Aim, London’s junior market, is one of the world’s most globalized markets but recently hit the headlines for all the wrong reasons. Roel Campos, a commissioner at US regulator the SEC, says his remarks were taken out of context after it was reported that he compared Aim to a gambling arena.
‘I’m concerned that 30 percent of issuers listing on Aim are gone within a year. That feels like a casino to me,’ Campos told Dow Jones Newswires.
Given Aim’s undeniable track record and growth over the last 12 years, comments on poor standards appear misplaced. Add to this Aim’s ongoing rebuttal of advances from Nasdaq, its US rival, and the remarks seem a case of the green-eyed monster.
Aim and its London Stock Exchange (LsE) parent attract more Ipos than a combination of the NYsE and Nasdaq, the latter of which has been trying to buy the LsE for the last year. Sarbanes- Oxley regulations are proving time-consuming and expensive, especially for small firms. CEos and CFos of US-listed groups must now sign statements attesting to the accuracy of their company’s accounts. The cost of compliance is far greater than on Aim, explaining why the number of small firms applying for a listing on US markets has halved.
‘Research last year by Canaccord Adams shows the cost of listing was an estimated 20 percent cheaper in London than on Nasdaq, with costs more than halving for maintaining the listing every year,’ says Graham Dallas, head of business development in the Americas for the LsE. ‘This is one of the reasons why Aim is attractive to international firms.’
Much of Aim’s growth – and subsequent weak performance; it underperformed all other major UK indexes in 2006 – has been attributed to the increase in foreign companies seeking a listing. The ease and flexibility of listing and the ‘lighter touch’ regulatory regime have attracted criticisms of a decline in the quality of companies on the index. Much of the blame has been put on the poor quality of visitors from abroad – but research shows this not to be the case.
Problems closer to home
Jim McCafferty, head of research at Aim broker Seymour Pierce, reckons the real reason for Aim’s poor performance is one-off disasters. His in-depth research shows that while the Aim All-Share rose by less than 1 percent in 2006, none of the top 50 UK companies did well – refuting the widespread belief that low-quality firms from overseas are depressing the index.
London accounted for 75 percent of western Europe’s floats last year, most of which were Aim listings. Some 124 international companies joined the index in 2006, representing 23 percent of new listings that year. Mining and oil and gas companies now make up nearly half of all Aim stocks.
‘There’s been a bull run over the past two years in energy stocks on Aim but they’ve had mixed performances, with many overpromising and underdelivering,’ comments Charles Vivian, a founding partner of Pelham PR in London. ‘I believe we are now on the downward trend and investors are not going to be interested unless it is a seriously compelling story or the company can produce within 12 months.’
Whatever the background, listing in London, one of the world’s leading financial markets, will bring a guarantee of respectability and credibility around the world. The flexibility and clear path to an Ipo are attractive to virtually any company, and there are clear tax advantages if the listing is done through an offshore jurisdiction such as Jersey or the British Virgin Islands (BVI).
Eastern promise
The exchange has lower listing fees than other international indexes and offers a tremendous amount of liquidity to smaller companies and access to institutional investors who often turn into mentors and partners. Many domestic markets don’t offer an alternative to Aim; Hong Kong has suffered from low-quality Chinese share issues, Singapore’s market suffers from poor liquidity, and Germany’s Neuer Market – its answer to Nasdaq – closed in 2003. Asian companies in particular have seen the benefits of listing on Aim, with 62 Asian firms listed on the exchange, and 25 added in 2006 alone: 44 Chinese, 13 from India, one from Bangladesh, one from Japan, one from Malaysia and two from Singapore.
Aim offers a welcome alternative to the Chinese home market, where many companies find it hard to secure funding from long-term loans to everyday credit facilities, because the privatization and reform of China’s state-owned banking system is still many years behind the western world. There is a long queue to list on the two main Chinese bourses in Shanghai and Shenzhen. Both are big and liquid, but often out of reach to smaller private firms.
While international Aim companies will certainly fall under the radar of small-cap fund managers in the UK, their reception can be lukewarm. Jeremy Harris-St John, a private client stockbroker at Eden Group, warns that many investors set the bar higher for assessing foreign firms.
‘Over the past three to four years more companies with no connection to the UK have come to Aim – from the US, Israel or emerging markets like Russia and China,’ Harris-St John explains. ‘We always look for the same things in a company wherever it is based: management, a good track record, sound finances and the product itself.
‘But there are more concerns with a company from outside the UK. Some firms might have different accounting methods from UK standards, so things can get hidden. It is very difficult to be certain what you are buying if you can’t understand what the business is doing and none of the management members speak English. I invested in Chinashoto last year and am pleased with how it is doing, but foreign companies generally have a lot more to prove to investors than their UK counterparts.’
Basic principles
So what should companies based outside the UK do if they want to list on Aim? And how can they prove to investors they are the ‘real deal’? Firstly, a business needs to prove it has significant growth prospects – if it simply wants to raise funds, Aim might not be the best route. A company must also show strong accounting and bookkeeping methods and be able to forecast future growth. Many groups will have to change accounting and corporate governance procedures, leading to an initial culture shock, but good companies should welcome this as a means to raise professionalism and industry practices.
Finally, management needs to communicate effectively with the investor audience – not having a board member who can speak English is a serious handicap.
‘It is vital the company is willing to engage with the UK market,’ explains Adam Hart, head of new business development at investment bank KBC Peel Hunt and chairman of the Aim Advisory Group. ‘To maintain a listing, companies need to establish regular contact with their UK investing audience and this includes regularly traveling to the UK.
The first question any investor will ask is why a foreign company is listing on Aim. It might be one of three answers: it can’t raise the funds locally; it wants to grow; or it wants to position itself relative to its international peers. All of these are equally important.
