The Alternative Investment Market – also known as “AIM” – provokes controversy in the investment community. Some see it as little better than a casino, useful for short-term trading at best; others see it as an ideal forum for the industrious private investor to seek out opportunities for growth. What is for certain is that AIM has had its fair share of successes and failures over the years since its inception in 1995. But what does its future hold?
Moore Stephens, a top-ten accounting and advisory firm, recently announced the results of a survey of AIM company directors and their professional advisors designed to answer one overarching question – Is AIM still the world’s leading growth market? The study found that companies were unsure of AIM as the most successful growth market for SMEs, as 47% said they didn’t know and only a third thought it was, with 19% thinking it isn’t. In contrast their advisors were split, with 47% considering it was the most successful growth market for SMEs, as opposed to 44% who didn’t.
The fact that company advisors espouse much greater enthusiasm for AIM than company management should come as no surprise to those familiar with London’s junior market. But before we assess the reasons for this discrepancy, let’s familiarise ourselves with AIM, its raison d’être, and its modus operandi.
Brokers and Nomads
AIM was launched in 1995 as a sub-market of the London Stock Exchange (LSE). Designed as a nursery for growing companies, AIM offers a more flexible regulatory system which enables its constituents to raise capital much more easily than would be the case on the Main Market. There is also less red-tape when it comes to M&A (mergers & acquisitions) and financial reporting. (As is now apparent, this is AIM’s greatest strength but also its greatest weakness.)
A key feature of AIM is the ‘Nomad’ system. The Nomad, or Nominated Advisor, is responsible for making sure the companies they are responsible for are keeping to the rules of AIM, in return for which they are paid an annual fee. As well as a Nomad, an AIM company also needs a broker who can assist them with raising capital and promoting their stock to investors.
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Here’s where it gets interesting. In practice, it has become commonplace for the Nomad and broker to be one and the same entity for many an AIM company. Now, you don’t need a PhD in capital markets regulation to suss out that this raises some pretty serious conflict-of-interest questions. Although Nomad-brokers will no doubt say that their compliance department is rigorous when it comes to enforcing so-called Chinese Walls, the fact is that the Nomad-broker is simultaneously being paid to regulate the client and promote its stock to investors.
The culture of self-regulation has led to many a corporate failure and some outright accounting frauds, which have done much to foster AIM’s image as a high-risk casino. If the Moore Stephens survey is anything to go by, there may also be signs that this tainted image is taking its toll. Marty Lau, Partner at Moore Stephens, commented: “This split between AIM companies and advisors is worth taking note because this split seems to suggest that many IPO advisors and prospective new AIM issuers are finding AIM to be no longer as attractive as it once was. The possible outcome to this is that some good quality companies are steered to list on other markets.”
Pitfalls and opportunities
The sad fact is that the situation is likely to get worse before it gets better. The advent of Mifid II (Markets in Financial Instruments Directive) looks likely to decrease the amount of AIM company research in circulation, thus exacerbating an already-bad situation – a fifth of the UK’s 2,000 smallest public companies already have no research coverage at all.
With all this in mind, ambitious smaller companies will have to find new ways to engage with existing and prospective shareholders. According to Lau, “the key is for company management to be aware of what’s happening in the market and which are the companies that have been more successful than others and why.” As for investors, pitfalls and opportunities abound. It will be more important than ever for investors to conduct their own research and due diligence when investing in AIM companies.
But for those who get it right, the rewards are potentially huge. The truth is that AIM is a highly inefficient market. For the savvy investors among us, inefficiency equal opportunity. So keep searching for that next ASOS (LON:ASC) or Accesso Technology (LON:ACSO) – but when you find it, be sure to let me know…