the exchange have provided much of this risk capital and with many mining ventures swinging into action as commodity prices reach record levels they are reaping rewards.
Junior miners have been able to tell investors how much money they need, and how they will spend it. But such clarity need not be confined to the mining sector. Any business entering AIM with a view to raising money must be able to explain exactly how that cash will be used and what the returns on investment will be. Investors will not back directors who are only able to offer vague plans for growth.
These days many AIM prospectuses refer to the chances of growth through acquisition. This route can be successful, but the opportunity to make successful acquisitions must be made clear. A good example was Brandon Hire, which bought tool hire businesses, rebranded them and was able to offer a national service to builders that had been used to dealing with local suppliers. Less successful roll-ups have been seen in the travel market where the case for buying individual operators is not strong.
Acquisitions can make sense for any business, but the history of AIM is littered with companies that have been brought down by bad deals. Apart from the need for a genuine business rationale, there are two keys to success. The first is to have experience of making acquisitions. Such deals must be meticulously planned and executed and the board of the acquirer must have experience in this area. The second is to pay cash and take control from the outset. Many acquisitions are made on an "earn-out" basis, with the full consideration paid in tranches over time reliant upon the financial results of the target company. This can look good on paper but the buyer is obliged to allow the bosses of the acquired company to remain at the helm. Future consideration in the form of shares can also seriously dilute the interest of existing shareholders who are dependent upon the share price at the time of the deal.
Share prices can fluctuate widely for no good reason. AIM entrants usually have visions of success, a rising share price and supportive investors. But due to little more than the investment fashion of the day AIM-listed shares can be depressed and stay that way for some time. That can seriously affect the ability to raise new funds, motivate staff and achieve all the other advertised benefits of a listing.
Directors must be sure that they have a sound growth strategy and that they can deliver it. An AIM listing is expensive and time-consuming, and isn't for vanity reasons. The exchange has been around since 1995 and has hosted many more failures than successes. Directors considering a flotation need to be clear about their reasons and they must build in a margin for error. Too many new entrants are unable to live up to expectations. To satisfy investors directors must be able to deliver on promises, not be expert at making excuses.
Rival Market targets AIM
Formed in 2005 out of the ashes of the Ofex exchange, Plus Markets was planned as a competitor to AIM and set out to be the key independent market in the UK for small firms. After initial success it became a Recognised Investment Exchange in 2007, attracting 30 per cent of AIM activity by the end of that year. But the drop in listings during the recession hit Plus harder than more established markets. Management has been reshuffled and a shift in focus has led to the launch of a derivatives market. Its supporters claim that AIM has too many companies with a capitalisation under £20m, while critics question the viability of a third market. But while bank lending remains stifled Plus has raised £80m for small firms listing on it.
Tom Bulford is editor of monthly newsletter Red Hot Penny Shares and free email service Penny Sleuth
