AIM Report 2019

14 15 A closer look at AIM’s new rules Although AIM can definitely be described as the world’s most successful growth market, it has always needed to strike a careful balance between too much and too little regulation. It was only 10 or so years ago that AIM was described by a commentator in the USA as a “casino” and any scandal concerning an AIM company seems to be covered with relish by the financial press, which always likes negative news. In these circumstances, last year the AIM Rules were updated to require nominated advisers to send to AIM Regulation an early notification form containing specified information on the companies on whose IPOs they were working. In addition, existing AIM companies and companies undertaking an IPO on AIM were required to identify a corporate governance regime with which they would comply. The early notification process seems to have been introduced to ensure that only companies appropriate to AIM are actually able to join the market. Following AIM’s introduction in 1995, this process of assessing suitability was part of the nominated adviser’s role, but I guess the London Stock Exchange felt that, to maintain and improve AIM’s standards, the nominated adviser’s assessment would have to be augmented by the new process. Certainly I have come across one instance (before the new process was implemented) of AIM Regulation refusing to admit a company once the Schedule 1 notice had been sent. (The Schedule 1 notice is required to be submitted to the London Stock Exchange 10 business days before a company is due to be admitted to AIM, in other words after the company has incurred most of the expense of an IPO.) The early notification process seems to have been designed to prevent these (rare) occurrences, enabling AIM Regulation to head off any unsuitable companies. However, despite what the name implies, an early notification can be submitted at any time up to the time that the Schedule 1 is submitted, which seems to defeat its purposes. Certainly on two IPOs I have worked on, the early notification notices were submitted fairly late in the process after some of the accounting and legal due diligence had been completed because the relevant nominated advisers wanted to have as much information as possible on the IPO candidate companies. It is too early to tell whether these changes have improved the quality of AIM companies The other change, requiring companies to identify a corporate governance regime that will be applied is, in my opinion, less controversial. Most companies were in any event applying the Quoted Companies Alliance’s Corporate Governance Code and, since the change, most companies seem to have identified with this code which is more appropriate for AIM companies, rather than the more demanding UK Corporate Governance Code, which applies to Premium Listed companies. In conclusion, it is too early to tell whether these changes have improved the quality of AIM companies, but anything that attempts to do so must surely be welcomed, if only to enhance the perception of the market. Chris Searle Corporate Finance Partner, BDO Market update / Thought leadership CURRENT MARKET CONDITIONS MOVING AWAY FROM VOLATILITY The AIM All Share suffered a significant drop at the end of 2018, and the steeper fall compared to the FTSE All Share demonstrates the junior market’s greater sensitivity to volatility. In total the sell off in the last quarter of 2018 saw the index lose over 20%. A variety of factors conspired to bring about the fall, including geopolitical factors such as fears over the US-China trade war, rising US interest rates and increasing uncertainty around Brexit. However, there were also some specific factors that hit AIM shares harder than the senior market. In particular, the OTS inheritance tax review raised some uncertainty in the second half of 2018 around the future of Business Relief, with the OTS confirming that AIM would be an area it looked at. Another cause for concern was the rumour ahead of the Autumn Budget 2018 that Chancellor Philip Hammond was considering making changes to the tax system that could affect AIM shares. He had been reported to be looking at a number of proposals, including changing rules on capital gains tax (CGT) in relation to inheritances. However, as these did not materialise in the Budget, the concerns have since receded somewhat. Underlining this general concern, rather than a more specific issue with a particular class of share, UK stock picker James Baker, manager of the Chelverton UK Equity Growth fund, said in October 2018, “so far, the sell-off has been fairly indiscriminate with AIM stocks in general being perceived as high risk even if they have strong balance sheets and high levels of revenue visibility and whatever their sector, with economically less correlated stocks being under the cosh just as much as more economically sensitive ones.” 8 Even with all the forces that were against it, experts have remained confident in AIM: “Although AIM clearly had a difficult second half of the year in 2018, it has not performed as badly as the cocktail of risks it faced might have suggested. Market values are still relatively high compared to historical levels and 2018 as a whole still saw a steady stream of new joiners. In our view, AIM is still a very viable market for well run companies with good business models and strong investment stories in the right sectors.” - BDO, January 2019 9 Since the start of 2019, there has been a meaningful recovery. There was an initial snapback in the first few months of 2019 and although this plateaued, it began August trading at around the same level it had done back in October 2018. By July 2019, AIM’s market capitalisation had climbed to £101 billion - its highest figure since 2017 and second highest since the market was launched in 1995. One interesting point to note is the performance of some of the tax efficient products on the AIM market during 2018. A look at the performance of a number of Business Relief AIM portfolios tracked by MICAP can offer an insight into this, although it is important to remember that such investments should be for the long term and so can ride out short-term shocks. FTSE AIMALL SHARE VS FTSE ALL SHARE 3 years to 27/6/2019 20% 30% 40% 50% 60% 70% 10% 0% -10% Sep 16 Jan 17 May 17 Sep 17 Jan 18 May 18 Sep 18 Jan 19 May 19 5% 0% -5% -10% -15% -20% -25% Aug 18 Oct 18 Dec 18 Feb 19 Apr 19 Jun 19 1 year to 27/6/2019 FTSE ALL SHARE FTSE AIM ALL SHARE