London’s Alternative Investment Market, or AIM, has had a rough few years. The number of companies on it has dwindled to just 610, down 88 from last year, and the rate shows no sign of stopping.
While AIM companies have always been small, they’re also getting smaller. The average size of an AIM-listed firm is now just £111m, 11 per cent smaller than last year.
In response to the market crumbling, investment bank Peel Hunt has called for a “fundamental review” of AIM in a bid to revive it.
“Doing nothing is not an option,” said Charles Hall, head of research at Peel Hunt.
“We believe a new government with a growth mandate can deliver the necessary changes to make AIM the growth market it should be.”
AIMing higher
AIM has had one big problem according to Peel Hunt: “Aggressive fund outflows”.
Investors have pulled billions of pounds from the junior market, leading to a significant number of the companies falling off AIM, along with fewer companies floating and a sharp drop in fundraising.
Performance has also been hit hard, with the AIM index falling 40 per cent over the last three years, compared to a 21 rise in the FTSE All Share and a one per cent rise for the FTSE Smallcap, excluding investment trusts.
“Many more companies, particularly at the smaller end of the market cap spectrum, are questioning the value of being listed, with numerous management teams citing low valuations, low liquidity, limited appetite to support fundraisings, excessive corporate governance requirements, and a high cost of being listed,” said Hall.
“We believe these issues need to be addressed to ensure that AIM functions effectively as a source of long-term funding for growth companies.”
So how to fix the problem? Peel Hunt has proposed a range of tweaks that the government could make to the junior market, ranging from the easy fixes to more radical changes.
Common suggestions that have been floated before include using the government’s £5bn stake in Natwest to seed a National Wealth Fund that could invest in smaller UK companies, reducing IPO costs, or pushing for AIM companies to be included in index funds.
Tax tweaks were also an easy suggestion, like upping the tax incentives in schemes like EIS and VCTs or increasing capital gains tax for shareholders on overseas-listed companies versus domestic ones.
However, Peel Hunt has also proposed more radical steps. While the Mansion House Compact envisages five per cent of assets in DC pension funds going to private assets by 2030, Hall called for a minimum allocation to AIM too.
He suggested a minimum of 0.5 per cent of all pension assets invested in the junior market, as well as pushing pension funds to invest more in the UK as a whole.
This could even be expanded to ISAs, with the British ISA resurrected to force savers to invest 20 per cent of their assets in the UK for tax benefits, eventually increasing to 50 per cent.
Other significant changes proposed by Peel Hunt included widening the scope of the British Business Bank, which currently invests around £4bn in private UK companies, to include listed equities.
“France has enabled Bpifrance and Caisse de Dépôts to support the growth of French companies, providing both growth capital and supportive long-term investment,” said Hall.
“The recent IPOs of Planisware and Exosens are great examples of the French system helping to build and foster the domestic technology sector and expertise.
These changes might be unpopular in the City, but would be cheaper for the government than any big tax breaks to push for more investment.
Whether Reeves decides to use the carrot or the stick, it’s clear that something needs to be done to save AIM – fast.