Analysis - AIM - Ready, AIM, fire

As the AIM heads towards its 10th anniversary, Liz Loxton highlights the benefits of listing.

It is hard to find many people with a bad word to say about the Alternative Investment Market. As it approaches its 10th anniversary (it opened in 1995), soundings from City institutions, private investors, small companies and their advisers indicate that AIM is seen not only as a highly effective place to raise funds, but a market with a good standing here and abroad and one that helps companies gain in credibility.

Taking AIM, an annual survey conducted by Baker Tilly, shows that although most companies use AIM to raise funds, in addition, one quarter say they hoped to raise their com-pany profile through flotation. When established AIM companies were asked what being on AIM had done for them, 78% said that it had added to their company's credibility.

Chiltern Taylor, corporate finance partner and head of capital markets at Baker Tilly, said that the most important factor in AIM's strengthening reputation was the fact that all the City institutions now invest in AIM.

'There is no reason why a company listed on AIM shouldn't have liquidity in its shares. For companies of 100m capitalisation and possibly up to 300m it is difficult to find many advantages to being on the main list.'

Worldwide access

Mark Fecher, corporate finance lead adviser at Kingston Smith, believes AIM to be one of the most successful markets in Europe. AIM has worked hard to gain worldwide access, he says. It is common to see investors from mainland Europe and while the costs of listing are higher than some of the other exchanges, Ofex for example, AIM has a good spread of companies from traditional industries like mining to newer technology and communications enterprises. 'It's a very good staging post,' he says.

'It teaches all the disciplines that companies need as they grow.'

AIM currently has 830 companies and is set to increase that to 1,000 by this time next year. The exchange has worked hard to preserve the special advantages of listing on AIM: the ability to make acquisitions without reference to shareholders and tax advantages for investors. It has successfully lobbied to stay outside of the EU Prospectus Directive, which means that the smaller growing companies it hopes to attract can float without taking on the full reporting regime of quarterly reporting.

AIM's growth figures - the value of shares traded quad-rupled in 2003, 162 new companies joined and 2.1bn of new money was raised - is good news for UK Ltd and good news for accountants looking to groom their SME clients for expansion via a flotation. Mark Fecher says many owner-managers want to avoid ending up working for venture capitalists.

They may want an exit route that preserves the business they have built up. Many entrepreneurs, 51% according to a study by Devonshire Corporate Finance, fail to think through their exit strategy and wrongly assume that a trade sale to a competitor is the most likely outcome.

Fecher says AIM may make a credible alternative in cases such as these.

AIM is also an excellent place to be if their objectives are to grow the business and stay involved, he says.

Opportunities for accountants

Not everyone is ready for the increased exposure and corporate governance requirements that listing on AIM brings and this of course is an opportunity for accountants and other advisers. Before floating companies need to consider what effect being in the public domain will have on directors' autonomy. Companies may not need a long track record to float, but they should nevertheless consider issues such as how they will keep interest in the company alive subsequently, as well as their obligations to issue forecasts, which many private companies do not do.

'Companies really must accept that they are in the public domain and act accordingly,' says Taylor. According to Baker Tilly's research, 26% of AIM companies surveyed said they had increased corporate governance measures such as establishing a remuneration committee, an audit committee and appointing a non-executive director. City advisers interviewed for the study said that in practice many companies do fully anticipate the increased attention they will need to devote to corporate governance matters.

Fecher says that advisers should make sure that clients do not take their eye off the ball when it comes to governance issues. 'AIM is not really looser in terms of your visibility. I think it is the adviser's job to make people aware of the expectations,' he says.

Richard Worthington, a serial entrepreneur and founder of Polish coffee shop chain Coffeeheaven, says AIM would always be his first port of call for fundraising. Worthington has been involved in consulting and fundraising for small companies for over 20 years. He has used AIM to raise funds for three companies: kitchen maker John Lewis of Hungerford, Bakery Services and most recently Coffeeheaven (see box).

Commentators say that increasingly AIM companies are benefiting from investment interest from the institutions. However, Worthington says that 'at the minnow end' he has yet to see institutional involvement. But he is pleasantly surprised by the degree of direct shareholder contact that AIM listing seems to encourage.

Shareholders and potential investors contact him direct and follow the company's progress closely. His one concern is that as AIM continues to grow and attract bigger companies it will dilute investment gains for the small minnows like Coffeeheaven.

He's right to be concerned - there is a trend for bigger companies to delist from the main exchange in favour of AIM. 'My worry is that as AIM grows and attracts bigger companies (I see this happening not only for the tax breaks but also as a result of reduced reporting obligations and corporate governance) that one of the key purposes of AIM - to provide funding for smaller growing businesses - is not 'lost' and that these smaller high risk companies will still be able to obtain a fair share of the funding. People need to remember that the ASKs of this world started as minnows on AIM.'

AIM STATISTICS Yr to April 2004 2003 2002 2001 No of companies (inc foreign) 809 754 704 629 No of foreign companies 69 60 50 42 Market cap 21,924m 18,358m 10,252m 11,607m Average market cap 27m 24m 15m 18m No of admissions 77 162 160 177 Average money raised by new cos 9m 12m 6m 4m Source: Taking AIM, Baker Tilly

Coffeeheaven was demerged out of Bakery Services in 2001 when serial entrepreneur Richard Worthington figured that central Europe's retail scene was about to blossom. The 2001 AIM flotation raised 750,000 and a further 400,000 was raised in 2002. Subsequently, Coffeeheaven raised funds through a bond issue on the Warsaw Stock Exchange, another 2.3m to fund expansion.

'AIM has clearly grown in reputation and size. This has certainly been of particular help with Coffeeheaven in central Europe where our public listing gives the company great credibility and attracts considerable interest from the local financial community well above our size (we are the only AIM-listed Polish-based business). Without the public listing I doubt our Polish trading company could have ever successfully listed its bonds on the Warsaw exchange,' Worthington says.

AIM's main benefit from his point of view is the capacity it gives him to raise small amounts of capital cost effectively. 'AIM has been absolutely ideal for funding Coffeeheaven,' he says. 'By being able to raise small amounts of capital at frequent intervals (so far at incremental valuations) we have been able to keep shareholder dilution to a minimum. And by going for small broker placings without having to spend time and money on road shows or documentation we have been able to focus our attention where it should be on developing the business. Management teams of small companies often consist of only two or three key people - the most scarce resource they have is time. Also we have been able to raise money as opportunities really arise - not based on speculative possibilities.'

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