AIM Industry Report 2017/18

54 55 SP: Not at all. The Alternative Investment Market (“AIM”) was set up to revive the interest in the previous Unlisted Securities Market (“USM”) and the powers that be have learnt their lessons from the strategic errors that took place in the development of that market. With just under 1,000 companies represented and a growing history of success and fulfilling its role, in government and HMRC terms, in providing equity funding for small growing companies, AIM can only be considered as a great success which is looked upon enviously from other countries. There is an old simple adage which seems entirely appropriate here, “if it ain’t broke don’t fix it”. MS: Although it has the backing of Nasdaq, we don’t think First North is a big worry. The AIM market has faced competition before. I remember well the brief successes of Neuer Markt and Nouveau Marche during the tech frenzy of the late 90s. They fell by the wayside, but AIM survived and probably became the stronger for it. Occasional reviews of the rules are a good thing, to allow them to adapt to change and patch up areas that have caused issues. The AIM market is well established now, with decent liquidity, and provides an essential conduit for capital to help emerging companies to develop and grow; something that will probably be even more crucial as Artificial Intelligence and the internet of things accelerates change. JW: As Matt says, competitors have come along before and tried to beat the AIM market and had not much success. Now, that doesn’t mean that Nasdaq, North First, won’t be very successful, and that’s not necessarily a bad thing, so I don’t think launching a new market necessarily means bad news for the AIM. I think in general greater opportunities to invest in smaller companies should be positive for all investors and for all markets. But the AIM does have a few major factors that other European markets probably don’t really have. One is the fact that you’ve got a pretty well developed small cap brokering community in the UK and there’s a whole bunch of reliefs that favour the AIM. The obvious one is BR and AIM IHT benefits and there’s also EIS and VCT. Those also help at the bottom end of the AIM market. But the behaviour also of people in the UK is to generally want to finance their company with the equity market and also a willingness to actually sell out portions of their company at much earlier stages than in other international markets, and therefore, the UK has been more successful in terms of generating these sort of small cap investment ideas, partly because they’ve put all the right regulation in place and all the right structuring in place, but also partly because it’s just cultural. And I think as long as that framework and culture remains in place, we’ll be pretty optimistic for the future. While obviously regulations can change, I think the government is well aware that the AIM market and areas around BR and also EIS and VCT are very important in terms of generating not just growth in small companies but the long-term sort of patient capital that these companies require to carry on growing and just be left alone to build their businesses. AMS: The greatest criticism of these small markets is that they’re lobster pot markets – very easy to invest in and quite tricky to get out of; but on the other hand there is good liquidity in some of the larger companies on AIM. I’ve been going for quite a long time in the markets and it is, I think, a really exciting and positive place to invest, it gets a lot of very bad press from people who focus on this liquidity issue but, you know, it’s a market for young companies, it’s doing a fantastic job, it’s lasted much longer than any of its predecessors and I think it’s very difficult for newcomers to unseat it at the moment. And I hope that it is protected, as far as possible, by the London Stock Exchange, because it is maturing and ripening, if you like. I believe that there’s a limit to what the Stock Exchange can do… really, the onus is very much on the sponsors to be more rigorous in their due diligence on the companies they bring to market. I am concerned that there aren’t perhaps fewer bigger participants in terms of brokers/sponsors, but I think the ones that are there at the moment are doing their best to improve their due diligence, and impose governance on the companies using the market. One of our key criteria when we make an investment in a new small company is to ensure that the governance of the company appears to be competent and responsive, but also that the quality of the sponsorship, and the quality of the shareholders that we’re investing alongside, is good. So, in my opinion, rules are one thing but actually the quality of the sponsorship is really very important. I think the market is there for high growth companies if they are properly presented and it’s a much more quality conscious market now than it has been in the past. SB: NEX has been around in one guise or another since I started working in smaller companies 15 years ago. It keeps trying to change its spots and I think that’s probably a testament to the enduring nature of AIM. It’s been such a success. And, although Nasdaq is a great backer to have, I think AIM is so dominant in this space that I don’t see it as something that’s going to materially change the way we operate. One of the issues that we might see over time, if you take MiFID II as being bad for brokers in terms of it reducing the commission that they can generate, the other way they can generate revenues is by new issues. There is a threat that the quality control is taken off somewhat in terms of new issues. And that’s a double- edged sword as well, in terms of allowing the right companies to come on to the market without restricting what has been a resounding success since launch. You don’t want to constrain the ability of good growing companies coming to AIM by putting too much regulation in there, but on the other hand, there will be a temptation for some brokers to float companies that may not be ready for AIM or may not be suitable for life as a quoted business. JG: AIM is still the largest market for small and medium size growth companies in Europe. I don’t think it would be overly generous to say that it’s become the benchmark for growth markets generally. So, in that sense it’s not entirely surprising to see other countries try to replicate its success with the Nasdaq North First as you mention. I think it’s reasonable to expect that it may draw some internationally headquartered businesses away from the AIM market, or at least encourage those international companies considering a float to float on another market, but I still think the desire for UK-based businesses to list domestically will continue, so I don’t think it will be destabilising in that respect. We tend to look to UK-based businesses anyway because we like to have the management teams readily accessible, factories and site visits on your doorstep. Our mantra has always been to think globally, invest locally. With regard to the LSE’s review of the AIM Rules, I think that any process that aims to improve the corporate governance standards across the market should be seen as a very good thing. An improvement in the standards could even open up opportunities that we might have discounted in the past. SD: I would doubt Nasdaq North First is a direct competitor just yet. It seems to be incredibly small, Nordic-based companies. We’ve had the ICAP Securities & Derivatives Exchange in its various incarnations over the years, and that never got anywhere competing, because the liquidity issues we have on AIM are just magnified tenfold or a hundredfold on these other, even more junior markets. We would love there to be another exchange that had 5,000 companies on it that all had good liquidity, that qualify for BR and to a lesser extent EIS and VCT, but I don’t think it’s ever likely to happen. The review of the AIM Rules doesn’t worry us on the basis that AIM’s period of tinpot companies being quoted then ramping up, then going bust seems to be long passed, and there is a maturity about the businesses on AIM, especially those in the top 200 by market cap. But there are still some quoted firms generally foreign- owned businesses with no real prospect of profitability and I think that is where the review is coming from. WHAT CHANGES WOULD YOU LIKE TO SEE IN THE AIM MARKET? DO YOU HAVE ANY CONCERNS FOR THE FUTURE AND HOW DO YOU SEE THE MARKET DEVELOPING OVER THE NEXT 12 MONTHS? JG: I don’t think I’d really like to see any material changes in the AIM market. I think it functions pretty well as it is. Aside from the obvious Brexit risks I think the biggest risk has always been and will remain the LISA BEST ANDREW MARTIN SMITH SHARON PRIEST SAM BARTON MATT STRACHAN JUSTIN WAINE JON GOULD STEPHEN DANIELS “Recent analysis suggests that AIM incorporated companies are contributing about £15 billion to UK GDP and employ over 400,000 people.” — JON GOULD, PSIGMA INVESTMENT MANAGEMENT “The review of the AIM Rules doesn’t worry us on the basis that AIM’s period of tinpot companies listing, then ramping up, then going bust seems to be long passed, and there is a maturity about the businesses on AIM.” — STEPHEN DANIELS, TIME INVESTMENTS “What would be very interesting, and I’m not sure whether this will ever happen, would be if companies in the Small Cap side of the main market actually realised that they were gaining nothing by being on the main market, but lost a lot by not getting BR relief, etc.” — STEPHEN DANIELS, TIME INVESTMENTS