No trading record, no minimum market cap, fewer reporting requirements and, for investors, some congenial tax benefits. The attractions of London’s Alternative Investment Market (Aim), and other small exchanges around the globe, abound.
In 2005, Aim had its most profitable year since its launch in 1995 with 335 IPOs, raising a total of £6.46 bn ($11.31 bn) in new issues. The exchange’s total market cap rose 40 percent to £1,399 bn in contrast to £1,021 bn at the end of 2004.
But given the relative ease of listing on Aim, it’s understandable that some speculation about the quality of investor relations among listed issuers should ensue. The question is, how effective are the management teams of these nascent businesses at explaining their company’s strategy? And is the less strict regulatory environment a boon or a potential danger to investors?
Rising to the challenge
Rory Stear, CEO of Freeplay, a £6.63 mn market cap Aim-listed company that produces electronic appliances based on wind-up energy technology, believes in clarity. Effective IR for him involves maximizing every opportunity to put his case to the market using the clearest language possible.
‘I can’t stand jargon,’ says Stear. ‘The annual report is a great opportunity for a small company to remind all its stakeholders what it’s really about and to highlight the things that are unique about it, in the most straightforward language.’
Hardy Amies, the UK’s last couture house, is another Aim minnow, with a market cap of just £5 mn. CEO Tim Maltin says one of his biggest IR tests is keeping in touch with a very broad shareholder base and encouraging ongoing voting interest. ‘Our previous incarnation was on Ofex for five years, so we’ve actually been listed for seven years,’ says Maltin. Ofex is the UK independent market for companies up to £20 mn. According to Maltin, shareholders tend not to get involved in voting – and that apathy disappoints him.
One of the biggest challenges for these small companies involves the cost and logistics of communicating to a large audience. ‘Getting half-yearly results out to 2,000 shareholders, for instance, is very expensive,’ says Maltin.
Maltin has worked out a cunning way to keep costs down by hiring students to come and lick stamps for mail-outs. But even when costs are under control, these companies still face the daunting reality of trying to communicate to shareholders via intermediaries. ‘The other difficulty is that we send out things to shareholders who have shares in nominee accounts, and nominees are extremely bad at forwarding information to individual shareholders,’ adds Maltin.
Spelling it out
Again, clarity is the name of the game when young, Aim-listed companies are trying to explain their business strategies to current and potential investors. Many of these issuers are in complex and relatively new industries with which investors and analysts aren’t so familiar.
Michael Tapia, CEO of technology utilities company Qonnectis, finds keeping shareholders updated on the company’s business strategy a challenge. Qonnectis was originally a pure internet business, but it has now evolved into an internet technology and utilities operation.
‘I’m aware that some who are less in touch with the business haven’t understood how we’ve changed,’ Tapia says. ‘But we’re investing more in the IR part of the web site, which includes share price and industry information. We also include stories about energy news, the environment, carbon emissions and energy prices.’ Tapia views the web site as an efficient method for keeping shareholders informed on the industry and Qonnectis’ own story.
John Halfpenny, CEO of CMR Fuel Cells, recognizes the need for delivering a simplified IR message. His company develops fuel cell technology for a variety of power-generation applications, including military power packs.
‘You can focus on green energy or lower emissions, but the key story is the commercial proposition – the classic features and benefits,’ says Halfpenny. ‘Why is it that current solutions are deficient in meeting a need? How does your product meet its need?Marketers talk about features and technology, but it’s the benefits that people really look for.’
Attracting coverage
Sell-side coverage is another major hurdle for small-cap companies. ‘These companies may have a range of investors, including private clients, investing from a speculative basis – people who are perhaps buying for inheritance tax reasons – and buy-and-hold investors who bring responsibility, which is what you want,’ says Hardeep Tamana, CEO of stockbrokers Fyshe Group. ‘But you’ve got to understand the effect of news flow and how to make your stock marketable to the broker community. Plenty of companies do IR roadshows, but most fail to realize that under current FSA regulations, most firms will never feature on any stock recommendation list unless there’s independent research on the company.’
Getting that coverage is very difficult for early-stage issuers. ‘It’s always a question of economics,’ says John Nuttall, an analyst with London-based Investec. ‘If you believe a firm will generate sufficient commission or win an advisory relationship as a consequence of covering an Aim company, you’ll do it. But if you don’t think so, you won’t.’
Attracting the sell side is about economics, resources and time, adds Nuttall. He won’t consider covering any company with less than a £70 mn market cap. And while some companies might consider investing in paid-for research, it’s generally good practice to continue to target traditional brokerage research because that is what the buy side will read.
Maintaining the balance
While many Aim-listed issuers appear to be taking a proactive approach to investor relations, these companies aren’t required to do so. Gary Withey, a partner with London-based KSB Law, says current Aim legislation doesn’t require ongoing investor relations dialogue with shareholders. ‘When we float a company on the Aim market we make sure it is aware of the Quoted Companies Alliance guidelines for Aim companies, which require dialogue with shareholders to establish a mutual understanding of the company’s objectives,’ he says. ‘While this is helpful, the majority of the recommendations are about corporate governance. I can run a company according to all the available corporate governance guidelines, but still effectively tell my shareholders very little.’
Withey says the UK government’s current Company Law Reform White Paper addresses the disclosure challenge young companies face. ‘The problem we always have is how much you tell investors without releasing price-sensitive information,’ says Withey. ‘You can, by all means, have an IR director people can call with specific questions, but you can’t tell them specifically what you’re doing with projects likely to impact on the share price.’
Clarity, balance and consistency are the best IR ingredients for companies that are listed on Aim or any other small-cap exchange. This is the best way for a young company to attract shareholders that will take it to the next level of growth. As always, aim high.
