June 2020 marked a quarter of a century since the Alternative Investment Market (AIM) launched. In that time, it’s become a renowned route for companies with ambitious growth plans to find patient capital. Octopus has long been an investor in AIM, helping growth-minded investors access the exciting opportunities available.
In fact, we have two fund managers who’ve managed AIM investments every day since its inception.
On 31 July 2020 at 10 am, Richard Power and Kate Tidbury, senior fund managers in our smaller companies team, will feature on the Monthly Octopus Online Show.
Richard and Kate will be sharing their learnings and recollections from 25 years of investing in AIM, and looking ahead to the future. Joining them will be Greg Davies, behavioural economist at Oxford Risk. He’ll be answering questions about decision making when markets look uncertain and how to approach conversations with clients in such times. To get involved, you can sign up to the Monthly Octopus Online Show here.
A platform for growth companies
AIM was set up in 1995. It replaced and expanded the scope of the Unlisted Securities Market (USM) that preceded it. The idea was to create a space where companies that face funding gaps could raise long-term capital and do so earlier in their growth journey.
“AIM was launched to provide growth capital to companies that wanted to raise equity, and wanted the advantages of doing so in the public arena. This is still true of the role AIM plays today,” says Kate Tidbury. “It’s become the place to go for small growing companies. It has a recognised fan club and a recognised place in the world. And this is borne out by the facts.”
Day one for AIM involved ten companies listing with a combined value of £82 million. Today, AIM consists of around 850 companies with a combined market capitalisation of over £100 billion. Since 1995, the market has helped over 3,800 companies raise more than £115 billion. [1]
“We’ve seen other equity markets, like Nouveau Marche in France, attempt to replicate AIM without the same success,” says Richard Power. “AIM has become the growth market of choice internationally.”
A significant boost to the economy
It’s no wonder AIM became a blueprint for growth markets elsewhere. The success of AIM has had a ripple effect for the UK economy. In 2019 alone, AIM companies contributed £33.5 billion to UK GDP and directly supported more than 430,000 jobs. [2]
“AIM provides companies with a long-term shareholder base that can evolve as the business grows,” says Richard.
Over the last 25 years AIM companies have raised £45 billion on admission and, crucially, follow on fundraising of £71 billion. [3] This reflects the long-term support available for companies listing on AIM.
“The market is great at scaling businesses so that the UK feels the economic benefit of them. Private equity firms are less able to scale businesses in this way, often selling businesses to foreign buyers and cutting short the economic benefit for the UK. There are so many examples of small companies that AIM has nurtured to become global leading businesses right on our doorstep. RWS, Abcam and Keyword Studios are just a few that come to mind. Some of these companies started out life as little businesses and have grown to be worth over £1 billion. They add incredible value to the UK.”
An environment that encourages growth
How has AIM managed to create such a rich platform for growth? Part of the answer lies in the consistent rules and principles that AIM was founded on, says Kate Tidbury.
“In the last 25 years, the rules that apply to companies on AIM have barely changed. It was a winning formula on day one that continues to work extremely well for businesses today. Disclosure to shareholders is as good as you’ll find on any market, while AIM still affords companies a degree of freedom to help companies to grow up with fewer barriers. AIM has avoided bringing in any stifling or expensive rules, and this has allowed companies to flourish.”
Over time, this has made AIM increasingly attractive to companies.
“Some of the types of business we see on AIM now would have gone to the FTSE Small Cap Index in the past. Companies like Fevertree, Hotel Chocolat and Joules. Ambitious, growing companies are drawn to AIM,” says Richard. “In the early days, we used to see a journey up, where AIM companies would graduate to the main market. We don’t tend to see this as much now that AIM is so established. In fact, we’ve started to see a journey the other way, from main market to AIM. And this is a welcome change to see,” adds Kate.
Exciting companies and new sectors
“A company listing on AIM is unlikely be a staid, mature and profitable business. Companies choosing to raise capital on AIM won’t have the certainty of cash flows that make raising debt suitable, as you would expect, for example, of a utility company,” says Richard.
This has implications for the types of company and sector you find on the market.
“AIM attracts progressive sectors and companies that are innovating. AIM is often the first place you’ll find new sectors emerge. AIM has always had those moments of great excitement. Right now, we have businesses such as Blue Prism bringing that excitement.”
Blue Prism is a software business that offers robotic process automation, pioneering technology that provides organisations with a digital workforce.
Investing in smaller companies comes with a risk
For investors, AIM offers a chance to share in the success of some exciting companies with huge growth potential.
But when investing in AIM companies it’s worth bearing in the mind the value of an investment, and any income from it can fall as well as rise, and investors may not get back what they invested. In addition, the shares of smaller companies can be more volatile* than those listed on the main market of the London Stock Exchange. They can also be harder to sell.
*Meaning they can go up or down in value more sharply
To compensate investors for taking extra risk when they invest in smaller companies listed on AIM there are several tax reliefs which exist. There is no stamp duty payable on investments in AIM shares, and AIM companies can also qualify for Business Property Relief (BPR). When investing in BPR-qualifying shares, as long as the shares have been held for at least two years, and are held at the date of death, they may be free from inheritance tax.
It’s worth remembering that tax treatment depends on personal circumstances and tax rules are subject to change. Entitlement to claim relief will depend on companies invested in qualifying for BPR at the time a claim is made.
“There will always be a degree of failure and reinvention in a market of smaller companies. Businesses will face challenges, management teams will change, some businesses will set off in a new direction,” explains Richard. “AIM doesn’t behave like an index and we shouldn’t expect it to. It’s a moving pool of growth-minded businesses that is constantly evolving. Underneath all that, however, is a seedbed for global leading businesses to quietly grow and succeed.”
The stock picker’s market
AIM offers the opportunity for significant outperformance.
“AIM is about spotting the winners and knowing which companies to leave. It takes a lot of hard work and experience, but it is well worth the effort,” says Richard. “It’s important to have the rapport with management teams and understand the companies. There will always be some you get wrong, which is why it’s important build diversified portfolios and to be comfortable with the risks.”
A resilient market
“AIM has proven that it is resilient. The market has come through adversity stronger and expanded because of it,” says Kate. “It’s been though the dot com bubble and the 2008 financial crisis. AIM picked itself up and found its place in the world. And has continued to demonstrate that place.”
We only need to look at AIM today to see how it’s proving its worth to the companies on it during the COVID-19 pandemic. From January to May 2020, as the pandemic began to take hold, 158 AIM companies raised over £1.9bn in follow-on capital. [4]
“Most AIM companies were able to put out announcements responding to COVID-19 very quickly and provided a good picture of what it meant for their financial positions. I think it showed that the discipline of being a public company has been good for both companies and investors. AIM is in as good a shape as it’s ever been. It should go on to thrive even further, provided it sticks to what it has always done well. That is, providing growth capital to small businesses from humble beginnings,” agrees Richard.
To hear more on AIM, join Richard Power and Kate Tidbury for the Octopus Online Show on 31 July at 10am. You can find further details, and reserve your spot here.
[1] https://www.londonstockexchange.com/raise-finance/equity/aim
[2] Grant Thornton, Economic Impact of AIM, June 2020
[3] AIM 25, Celebrating 25 years, London Stock Exchange, June 2020
[4] AIM 25, Celebrating 25 years, London Stock Exchange, June 2020
