AIM high: the market for growth companies

Posted by Liz Rees in Latest insights category on 06 Dec 19

Companies listed on AIM (previously known as the Alternative Investment Market) are popular with, though by no means exclusive to, UK Smaller Companies funds. With concerns regarding liquidity of shares garnering attention, some investors may be wondering whether AIM should be given a wide berth. Here we examine the pros and cons.

Humble beginnings

Known as the junior market of the London Stock Exchange (LSE), AIM launched in 1995 with ten companies worth just £82m. Today it comprises over 850 companies with a value exceeding £100bn.

Lighter regulation means it may serve some early stage businesses but it also includes well-known names such as ASOS (the online retailer) and Fever-Tree (the producer of upmarket mixer drinks).

Listing on AIM

AIM allows ambitious companies to raise capital with less stringent requirements than the LSE main market. The main market requires companies seeking a listing to have a three-year trading record, list at least 25% of their share capital and have enough working capital for one year.

AIM does not impose any of these requirements. This means more companies qualify and get the opportunity to raise their profile whilst investors get the opportunity to support innovative entrepreneurs at an earlier stage.

Although many companies use AIM as a springboard to the main market, there are several that have chosen to remain even when their market capitalisations have exceeded £1bn.

Features of AIM

AIM is a dynamic market and more than 3,600 companies have joined it at some point in its history. The market is under-research which presents an opportunity for talented fund managers to find hidden gems.

AIM trailed the rest of the UK market substantially over the past decade, having been particularly exposed to the dot-com bubble bursting in 2000 as it was home to many internet ‘concepts’ that collapsed. More recently, a few highly successful companies have driven returns.

How risky is AIM?

In the early days, sceptics claimed the exchange was little more than a casino for investors but it has matured considerably. There will always be higher-risk sectors, such as biotechnology or mining exploration, whose success hinges on binary outcomes. A few may become outstanding successes but plenty of others will burn through their cash and fail.

However, it’s not all about start-ups. Some long-established companies have transferred from the main market to AIM. Carpet manufacturer Victoria, laundry business Johnson Services and Scapa, which makes industrial tapes might not be typical businesses you would expect to find but have been among AIM’s stronger performers.

Renold and Alumasc are engineering companies with long histories that have recently made the move with the latter citing it a better option to allow some shareholders to benefit from tax concessions.

The tiddlers at the bottom end may have a limited volume of shares traded but the larger constituents will be as liquid as those of the same size on the main market. Of course, much depends on market conditions; during the depth of the financial crisis it was hard to sell anything.

Winners and losers

Widely held winners include: ASOS and boohoo, the online retailers; Abcam, a supplier of antibodies to the life sciences industry, Blue Prism, an automation software company and Fever-Tree, all of which have delivered phenomenal returns to investors who got on board early.

Other front-runners, some of which graduated to the main market, include Domino’s Pizza, food distributor Booker (bought by Tesco), student accommodation provider Unite Group, storage company Big Yellow and animal genetics firm Genus. Betting and gaming platform GVC Holdings, owner of Ladbrokes Coral, is currently a member of the FTSE 250.

AIM has had its share of losers too. Patisserie Valerie, Conviviality (owner of Bargain Booze) and virtual mobile network The People’s Operator all collapsed into administration. Drug failures and natural resource exploration companies have also been a source of losses.

The outlook

The speed of technology change and low capital required to be a disrupter means AIM has no shortage of applicants. Although the listing criteria are less onerous, financial standards sometimes exceed those of companies with a full listing.

Fund managers prepared to do extensive research and due diligence see significant opportunities to be exploited. Respected managers such as Dan Nikols of Merian and Harry Nimmo of Aberdeen Standard are positive on the prospects for AIM. Nimmo considers it a very different proposition to 5 years ago as more companies are profitable and pay dividends.

Funds to consider

AIM has the potential to be an incubator for some of the blockbusters of the future but finding them may be best left to experts. Many companies do not survive and few become top-flight business.

Morningstar bronze-rated Franklin UK Smaller Companies fund has around 40% invested in AIM stocks. Bronze-rated Liontrust Smaller Companies fund has around 72% exposure whilst Liontrust Microcap fund has approximately 85%. None look to invest in what they consider to be speculative stocks.

An Investment trust structure may be suitable for more illiquid companies as, unlike funds, managers do not have to sell shares to meet redemptions. Gold-rated Standard Life UK Smaller Companies Trust has significant exposure to AIM.

Important Information: We do not give investment advice so you will need to decide if an investment is suitable for you. If you are unsure whether to invest, you should contact a financial adviser.