AIM needs to get better
The AIM market is going through a protracted death, says columnist Jon Moulton, yet British politicians have not understood that this is a long-term problem, and few have seemed to care. So what’s the solution?
A few days before the UK government’s Cabinet reshuffle in February – and before coronavirus had hit Europe hard – I visited several senior politicians, hoping to persuade them of the adverse impacts of relentlessly piling more and ever wider duties on public companies.
Of course, some of these souls are no longer in office – but some are. What startled me was that most of them really did not care if AIM vanished or if private equity became even more dominant. One surviving senior minister actually stated that these trends were mostly good. Bizarrely, he even argued that private equity was a better route, in part because of the lower level of regulation.
There is no question that AIM is declining. At its peak in 2006, there were 1,634 companies listed, whereas at the end of February 2020 it was 847. In value terms it has shrunk by around 40% over the same period –even before the recent coronavirus-related run on the markets. In 2006 the value of money raised was a six-fold multiple of the amount raised in 2019. By any metric, this market is not doing well at all.
Regulation has been heaped on AIM year after year – the Market Abuse Regulation, much increased governance, the Disclosure and Transparency Rules, lease accounting, Companies Act extensions and lots more to come from Sir John Kingman, Sir Donald Brydon and other audit-related changes.
If the AIM market were a donkey, then there would be cruelty prosecutions for thoughtless overloading. The smallest 400 AIM companies have market capitalisations below £25m each.
Talking to directors of small AIM stocks, the prevalent view is that the costs and benefits of being on the junior market are increasingly skewed towards the costs instead of the benefits. The same applies to small stock on London’s main market – and that market is also going backwards. Even the big companies, which can afford to produce largely unread stuff and follow tedious rules, moan about the increasing load.
Businesses have historically gone public to raise money, obtain tax benefits, provide liquidity to investors and sometimes to have the prestige of being a public company.
In the distant past, the tax law on ‘close’ companies was a powerful incentive to avoid punitive taxes by being public. Nowadays, tax – especially enterprise investment schemes and the taxation of share incentives – favours private businesses.
Raising money is still clearly possible on public markets, but the ever-increasing scale of private equity, and the often simpler buy-out process (no bulky unread prospectuses, for instance) means that private markets are competitive for all but gigantic fundraisings.
Increasingly, there are good options for liquidity in scale for secondary investors to provide the means for fundraising without the need for a listing. However, for smaller companies, liquidity is a serious problem whether they’re listed or not. Trading on any scale in a small cap is difficult and often requires big discounts.
Prestige? Nowadays I don’t think this is much of a factor. If you enjoy publicity, then perhaps the public route is a good one. But being listed means more and more disclosure, and this can in fact be detrimental for a business.
If there were no formal public markets would it matter? Well, private markets can replicate public markets pretty well – I can think of no corporate/shareholder need that absolutely requires the latter to exist.
I do wonder if the distinction between public and private will much matter in the long term. I suspect regulators will seek to inflict the same rules in both worlds. We already see this clearly in the codes of conduct and disclosure standards that are applied to larger private equity deals. The relentless march of regulation, ‘transparency’ and ever wider corporate objectives will likely continue without much concern for benefit or cost.
About the author
Jon Moulton is a CF and a Fellow of the Institute for Turnaround Professionals. Jon has long experience of turnarounds, having invested in them for 30 years and with considerable success. Jon is currently Chairman of FinnCap, the major AIM broker, The International Stock Exchange and Anti-Microbial Research Limited. He also chairs the Better Capital funds and Greensphere, an alternative energy infrastructure fund.
He regularly writes, broadcasts and speaks on corporate finance and financial matters. Jon is also a Director of the think tank The Centre for Policy Studies and an Honorary Fellow of University College London..
This article originates from the Corporate Financier April 2020 edition. The magazine is exclusively available to ICAEW Corporate Finance Faculty members.