AIM Industry Report 2017/18

35 34 MARKET RISK OF SMALLER COMPANY There were 58 cancellations of companies quoted on AIM from January to the end of September 2017. Many were taken over, some cancelled because their Nomads resigned. That said, other cancellations were as a result of financial failure. The following examples demonstrate the vulnerability of some firms to single events: RAME ENERGY PLC A South America-focused wind power group went into administration in August 2016. The company blamed difficult market conditions and the outcome of the UK referendum for a failure to raise £2.8 million in a funding round. As a result, the directors concluded that the group could no longer continue to trade on a solvent basis 71 . The firm was cancelled from AIM in January 2017. DIAMONDCORP PLC South Africa-focused mining company suspended trading in its shares in November 2016 after storms flooded its mine in South Africa and caused operations to be shut down. The firm was cancelled from AIM in May 2017. CONCLUSIONS THE AIM CONTEXT COMPARISON OF AIM COMPANIES TO UNQUOTED COMPANIES CONSIDERATION EXPLANATION GREATER SCRUTINY By complying with the requirements to be quoted, the operations of the company become more transparent and investor friendly. This further enhances the reputation of the company. In order to be admitted to AIM, a firm must, among other things, appoint an independent reporting accountant to conduct financial due diligence and deliver a report used by the company’s nominated adviser (Nomad) to assess whether the company is appropriate for AIM admission, submit a due diligence report prepared by its lawyers with a minimum requirement to establish the corporate structure and standing of the company, verify title to respective assets, examine material contracts and employment agreements, review any current or prospective litigation and provide an admission document listing the directors, promoters, business activities and financial position. If accepted, the firm must also provide ongoing reporting and information to AIM. HIGHER LIQUIDITY The simple fact is that, like any stock market, AIM provides visibility. Firms become quoted so that potential investors know where to find them and there is ease of trading in their shares. And, while the AIM share trading volume is not as high as the main markets, and trading across the market does not guarantee trading in a particular stock, it does very much increase the chances of regular trading by a wider audience of investors. MORE TRANSPARENCY Shares are traded in an open market, where price movements and valuations are freely available in real time. Transactions are subject to a well-defined code of conduct, meaning that investors have an assurance of fair dealings. Additionally, quoted companies are obliged to provide clear and timely information to AIM regarding, for example, dividends, corporate transactions, and fundamental changes of business. They must also provide half yearly reports and annual accounts which may be published on AIM. This enables investors and potential investors to take informed decisions. ADDITIONAL DIVERSIFICATION The ease of trading in AIM-based offers, as well as the availability of data and reporting for more straightforward due diligence, has allowed funds which concentrate on AIM shares as their underlying assets to hold more investee companies than those focused on unquoted shares. This can provide greater diversification. DATA AVAILABILITY As a result of the data collected and published by the exchange, characteristics such as share price and company performance, liquidity and volatility can be examined and quantitative analysis can be undertaken. This allows investors to design and fulfil their investment strategy using objective statistics that can be easily sourced. High growth potential (as well as income possibilities) combined with tax benefits make AIM a compelling option for those who understand the risks of investing in smaller companies. AIM shares are also a very interesting outlet for investors seeking to make a positive impact with their money, as well as achieve a return from it. This type of investing is on the rise and the positive social impact of job and wealth creation through the funding of SMEs is massive. Of course, the role of SMEs in the UK economy has always been significant. But in the context of Brexit, which threatens loss of jobs to other economies that remain in the EU as well as loss of EU funding routes for UK SMEs, helping SMEs to grow is becoming an increasingly important win/win scenario. The AIM market places smaller companies within a regulatory framework, designed to be less rigorous than the rules applied on the main markets. Nevertheless, they are demanding enough to provide the data and due diligence that gives AIM investors much better access to the intelligence they need to make fully informed investment decisions, than is commonly available with unquoted SMEs. The AIM indices compare favourably with the main FTSE markets, with performance over the last year, in the middle of Brexit uncertainty and an unexpected election that generated a hung parliament, remaining surprisingly robust. Some AIM indices display volatility levels that are comparable with the main market. “Jim Slater once said that ‘elephants don’t gallop’. By this he meant that it is a lot easier for a small company to become a lot bigger than it is for a company that is already very big.” — PHIL OAKLEY, SHARESCOPE The AIM investment opportunities are not just in growth, but decent dividends can also be found, with ISA and VCT wrappers available to mitigate dividend tax. “With the OBR projecting an increased tax take from IHT over the next 5 years, the importance of investing in AIM companies as a tax planning tool looks set to grow.” — SAM BARTON, CLOSE BROTHERS ASSET MANAGEMENT PERFORMANCE AND VOLATILITY - TOTAL RETURN, FTSE INDICES RETURN % RETURN PA %* VOLATILITY %* INDEX (GBP) 3M 6M YTD 12M 3YR 5YR 3YR 5YR 1YR 3YR 5YR FTSE 100 2.8 6.1 8.5 12.1 28.5 56.2 8.7 9.3 8.8 14.9 10.0 FTSE SMALLCAP 3.0 7.1 16.0 20.6 46.4 104.5 13.5 15.4 5.4 9.2 8.2 RETURN % RETURN PA %* VOLATILITY %* FTSE AIM UK 50 6.3 11.4 30.0 31.6 79.6 105.2 21.6 15.5 9.2 14.3 13.7 FTSE AIM 100 7.9 13.3 32.7 28.1 50.5 58.3 14.6 9.6 6.0 9.9 10.5 SOURCE: FTSE FACTSHEETS, OCTOBER 2017 PERFORMANCE AND VOLATILITY – TOTAL RETURN, FTSE AIM INDICES