After 18 months in the doldrums, the Alternative Investment Market is starting to look more welcoming for companies in certain sectors, finds John Sanders.
Investor interest in the Alternative Investment Market (AIM), home to most of Wales’ traded companies, plummeted last year.
Just 36 companies joined this junior version of the London Stock Exchange in 2009, compared with 114 in 2008 and a high of more than 500 in 2005.
But by the year end new listings had crept up to four or five a month, even though entry criteria have become noticeably tighter. Typically, investors will only hand over their cash to solid companies run by experienced management with a clear growth strategy. For anything hinting at blue sky research, the advice is: “Don’t bother.”
Investors have become extremely choosy about the sectors they will back. Healthcare is a firm favourite, on the basis that people are always willing to spend on keeping fit and healthy. The right technology and energy companies may get a look in too.
One Welsh entrepreneur among the handful to get access to AIM recently is Julian Baines. He and colleague David Evans acquired AIM-listed cash shell International Brand Licensing in January to develop a health diagnostics business. Their track record includes British Biocell International, which they sold in 2008. “BBI had high profits and good growth potential, and so will the companies we’re looking to acquire,” says Baines.
He’s aware of risk aversion across the whole stock market but is not deterred. “I think it’s a solid, positive change. Now isn’t a bad time at all to come back to the market if you have solid businesses with good growth and a high reputation.”
Funding growth through acquisitions – which is IBL’s strategy – is where AIM is particularly supportive compared with private equity. BBI made seven acquisitions in the three-and-a-half years after it floated, compared with none in the four years it was under venture capital ownership.
Baines already has three acquisition targets in his sights. Once the first is complete he will give IBL a more appropriate name and set up a corporate headquarters in Cardiff. Listing on AIM, he says, “really is an easier way of rapidly growing a business if you’re starting from a very strong base”.
Avia Health Infomatics is another company in the health sector that has listed on AIM recently. Its strategy is also to buy and build through acquisition. Although Avia is officially headquartered in Oxforshire, the company’s main Plain Software subsidiary operates from Colwyn Bay.
Chairman Barry Giddings planned to list Avia in 2008, but the collapse of Lehman Brothers shredded that timetable. So, instead of taking 12 weeks to list, Avia finally came to AIM more than 12 months later in November 2009. That marathon gave Giddings a great insight into market sentiment. He, too, is convinced that investors are slowly getting back their confidence in AIM.
“During the middle of 2009 there was just no appetite anywhere from anyone for anything to do with fundraising,” says Giddings. “And you couldn’t blame them. We just had to wait out the market to rise. It was a sobering experience. We believed we had something different and that people would understand that. They did, but it was very hard work.”
One reason an AIM listing is so useful for companies with an acquisition strategy is that they can pay with AIM quoted paper instead of cash. “We have no intention of buying anything for cash,” says Giddings, adding that AIM is ideal for intellectual property based companies such as Avia. In contrast, companies with physical assets may find the venture capital route better suited to their funding needs.
Frank Holmes, senior partner at Gambit Corporate Finance, is working towards possible AIM listings in 2011 with two clean technology and energy companies. Given the caution in the market, both may first opt for prior funding to make them more attractive to a wider investor audience when they list.
But Holmes says the recent upturn in sentiment does not signal the return of a wave of naïve capital. “The appetite for small AIM floats will be restricted. But for companies with the right profile, the right credentials, the right strategy and the right sector, there’s definitely a case to be made.”
Using AIM paper can be quick, too. Cardiff- based semiconductor technology specialist IQE used a placing of its AIM-listed shares last year to acquire NanoGaN in Bath. “It was a much shorter route to be able to put that to a placing with existing shareholders than it would have been had we been on the main market,” says investor relations manager Chris Meadows.
But IQE is not planning a buying spree on the back of its listing, says Meadows, and the company still considers other funding options. A particular challenge for IQE is the lack of understanding of its hi-tech products in the UK, compared with the US . So, if and when IQE’s market capitalisation tops £100m, the company may return to a full listing to raise its market profile.
Promotion to the main market is not an option for most AIM-quoted Welsh companies, which have experienced mixed fortunes over the past year. So, while some have performed extremely well, one or two – notably including Freshwater UK, the public relations group, are thinking about delisting.
That should not deter other companies, for whom a listing makes sense and are willing to accept an increased level of corporate governance in return for access to equity funding. But despite the persistence of corporate advisers, some potential beneficiaries of AIM don’t know what it offers or are in awe of the listing process.
On the back of publicity surrounding IBL, for example, Baines was contacted by one entrepreneur who he referred to advisers. “The person who approached me had not really thought about AIM because he knew nothing of it. I think there’s a general fear of even looking at it. It’s not rocket science. It can be done – if you have the confidence in your business.”
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