By Sam Pearse and Ashmi Bhagani
Designed primarily for the equity securities of small and medium-sized growth companies that either cannot, or do not want to, qualify for the Main Market, London’s AIM has seen over £110 billion of development capital raised by more than 3,600 companies since its inception in 2005.
However, a wider context of the turbulent pound, the slowdown in worldwide economic growth, global trade tensions and the ever-present Brexit ‘fog’ have taken their toll on AIM, causing a lull in fundraising activity more recently. Yet, looking beyond this Brexit-induced uncertainty, a number of advantages remain and it is useful to consider the volume of secondary issuances on AIM compared to IPOs, as well as broader M&A trends across all markets.
Why is AIM desirable?
The key advantages of an AIM listing compared to a Main Market listing for smaller growth companies are:
• A flexible and lighter touch regulatory environment governed principally by the AIM Rules (and subject to certain exemptions from the EU Market Abuse Regulation);
• “Exchange-regulated” status (as opposed to EU “regulated market” status), which means that AIM admission documents are not pre-vetted by the UK’s Financial Conduct Authority unless the offering involves an “offer to the public” requiring a prospectus;
• No minimum capitalisation, free float or track record eligibility criteria (subject to a one-year lock-in for companies that have not been independent and earning revenues for at least two years);
• Less onerous continuing obligations and more proportionate corporate governance disclosure standards;
• Lower costs associated with seeking and maintaining an AIM listing; and
• Certain tax benefits for qualifying investors, including inheritance tax relief, stamp duty exemptions and the ability to hold AIM shares in stocks and shares ISAs.
The EU is also making efforts to facilitate better access to the capital markets for small and medium-sized companies. Recent changes to the EU Prospectus Regulation (that came into effect on 21 July 2019) are intended to simplify disclosure requirements on both initial and subsequent offerings on SME Growth Markets, such as AIM, in order to encourage the issuance and listing of shares and promote liquidity in the secondary markets.
Geopolitics causes a slowdown
These factors make an AIM listing particularly suited to technology, fintech and life sciences companies, as well as those in the budding medicinal cannabis industry – all of which are sectors currently enjoying a wealth of start-up activity. Correspondingly, these sectors are expected to see a higher volume of activity towards the end of 2019 as the Brexit trajectory hopefully becomes clearer. Nonetheless, while doubts over the strength of the economy linger, wary investors might look to offset some of the risk by investing in businesses with a strong track record, resulting in an increase in traditional sector IPOs, such as natural resources.
It cannot be denied that investors are being cautious for good reason – Europe as a region is more dependent than others on global trade and therefore more sensitive to ongoing geopolitical tension between the US, China and EU, which has slowed economies across the world. It is therefore no surprise that fundraising activity on the EU’s equity capital markets in the first half of 2019 has been unusually quiet. With only five IPOs and a combined total of only £136 million raised in new issuances (including transfers and re-admissions) in H1 2019, AIM is no exception.
However, the situation is not as dire as it might appear on first glance. Diving further into the figures, AIM companies have raised a further £1.97 billion in secondary issuances over the same time period and market liquidity has also continued to improve, as daily trades and average turnover continue to steadily rise. AIM has even cultivated its own giants – as companies such as ASOS, Boohoo and Fevertree prompt speculation over FTSE-100 indexation and moves to the Main Market with their sizeable, multi-billion-pound market capitalisations.
This is clear evidence that there is a deep pool of capital available in London for smaller growth companies, if they know how to reap it. AIM is undoubtedly a trailblazing incubator for smaller companies looking to move into more profitable growth phases, and yet the fact that it has evolved into a suitable venue for these more mature companies offsets some of the high risk/return volatility inherent to the junior market.
M&A and AIM companies
UK public M&A activity across both the Main Market and AIM increased during H1 2019 compared to H1 2018, with the AIM market registering 13 firm offers to date. Interestingly, no particular sector dominates with a good spread across sectors, unlike the distinct bias in pharmaceuticals, biotech and healthcare of 2018. Technology continues to feature and there has also been some consolidation in the finance/payments sector.
Of the firm offers for AIM companies announced in 2019, there is a fairly even spread between UK and non-UK bidders, with the four US bidders representing the single largest non-UK faction. The overwhelming majority of bidders were listed entities, although only two bidders were fellow AIM companies, namely Taptica International Ltd, which acquired RhythmOne plc, and SEC S.p.A, which acquired Porta Communications Plc. Unsurprisingly all but two of the acquisitions were structured as schemes of arrangement. Only one transaction, Mastercard’s purchase of Earthport plc, was hostile, having originally been recommended, and that offer lapsed.
Even with that brief colour, there are some trends or conclusions that could be extrapolated. For example, the buoyancy of the public M&A market is noteworthy and the flow of transactions concerning AIM companies offers encouragement for those investors less focused on income. We may well be seeing increased activity as the UK faces economically uncertain times. Try as we may, we cannot avoid the fact that Brexit, and the distinct possibility of a no-deal, has negatively impacted the UK economy, at least in the short term. Theoretically, that should mean that there is great value to be found. For example, those companies that operate in sectors that are unlikely to be disrupted by inefficient border controls, such as technology and service companies, and that are sufficiently specialist or that have a global client base, ought to remain fundamentally good businesses attractive to purchasers. That supposition is supported by the earlier comment regarding the technology and payments sectors featuring in the announced deals to date. We might expect that they would suffer from the contagion of the wider economic weakness, creating a buyer’s market. Additionally, the weak sterling would add further lustre to a deal for a non-UK purchaser given the possibility of a currency arbitrage to strengthen an acquisition proposal.
With that outlook, it is logical that we might see a continued level of interest in AIM companies for purchasers. Quite who the buyers will be is trickier to predict. To date, the bidders have been almost exclusively trade buyers, with private equity purchasers absent. There is reportedly a substantial amount of undeployed private equity capital and so that trend may change. Furthermore, a number of activist investor-led or encouraged transactions have featured, albeit the activity is loaded towards the Main Market, with the sales of RPC Group Plc, KCOM Group, Ophir Energy plc and Tax Systems plc serving as good examples where activists have played notable roles. Consequently, we may see those sorts of funds driving acquisition activity, whether to facilitate an exit or to kickstart the next phase of capital growth.
Late 2019 and beyond
Market sentiment on the UK IPO pipeline for H2 2019 (and beyond) remains robust and commentators expect a resurgence of activity once the Brexit dust has settled. This includes a higher percentage of cross-border IPOs coming to both the Main Market and AIM; assuming that the US and China can resolve their trade and tariff issues and there is, in fact, more clarity around the future of UK-EU relations.
However, well-prepared flexible growth companies with a strong equity story will find their fundraising windows of opportunity, as demonstrated in H1 2019 and AIM remains the leading junior market in the EU. It does face challenges from alternative sources of financing, including crowdfunding, peer-to-peer lending, venture capital and competition from alternative junior stock markets such as the NEX Growth Market (which has identical regulatory status but boasts “fast-track” admission, a more engaged service and significant cost reductions). Yet, in a post-Brexit world, it will still be difficult to challenge AIM’s credentials for championing the growth of companies both in the UK and abroad.
About the Authors
Samuel Pearse, a Pillsbury partner based in London, advises clients in the UK and internationally on a wide range of complex corporate and securities transactions. Experienced in M&As, capital markets, joint ventures, investment funds, private equity and finance, Sam advises on cross-border investments, acquisitions, disposals, restructurings, accessing capital markets and corporate issues.
Ashmi Bhagani, a counsel in Pillsbury’s London office, focuses her practice on corporate finance, mergers and acquisitions and investment funds transactions. Ashmi has a broad range of experience in complex cross-border transactions, advising on international equity and debt capital markets financings, mergers and acquisitions, private equity and investment funds and joint ventures.
