AIM Industry Report 2017/18

28 29 HIGH GROWTH POTENTIAL SMEs IMPACT ON THE ECONOMY PICKING THE WINNERS WHAT THEY DO FOR THE UK As the AIM market allows small and growing companies to raise finance under less onerous, lower-cost rules, AIM provides a route to growth for some firms that would otherwise struggle to gain funding or visibility. This has accommodated numerous small and unproven companies, many of which have failed and dragged down the index. Research into the first 20 years of AIM by the London Business School found that investors would have lost money in 72% of all the companies ever to have quoted on AIM 39 . Nonetheless, focusing on the index does not give a true picture of what is going on at the company level – even when it is eye-catchingly positive – the AIM 100 index rose 34% in the 12 months to April 2017, compared with 18% from the FTSE 100. In the same period of impressive growth and performance figures, just 56% of AIM All-Share quoted companies were in positive territory, against 76% on the FTSE All-Share 40 . The point is, AIM is a market of big winners and lots of losers and, as obvious as it might seem, the key to accessing the high growth potential on offer is picking the right stocks – simply tracking the market just won’t work. Having said that, the one possible exception to the use of an active stock- picking strategy above passive market- tracking as a successful investment method is using a smart passive or smart beta strategy. Such a strategy offers an active slant on passive index- tracking investment strategies, with the aim of lowering costs and beating the market. This removes the human factor of stock-picker bias and uses algorithms to identify stocks which are trading below their true value based on earnings or momentum; or those which tend to be less volatile. The importance of SMEs to the UK economy should not be underestimated. Statistics from the Department for Business, Innovation & Skills show that small businesses accounted for 99.3% of all private sector businesses at the start of 2016 and 99.9% were SMEs. These firms provided 15.7 million jobs; 60% of all private sector employment in the UK and their combined annual turnover was £1.8 trillion, 47% of all private sector turnover in the UK 46 . SMEs are a prime target for growth and increased productivity and improving the UK’s low productivity is a key challenge to generate growth in the economy. The Economic and Social Research Council has called SMEs a key underused resource for increasing productivity 47 and this makes them a critical element in the UK’s future economic health. Growing SMEs contribute significantly to the UK fiscal landscape, with job creation, exports, VAT intake, as well as the revenue that HMT receives in the form of employer NI contributions, employee NI contributions, Business Rates, VAT and Corporation Tax 48 . New, young companies also play a major role in generating new ideas, new products and services and creating new markets. This disruptive innovation can be extremely valuable, but can also need assistance to become commercialised and grow. But firms receiving this assistance can repay it very handsomely: SMEs create wealth for investors (which is often recycled) and research has shown that investment in early-stage companies saw a rate of growth in the five years to 2016 that was more than six times faster than that of the FTSE All-Share index 49 . The rules of EIS, SEIS, VCTs and BR very much target investment in small, young companies. 45% of BR, 39% of VCT (with 22% almost entirely AIM focused and the rest with an AIM component) and 3.5% of EIS products are currently AIM-based 50 (open offers at October 2017). This equation, plus the interest of the venture capital community, translates to massive, tax efficient opportunity within the AIM market that provides a huge boost to UK PLC. In terms of BR, in the five years from 2010/11 to 2014/15, HMRC statistics show that over £5.6 billion of Inheritance Tax relief was granted against unquoted shares 51 (including AIM-quoted shares). In addition, since 1994, EIS has raised over £16.2 billion for over 26,000 small companies through angels, funds and direct investment 52 and VCT has raised approximately £7 billion of funds 53 . HMRC commissioned research links EIS/VCT investment to increases in sales (a median growth rate of 0.4%), jobs (a median growth rate of 33%) and productivity, as well as greater innovation in products and services 54 . British Venture Capital Association research has also found that VC- backed businesses contribute, on average, £73,700 per employee per year to the UK economy vs. a private sector average of £47,500, and 200,000 people were employed in the 24,200 companies backed by VC in 2015. The report also estimates that some 480,000 full-time jobs were created, directly and indirectly, from VC funding in the five-year period between 2010 and 2015 – roughly equivalent to the UK’s entire retail sector 55 . Another noteworthy finding is that UK businesses received £4.1 billion of VC funding in 2015, a year in which £15 billion was directly contributed to UK GDP by businesses that had been backed by VC money in the preceding five years. Once their impact on the wider supply chain is taken into account, the figure doubles to £30 billion GDP. This is more than seven times the flow of VC investment in 2015 56 . AIC commissioned research reports that in the VCT sector alone, every £1 million of investment has been accompanied by an average increase of £2.2 million in turnover; where funds have had longer to work, growth has been greater; and 41% of VCT- backed businesses reported export earnings 57 . The same work stated that, in August 2017, there were “512 UK smaller companies currently benefiting from £1.4 billion of VCT investment. 57% of smaller companies supported by VCTs received total investment between £2 million and £10 million, a level of funding not well served by traditional investors. These amounts of money tend to be out of the reach of the business’s own resources but are too small for conventional private equity funds, which prefer larger deals.” The AIM market can give these companies a regulatory framework (however light-touch it may be considered) that unquoted SMEs are not subject to, not to mention visibility in what is the world’s pre-eminent shop window for SMEs seeking growth funding. AIM is a perfect hunting ground for firms that have the creativity and inventiveness to succeed. When they have this, the results for the SMEs can be impressive. KEYWORD STUDIOS PLC The winner of the AIM Awards Growth Business of the Year in October 2017 was Keywords Studios, the international technical services provider to the global video games industry. The company has achieved exceptional and consistent growth in turnover over the last three years through market disruption and innovation 41 . Keyword’s AIM share price more than tripled in the year to 24 October 2017 (from 456 to 1,495) and the multiple is almost 9.5 for the two years from 24 October 2015 (158.5 to 1,495 42 ). ADVANCED MEDICAL SOLUTIONS GROUP PLC A slower burner showing consistent growth over a five-year period is Advanced Medical Solutions, a surgical products firm. In September 2017 it reported interim pre-tax profits of £11.4 million, up from £9.0 million in the previous year. The company streamlined its two business units, and delivered 26% revenue growth in its branded unit, and 6% in its original equipment manufacturer unit 44 . The share price at 25 October 2017 was 299.75 compared to 215 at the same date in 2016 – an increase of almost 40% 45 . GEAR4MUSIC HOLDINGS PLC Another finalist in the AIM Awards Growth Business of the Year in October 2017 was Gear4Music, an online shop for musical instruments. For the six months to 31 August 2017, gross profit was up £2.1m, or 36%, at £7.8m, UK revenue was at £17.9m (+30%) and International revenue at £13.3m (+70%). This equates to 44% revenue growth in the period, and two-year growth of 150% 43 . ADVANCED MEDICAL SOLUTIONS GROUP PLC AIM SHARE PRICE PERFORMANCE JUL 2013 JUL 2O14 JUL 2015 JUL 2016 JUL 2017 64.955 129.91 194.87 259.82 324.77 SOURCE: LSE REAL EXAMPLES