Inside the changing world of Aim listings

May 10, 2019
Head of primary markets talks everything from IPO numbers to Brexit, Mifid II and corporate governance

The number of companies listed on London’s Aim market fell to 904 last month – the lowest since 2003 and well below the 1,694-high of 2007. But the market is performing well and two companies, Circassia Pharmaceuticals and 155-year old gear and chain maker Renold, have even made the move, or indicated their intention to move, to Aim from the Main Market so far this year. 

Marcus Stuttard, head of Aim and UK primary markets at the London Stock Exchange Group (LSEG), talks to Garnet Roach about why a company might make that move, how the IPO numbers don’t tell the full story, and the impact of Brexit and Mifid II on Aim-listed companies. He also discusses the new corporate governance rules that came into force last year. 

The number of listed companies on Aim has fallen in recent years. What is driving that trend and what can you add to paint a fuller picture of the situation for small caps going public today?

There has been a trend over the past few years where we’ve seen a lower number of IPOs globally. But actually that’s only one statistic [and while] IPOs tend to be used as a barometer of activity in the market, the amount of capital companies are raising on a longer-term basis is just as, if not more, important. 

This year to date, we’ve had more than £1 bn ($1.3 bn) raised by Aim companies doing further issuances on Aim. And if you look over the last 10 years, we are seeing the size of companies and the amount of capital raised at IPO increasing quite significantly. 

For example, the average market cap of an Aim company that listed in 2008 was around £25 mn – last year it was £100 mn. The average money raised by a company on admission to Aim in 2008 was about £10 mn – now it’s closer to £25 mn. 

And if we compare Aim to other European growth markets in the first quarter of 2019, 72 percent of all of the capital raised in the quarter through European growth markets was raised on Aim. That’s three-and-a-half times more than was raised on the next biggest growth market.

I think those figures indicate that companies are able to access a deeper pool of capital at market and also probably have access to a wider range of funding sources prior to IPO. 

In the UK, the funding environment has improved markedly over the last 10 years. There is an increasing number of business angels and angel syndicates, as well as an increase in the amount of venture capital money available. There have also been a number of government interventions such as the Enterprise Investment Scheme and venture capital trust tax incentives, and the launch of organizations such as the British Business Bank, all of which have helped support companies through their early funding stages. 

These are all forms of fund-raising we’ve supported to ensure companies can access the right form of funding throughout their development. At LSEG we want to make sure the overall funding ecosystem in the UK is functioning well. This is so that when companies that get to the size or level of maturity or the point where they can really benefit from being public, we can support them in the public markets – whether that’s on Aim or the Main Market.

The result is that companies that are coming through are able to make the best use of the markets. They’re able to raise capital at IPO, access liquidity for exiting shareholders and undertake follow-on capital-raising, taking advantage of the fact that liquidity on Aim has increased significantly over the last 10 years. Companies that are joining the market now are able to benefit from that greater level of investor interest and trading in their securities.

What has been the impact of Brexit on smaller companies looking to list?

Brexit and broader global, macroeconomic uncertainties have undoubtedly had an impact on the short-term IPO pipeline. But they haven’t impacted the interest from investors or the amount of capital available in the market.

We have seen a number of IPOs so far this year and the pipeline is definitely picking up. The first quarter is often a bit slower for IPOs but certainly the levels of interest – from both companies and investors – are very strong. 

And on that investor point, if we take the AIM 100 Index and compare that with the FTSE 100 over the last five years, we’ve seen an 18 percent increase in the value of the Aim companies compared with 9 percent in FTSE 100 firms. Investors are recognizing that outperformance and want increasing access to smaller companies.

Talking of corporate access, how do you think the impact of Mifid II has played out among Aim-listed firms? There was obviously a lot of talk of heavy, negative impacts for small companies before the regulation came in.

I think the story is more nuanced. We’ve spent a lot of time engaging with companies, the buy side and the sell side. And actually, I think the impact for small caps is not necessarily what some predicted it would be. For example, small caps tend to get their support from the house broker – that was the case prior to Mifid II and that continues to be the case. 

One of the impacts we have seen as a result of the debate around Mifid II is that there has been an increased focus on the importance of research and of communication with investors, which has made a number of small caps – on both Aim and the Main Market – think more about their IR activities and investor engagement. 

Some companies are thinking about whether they might benefit from engaging an additional broker and whether they should be increasing their own internal investor relations activities. They are also thinking about the balance of their shareholder registers and whether they should be proactively trying to attract retail investors in addition to the institutional providers of capital. 

There has been an impact but I don’t think, from what we’re seeing, that the impact has been necessarily in line with some of the predictions prior to implementation.

Aim introduced new corporate governance requirements for listed companies last year. What impact has that had?  

The rule changes we made last year were the result of extensive market consultation. We had changed the disclosure obligations around corporate governance in 2014, requiring companies to provide more visibility to investors about their corporate governance arrangements, through their disclosures on their IR website and the extent to which they were complying with their chosen corporate governance code. 

We then took that a step further last year to say that all companies needed to follow a recognized code. We’ve not set out prescriptively what the corporate governance requirements are. Instead we’ve given companies choice about which code is the most appropriate for them to follow: the vast majority are using the Quoted Companies Alliance Code, with some others – often the larger companies – using the UK Corporate Governance Code or international firms using their domestic corporate governance code.

We’ve preserved the element of choice, allowing companies to choose the best option for them. For us, corporate governance is about making sure there is a good level of disclosure about an individual company’s corporate governance arrangements so that the board of the company can have a much more engaged dialogue with its investors.

For many companies this was just a natural evolution. For a minority it probably made them think, ‘Actually, how do we disclose what we do around corporate governance? And is that accurately reflecting our underlying practices?’

It has been a helpful exercise and, broadly, we’ve had positive feedback.

I’ve seen that two firms moved from the Main Market to Aim this year (or signaled intent to do so). Is this unusual? Why might a company do this?

The London Stock Exchange is unique in that it has both a vibrant growth market – Aim – and a very well established and respected Main Market. Few exchange groups around the world have both.

When Aim originally launched in 1995 people very much viewed it as a stepping stone: companies would go from being private onto Aim and then potentially transfer to the Main Market. 

Over the years, as Aim has matured, we’ve actually seen companies moving in both directions. We have companies that move from Aim to the Main Market, particularly once they get to a certain size and maybe are eligible for UK benchmark indices like the FTSE 250 or even the FTSE 100. 

But we also get companies transferring from the Main Market to Aim and there are a variety of reasons for that. Companies will often want to be on a market alongside their peer group, whether that’s by size or sector. Another factor is the way we’ve designed the broader regulatory structure, with things like the role of the nominated advisers, to support smaller companies. 

A lot of smaller companies can see the benefit of that. And particularly when it comes to issues like further capital-raising, the documentation requirements are less prescriptive so it makes it easier for companies to raise further capital and make acquisitions on Aim than on the Main Market.

Finally, what tips can you offer companies considering a listing on Aim?

The main tip we give to companies thinking about joining Aim is to be well prepared and really think about what life as a public company will mean for them.

We talk a lot to companies about the range of benefits of being public, and not just from the capital-raising perspective. Companies on Aim tend to find very quickly that their visibility, profile and credibility increases. This often means they can win contracts and do business with third parties in a way that perhaps they couldn’t before. 

So companies need to think and plan in order to really benefit from that increased profile and visibility from their first day as a public company. 

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