London's AIM - IPO Activity - 2005 to 2007

Highlights

• A tale of two markets….2005 versus 2006 and 2007
• London Stock Exchange AIM IPO funding expands but number of new entrants contracts
• 50% of London AIM IPOs in all three years raise between £3m and £30m
• Outlook for London's AIM:  Extremely cautious and selective market, only funding high quality companies listing on the London Stock Exchange's AIM

While the top line growth in London AIM IPO funds raised from 2005 to 2006 was impressive at 65%, the makeup of the companies listing on London's AIM changed dramatically during 2006 with the emergence of Special Purpose Acquisition Corporations (SPACs) and Investment and Real Estate Funds.  This trend continued throughout 2007.  The bifurcation of London Stock Exchange AIM IPOs between ‘investment vehicles’ and ‘operating companies’ listing on London's AIM causes the aggregate and average metrics to be misleading.

All Companies	Number of London AIM IPOs	Gross Funds Raised (in £ billions)	Average Funds Raised (in £ millions)
2005	335	5.63	17
2006	278	9.32	34
2007	182	6.26	34
Total	795	21.21	27

Exclusive of SPACs and Investment and Real Estate Funds:

‘Operating Companies’	Number of London AIM IPOs	Gross Funds Raised (in £ billions)	Average Funds Raised (in £ millions)
2005	306	3.44	11
2006	172	2.77	16
2007	111	1.99	18
Total	589	8.20	14

The key takeaway from comparing the tables above is that only 60% of the London AIM IPOs in 2006 and 2007 were for ‘operating companies’ listing on London's AIM and those companies only captured 30% of the gross funds raised on the London Stock Exchange's AIM.  Notwithstanding the bifurcation of the London AIM IPO market, 50% of all of the London AIM IPOs in each of the three years raised between £3 million and £30 million.

Question:         Why did the makeup of the companies listing on London's AIM change during 2006?

Answer:           Aversion to risk.

By virtue of the fact that the London Stock Exchange's AIM caters to small and medium-sized, growth-oriented companies, a handful of companies do exceptionally well, some tread water and many perform below initial expectations.  As such, it is difficult to “pick the winners”.  Since London AIM IPOs are largely backed by London-based institutions, it’s not practical for them to construct portfolios to mitigate that risk, therefore, they either choose not to participate OR develop new products.

The emergence of SPACs and the formation of Investment and Real Estate Funds allowed London-based institutions to better manage their risk because:

1. London Stock Exchange AIM IPO funds committed to a SPAC are held in trust with the London AIM investors able to opt out of proposed acquisitions and have their investment returned or have their investment returned if a Qualified Business Combination is not consummated by a certain date.

2. London AIM IPO funds committed to an Investment Fund typically have narrow remits in terms of sectors and/or geography and only a certain percentage of the fund can be committed to any one company. 

3. London AIM IPO funds committed to a Real Estate Fund are supported by “hard assets”.

Question:         What is the net result of this aversion to risk?

Answer:           London AIM IPOs < £3 million have been replaced by London AIM IPOs > £30 million.

Very small ‘operating companies’ listing on the London Stock Exchange's AIM are no longer being funded which is good for the market since it increases quality.  While London's AIM was founded in 1995 to fund these very companies and nurture them through to the Main Market, London's AIM has forged its own identity in recent years and, in fact, more companies now move from the Main Market to London's AIM!  With a 12 fold disparity between the average company’s market capitalization on London's AIM and NASDAQ, there is certainly scope for the London Stock Exchange's AIM to continue to address larger U.S. companies listing on London's AIM before becoming competitive with NASDAQ.

The outlook for London Stock Exchange AIM IPOs in 2008 is extremely cautious with an expectation that the market will be exceptionally selective, focusing on more mature, higher quality ‘operating companies’ with London AIM IPO fundraisings averaging around £20 million.