AIM is primed for a 2010 resurgence

Optimism is returning to AIM. In one of the most comprehensive investigations into the health of the junior market ever undertaken, Growth Company Investor can reveal that AIM’s advisory community is expecting an upturn in IPO and M&A activity, its professional investors are keen to increase their exposure to AIM ventures, and private investors believe the overall AIM index will provide further gains in 2010 – and that’s after last year’s 67 per cent hike from recessionary lows.

The reason is that, despite last year’s rebound, 90 per cent of AIM companies are valued at less than £50 million and 43 per cent are valued at less than £10 million. There is, quite simply, a tremendous amount of value around.
The research, undertaken in association with the London Stock Exchange, saw Growth Company Investor conduct interviews with: fund managers representing £740 million of funds under management; entrepreneurs representing companies worth over a combined £1.2 billion; and advisers acting for more than a fifth of all AIM companies. We also conducted online surveys with over 250 private investors/AIM executives and produced an exhaustive statistical analysis of every aspect of the junior market.

Commenting on the findings, Marcus Stuttard, head of AIM at the London Stock Exchange, said, ‘AIM’s fundamentals remain strong and I firmly believe that the market’s regulatory system, based on balancing the needs of growing companies with appropriate levels of investor protection, will continue to create a compelling offering.’
A private view

Growth Company Investor’s online survey of private investors’ attitudes toward the junior market found that 67 per cent expect further gains for AIM in 2010, while 76 per cent believe that AIM currently offers good value.

Said one bullish investor, ‘From the floor of 2008, smaller companies are now recovering well. There will always be those that are just too weak to survive, and one would expect to lose a few on the way.’  Another pushed the point that the depressing market conditions of the past few years were not the fault of AIM companies: ‘It is not small-caps that have let the market down. Quite the contrary, it is many of the big boys that have forfeited public confidence.’

Asked which sectors they were most likely to invest in this year, natural resources remained the most popular, with oil and gas and mining chosen by 51 and 43 per cent respectively. Renewable energy is a fashionable choice for 44 per cent and the beleaguered biotechs are fancied by 40 per cent.

The least popular industries for retail investors at present are investment vehicles, life and non-life insurance, household goods, automotive and travel and leisure, all of which were favoured by less than 5 per cent.

One interesting fact to emerge from our survey of private investors was that a significant minority – 46 per cent – do not invest in AIM’s foreign companies. And in a development that may perplex entrepreneurs and advisers, 34 per cent called for the regulatory environment to be tightened – a hangover perhaps from the financial hiatus of 2008/09.

AIM’s notoriously tight price spreads were only bemoaned by 30 per cent of investors, with 55 per cent remaining relatively sanguine and 15 per cent seeing the spreads as appropriate for the size and risks involved in this type of environment.

The one issue on which private investors were very much united though was tax: 58 per cent wanted the government to make the tax breaks for backing high risk to be as attractive as they once were, with 33 per cent calling for a reinvigoration of the (currently troubled) VCT regime and 57 per cent demanding that AIM shares qualify for ISAs.

Institutional optimism

In tandem with our private investor survey, Growth Company Investor conducted numerous interviews with key institutional investors.

This professional class are generally very positive, with the majority expecting to increase their investment in AIM companies this year, although they express concern about tax incentives, liquidity and the variable quality of companies.

Harry Nimmo, investment director at Standard Life Investments, admitted that he ‘can’t wait to get stuck in’ to what he hopes will be a robust year for new companies coming to the UK’s growth market (for more on brokers’ views on IPOs see New Issues Examined on p15). In addition, Nimmo was keen to highlight that ‘AIM has taken a lot of knocks over the past few years and has proven to be pretty resilient’.

The wide variety of risks on offer to investors is something that he applauds: ‘It is quite a deep market, with hundreds of companies to choose from. It is very much a case of caveat emptor’.
This view is supported by Henderson Global Investors’ Colin Hughes, who said, ‘[The purpose of AIM is to make] available to investors…innovative investment opportunities. They may be higher risk but really that is what it is there for.’

Although there were complaints from the likes of Scottish Widows’ Chris Bamberry that ‘liquidity is a major issue for AIM because there is less free-float’, it was acknowledged that ‘this isn’t necessarily a bad thing if you are investing on a three- to five-year period’.

Entrepreneurs in harmony

A survey of a cross-section of AIM chief executives – across a range of companies valued from £2 million to £750 million – found a characteristically mixed set of opinions.

One harmonious view was that funding support remains for well-run, proven companies, with 82 per cent confident that they would be able to raise funds if they needed to.

Many CEOs praised AIM investors for their ‘entrepreneurialism’ and willingness to back ideas at an early stage but called for more incentives to encourage continued investment in risk. Bob Holt, boss of AIM’s Green Compliance and AIM graduate Mears Group said that ‘the tax rules relating to AIM companies are certainly less helpful than they were’ and that ‘any help for smaller growing companies would be greatly welcomed’, a view backed up by the 78 per cent of CEOs polled who called on the Treasury to introduce further tax breaks on AIM investment.

The London Stock Exchange’s Stuttard confirms that this has been one area in which he has been conducting a certain degree of lobbying, alongside the promotion of greater freedoms for venture capital trusts, in terms of tax breaks and what they are allowed to invest in.

Bob Morton, chairman of numerous AIM companies including accountancy group Tenon and pre-IPO investor St Peter Port Capital, was one of the few critical voices, but his arguments point to how advantageous the current climate is for investors: ‘Quite frankly, I wouldn’t bother to float a company on AIM this year because at the moment valuations are so low. We’re talking about p/e ratios of five to seven, and who wants to give away value at that price?’

Investor attractions
From an investor’s point of view (rather than a CEO’s) there is much to be excited about since value abounds.
The report finds that there are currently over 230 companies valued at less than seven times their historic earnings on AIM. Many are unduly lowly rated, 528 companies having grown their annual revenues at double-digit rates or faster in their last results and 157 having done the same with profits.

As Gervais Williams says, ‘Strong companies with sound fundamentals have been overlooked as a result of the economic environment. As that improves, so too will the fortunes of these small companies.’ As such, Williams claims that ‘AIM exhibits extraordinary value’. We agree.

BUY THE FULL REPORT
This article is a digested version of the full 80-page report AIM in Review 2010, which also includes a statistical view of the state of play on AIM, with the highlights of a year’s worth of research reports from the Growth Company Investor team. To order the report for £350 + VAT, call 020 7250 7056 or email blanka.biernat@vitessemedia.co.uk