The London Stock Exchange recently celebrated the first anniversary of AIM.  AIM has created renewed interest in smaller companies such that, by the end of July, 200 companies were being traded on AIM with £594 million in new finance raised.  84% of this has been raised in 1996, with £178 million raised in July alone - demonstrating a growing market for growth companies! 

Whilst no company should rule AIM out, it is interesting to note the broad parameters which are being applied by nominated advisers, who have recently had to sift through a plethora of invitations to sponsor companies on AIM as interest in the market has increased. 

These are: 

minimum prospective pre-tax profits of £500,000 per annum with a historical trend of increasing profitability; 

experienced management team with a track record of generating attractive returns to shareholders; 

robust cash flow profile for the business thereby minimising the risk of returning to the market for more funds in the short-term; 

new money being raised to invest in the business although exit finance to facilitate family succession not ruled out; and 

ability to pay reasonable dividends together with the prospect of strong capital growth. 

Winners and losers 

The good news is that so far there have not been too many losers on AIM - indeed the market has yet to experience its first corporate failure although the law of averages alone would suggest this cannot be too far away.  However, AIM will withstand such inevitable setbacks now it is established and the current mood of investors should be one of satisfaction.  The FT-SE Index of shares listed on AIM stood at 1049.4 on 31 July 1996 indicating the growth in market value since the end of last year (base 1000 on 1 January 1996).  This 4.9% increase compares with a 1.8% increase in the FT All Share Index over the same period. 

The majority of newcomers on AIM are therefore well ahead of their counterparts on the main market when it comes to share price performance. 

Points to note 

Investors seem most comfortable with companies capitalised in the £10 million to £50 million range.  Consequently, companies of lesser value need to be aware of this and other investor aspirations, such as a reasonable level of free market capital to facilitate liquidity in the market, when considering their strategy for raising new finance.  The recent slow down in new entrants onto the market is an indication that AIM was beginning to suffer from being "overtraded" by advisers and there has been evidence that institutions are becoming more wary of some of the new issues being offered to them.  Another factor which companies should be aware of is the level of issue costs associated with admission on AIM.  The majority of companies looking to raise finance on AIM have raised between £1 million and £10 million.  With minimum issue costs of around £50k/£100k plus commissions, raising less than £1 million is, generally, cost prohibitive.  To date, the average finance raising by companies at the time of their admission on AIM is in excess of £5 million. 

The institutional investor 

At the end of 1995, the change in sentiment towards AIM of the UK's major financial institutions was the spark, which lit the AIM fire and it seems, several months on, that those institutions want to see how the money they have invested in AIM companies performs before moving back into the market. 

Critically, they will be interested to ensure that companies' nominated brokers, another key requirement for any company seeking an AIM listing, can maintain liquidity in AIM stocks by producing regular and informed research on their AIM clients. 

The sentiment of the professional investment community is the key to the continuing success of AIM.  A significant proportion of the new finance raised on AIM has come from institutions and their taps can be turned off as quickly as they are turned on.  This is why the appointment of nominated advisers is critical as they are the Stock Exchange's watchdog in maintaining quality control in the market. 

The private investor 

The Inland Revenue considers investment in an AIM company to be an unquoted investment for tax purposes.  Consequently, the private investor has a further incentive to invest in AIM. 

One of the more attractive reliefs is that relating to capital gains tax where investors can "roll over" a capital gain by reinvesting the proceeds in a qualifying company.  The rules which determine whether a company "qualifies" are similar to those which apply under the Enterprise Investment Scheme (EIS). 

However, there have been problems with regard to reinvestment relief, due to companies being unable to obtain advance clearance to confirm whether their shares qualify for this tax break before they come to the market.  Consequently, investors have had to make an investment blind and hope that, when they claim the relief, the company qualifies. 

We were pleased to see the recent announcement that the Inland Revenue is now putting in place procedures for advance clearance by companies. 

For the moment, private investors should be aware that fewer than a third of AIM companies are likely to qualify for reinvestment relief and we suggest that nominated advisers are contacted before shares are acquired if tax relief is a factor in the investment decision. 

THE OFEX FACILITY - A VIABLE ALTERNATIVE? 

OFEX was established in October 1995 by J P Jenkins, a specialist market maker in unquoted securities.  J P Jenkins itself was formed in 1991 to make markets in companies traded under the now defunct London Stock Exchange Rule 4.2 matched bargain trading facility.  J P Jenkins is also active in AIM, Rule 4.2's successor, but identified a market for shares which, although unregulated by the Stock Exchange, could nevertheless be traded "off exchange". 

There are now over 100 companies on OFEX and a total of £33 million in new finance had been raised by the end of July at an average of around £1 million per individual finance raising transaction. 

Companies on OFEX include relatively large concerns such as National Parking Corporation and Weetabix which have less of a requirement for new capital but do welcome a means for shareholders to trade in their shares at minimum cost. 

OFEX is therefore a viable alternative for raising new finance in the right circumstances.  However, with a broad range of companies already on OFEX, investors should take note that this is an unregulated facility for trading in shares. 

EASDAQ - THE EUROPEAN MARKET OPPORTUNITY 

September will herald the introduction of EASDAQ, a new stock market which will be independent of existing European stock markets.  It has been created to bring together high-growth companies, their investors and financial intermediaries into one pan-European stock market.  It is based on, and shares many of the characteristics of, NASDAQ, the successful US exchange for young, growing companies.  The close relationship between EASDAQ and NASDAQ should assist companies traded on one exchange in gaining a trading facility on the other.  Dual trading would offer a number of advantages; not least the hours of trading would be extended and the company would gain access to a wider range of investors.  In contrast to specifically national markets such as AIM which are geared towards smaller companies.  EASDAQ will enable companies to raise their profile throughout Europe since the investor base is pan-European. 

The anticipated higher level of liquidity will also be attractive to investors, as will the growth characteristic of the listed stocks and the protection of a regulatory framework which has been closely modelled on that of NASDAQ. 

Companies should note that EASDAQ will have the same demanding information disclosure standards as NASDAQ and the Securities and Exchange Commission (SEC) in the US.  The disclosure requirements include rules which ensure information is reported to a uniform standard, irrespective of the nationality of the company.  The rules require companies to publish quarterly reports on financial performance and to make timely disclosure of all material events. 

Consequently, we anticipate that, rather than being a competitor to AIM and OFEX, EASDAQ will supplement the recent improvement in trading facilities for smaller companies.  By widening the horizon for raising new finance, more companies will seek a quotation on these new markets, thereby facilitating growth for the vast majority of the UK's smaller companies. 
  
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