London's AIM - U.S. Company Performance - Share Price and Liquidity - H1 2010

Highlights

• U.S. domiciled companies* listed on the London Stock Exchange's AIM register a weighted loss of 6%
• Foreign domiciled U.S. operating companies** listed on London's AIM achieve a weighted return of 24%
• FTSE AIM All-Share Index inches up 1%
• Significant liquidity difference between U.S. and foreign domiciled U.S. companies listed on London's AIM

While there were 26 U.S. domiciled companies listed on the London Stock Exchange's AIM and 31 foreign domiciled U.S. operating companies listed on London's AIM as of the beginning of 2010, only 24 of the former and 30 of the latter traded on London's AIM for the entire six months.  Of the three U.S. companies that left the London Stock Exchange's AIM during the first half of 2010, one cited a lack of liquidity on London's AIM, one was unable to raise additional capital and one moved its listing up to NASDAQ.  These companies are not included in the chart and analysis below because their aggregate market capitalization on the London Stock Exchange's AIM as of the beginning of 2010 was only 9% of the U.S. companies’ market capitalization and one large company dominated and actually increased in value, therefore, their effect on the share price return analysis is immaterial.

 

The weighted returns in the table below were calculated using the average market capitalizations of the U.S. companies listed on London's AIM during the six months, similar to how an index fund would calculate returns.

Index	Unweighted	Weighted
U.S. Domiciled Companies	(1%)	(6%)
Foreign Domiciled Companies	4%	24%
FTSE AIM All-Share Index	N/A	1%

*    U.S. operating companies listed on AIM directly through a U.S. entity.

**  U.S. operating companies listed on AIM through a U.K. or tax efficient jurisdiction with central operations and/or decision making in the U.S.

The weighted return contributions for the U.S. domiciled companies listed on the London Stock Exchange's AIM were tightly packed with no one company accounting for more or less than 3%.  This was not the case for the foreign domiciled U.S. operating companies listed on London's AIM.  One company accounted for the entire 24% weighted return with the others reasonably tightly packed at +/-6%.  This company’s absolute return was 102%, however, the first half of 2010 can not be characterized as a ‘stock picker’s half’ which was the case during the full-year 2009 when 25% of the U.S. companies listed on the London Stock Exchange's AIM posted returns of more than 100%.

In some respects, weighted results are a self-fulfilling prophesy in that companies listed on London's AIM with increasing share prices, and therefore increasing market capitalizations on London's AIM, become more heavily weighted relative to those with decreasing share prices / market capitalizations.  In addition, a company that is performing well has a better chance of completing a secondary offering on London's AIM and for its share price on the London Stock Exchange's AIM to hold up relative to the dilutive effects, further increasing its market capitalization and relative weighting.  When these factors are controlled for by weighting the companies’ returns by their market capitalizations on London's AIM as of the beginning of 2010, the 24 U.S. domiciled companies listed on London's AIM lost a little more at 10% and the 30 foreign domiciled U.S. operating companies listed on London's AIM gained less at 9%.  The results of this same analysis for 2009 were much more dramatic, which is an indication that the capital raising environment on the London Stock Exchange's AIM improved during the first half of 2010.

In terms of average monthly liquidity on London's AIM (see the table below), the foreign domiciled U.S. operating companies listed on London's AIM outperformed the U.S. domiciled companies listed on London's AIM on both measures and London's AIM as a whole on one of two measures.  In more normal times, all of the weighted results exceed all of the unweighted results, reflecting the positive relationship between a company’s liquidity on the London Stock Exchange's AIM and its market capitalization listed on London's AIM.  The unweighted results represent the level of monthly liquidity on London's AIM that the average company can expect to achieve.  The reversal of this relationship for the U.S domiciled companies listed on London's AIM indicates that relative trading volumes were greatest for the companies listed on London's AIM with the smallest market capitalizations on London's AIM.  This could represent London AIM investors coming into companies listed on London's AIM that they felt were undervalued but is more likely reflective of London AIM investors exiting small companies where they are no longer comfortable with the risk/reward relationship.  This view is supported by the share price underperformance of the U.S. domiciled companies listed on the London Stock Exchange's AIM relative to the foreign domiciled U.S. operating companies listed on London's AIM and London's AIM as a whole.

Average Monthly Liquidity on London's AIM	Foreign Domiciled U.S. Operating Companies Listed on London's AIM	U.S. Domiciled Companies Listed on London AIM	Entire London's AIM
Weighted	3.71%	0.57%	3.99%
Unweighted	3.62%	1.71%	2.64%

The chart below provides the monthly detail of the unweighted liquidity on London's AIM for each of the three categories in the table above.  It should be noted that an abnormal level of trading activity in one U.S. domiciled company listed on the London Stock Exchange's AIM during February caused the average for that month to spike to 4.31%.  If this company is excluded, the average would have been broadly in line with the other months at 1.85%.

 

The key takeaway from the chart above is that there is a liquidity advantage for U.S. companies that list on the London Stock Exchange's AIM via a U.K. holding company.  The four main reasons being:

1. Once the Reg. S period expires, the London AIM IPO shares can trade directly within CREST
2. Pre-IPO shares not subject to Reg. S can immediately trade directly within CREST
3. Articles of incorporation fully conform to U.K. law providing comfort to U.K. investors
4. London AIM institutional investors only allocate a portion of their investments to non-U.K. companies

Nevertheless, irrespective of where a company is domiciled, liquidity on London's AIM can be improved.  The reasons for a lack of liquidity on London's AIM are often company specific and not obvious.  As a consequence, thoughtful and thorough investigation is needed in order to formulate actionable solutions.  Several strategic decisions can be taken during the planning of the London Stock Exchange AIM IPO to minimize the risk of lack of liquidity on London's AIM becoming a problem in the first instance; including, selection of the most appropriate AIM Nominated Adviser (Nomad), AIM Nominated Broker(s), financial PR/IR firm and Independent Equity Research firm.

London's AIM - U.S. Company IPO and Secondary Offering Activity - H1 2010

Highlights

• London's AIM IPO activity accelerates, H1 2010 (16 London Stock Exchange AIM IPOs) exceeds the full year 2009 (13 London AIM IPOs)
• First U.S. company listing on London's AIM since July 2008 does not occur until October 2010
• ‘Operating companies’ return to listing on London's AIM, account for 75% of H1 2010 London Stock Exchange AIM IPOs, mirror image of 2009
• However, London AIM IPO market remains fragile and below trend (50 - 150 yearly) for foreseeable future
• Given market conditions, prospective issuers should carefully consider:
• Suitability before embarking on the London Stock Exchange AIM listing process
• Key advisers, most notably Nominated Advisers (Nomads) and Nominated Brokers

• Surprisingly, only 4 of the 16 companies listing on London's AIM had revenues > £1 million (range £1m - £58m)
• Those 4 companies listing on London's AIM broadly in the tech space (digital media and cleantech)
• Other 12 companies listing on London's AIM broadly in natural resources space or ‘investment vehicles’

• Secondary offerings on the London Stock Exchange's AIM remain strong

• U.S. companies listing on London's AIM account for 6% of all London AIM IPOs since 2008
• U.S. companies listing on London's AIM account for 10% of all AIM ‘operating company’ listings on London's AIM since 2008
• Respectively account for 7% and 16% of gross funds raised from London AIM IPOs since 2008

• £350m raised from secondary offerings on the London Stock Exchange's AIM for 26 U.S. companies listed on London's AIM since 2009
• 48% of all U.S. companies listed on London's AIM have completed at least one secondary offering on London's AIM since 2009
• U.S. companies listed on London's AIM make up 4% of London's AIM but capture 5% of secondary offering funds raised on London's AIM

• Selling shareholder activity on the London Stock Exchange's AIM continues at historic levels since 2008
• U.S. Accredited Investor and Qualified Institutional Buyer participation on London's AIM increases 

London AIM IPOs

The key takeaway from comparing the first two tables below is the return of ‘operating companies’ listing on the London Stock Exchange's  AIM.  The £18 million ($29 million) average raised on London's AIM by these 12 ‘operating companies’ listing on London's AIM is consistent with 2008 when 27 ‘operating companies’ listed on London's AIM and raised an average of £19 million ($30 million).

While the return of ‘operating companies’ listing on the London Stock Exchange's AIM is a positive sign, the London AIM IPO market remains below trend (50 - 150 yearly) and is expected to remain so for the foreseeable future.  In addition to the current macroeconomic situation, the Secondary Offering market on London's AIM has been booming (£2.1 billion or $3.4 billion raised on London's AIM during the first half of 2010) as a result of attractive valuations for companies listed on London's AIM that are ‘known quantities’.  The strength of the Secondary Offering market on the London Stock Exchange's AIM is a positive sign for London AIM IPOs over the medium to longer term as London AIM investors remain confident in the market; however, the shifting of their risk profiles towards London Stock Exchange AIM IPOs is sure to be gradual.

It was surprising that the types of ‘operating companies’ listing on London's AIM during the first half of 2010 fell into two very distinct categories; those companies listing on London's AIM with revenue traction and profits, or very close to profitability, and natural resource plays (mining and oil and gas) at a very nascent stage.  The latter all had owned or identifiable assets, solid geological studies and exceptional management teams with demonstrable track records of success.

Entire Market      All Companies	Number of London AIM IPOs	Gross Funds Raised (in £ millions)	Average Funds Raised (in £ millions)
H1 2008	31	830	27
H2 2008	7	88	13
H1 2009	2	222	111
H2 2009	11	388	35
H1 2010	16	350	22
Total	67	1,878	28

Exclusive of SPACs and Investment and Real Estate Funds:

Entire Market      ‘Operating Companies’	Number of London AIM IPOs	Gross Funds Raised (in £ millions)	Average Funds Raised (in £ millions)
H1 2008	22	455	21
H2 2008	5	68	14
H1 2009	-	-	N/A
H2 2009	3	16	5
H1 2010	12	211	18
Total	42	750	18

All of the U.S. companies listed on the London Stock Exchange's AIM in the table below that completed IPOs on London's AIM during 2008 are ‘operating companies’.  U.S. companies listed on London's AIM were relatively immune from the ‘investment vehicle’ IPO phenomenon.

U.S. companies listed on the London Stock Exchange's AIM have accounted for 6% of all London AIM IPOs and 10% of all ‘operating company’ listings on London's AIM since 2008.  While London AIM listing activity has been muted over the last two-and-a-half years, it is relevant to note that these London AIM-listed companies have garnered 7% and 16%, respectively, of the gross funds raised on the London  Stock Exchange's AIM.

While the limited number of U.S. company listings on London's AIM since 2008 makes it difficult to draw firm conclusions, it is believed that the upward trend will persist from the £24 million ($38 million) average raised by the 50 U.S. ‘operating companies’ listed on London's AIM that completed London Stock Exchange AIM IPOs from 2005 – 2007.

U.S. Companies	Number of London AIM IPOs	Gross Funds Raised (in £ millions)	Average Funds Raised (in £ millions)
H1 2008	3	70	23
H2 2008	1	53	53
H1 2009	-	-	N/A
H2 2009	-	-	N/A
H1 2010	-	-	N/A
Total	4	123	31

London AIM Dilution

The chart below highlights an interesting shift in the listings on London's AIM that occurred during 2008, a substantial decrease in London Stock Exchange AIM IPO dilution of existing shareholders.  2009 is viewed as an anomaly given the lack of activity.

There are two main reasons for this shift.  First, the London Stock Exchange (LSE) codified the AIM Rules for Nominated Advisers (Nomads) in early 2007 which has increased the scrutiny of prospective new entrants by Nominated Advisers (Nomads) since the Nominated Adviser (Nomad) vouches to the London Stock Exchange as to a company’s suitability for admission to London's AIM.  Second, London AIM investors have become more risk adverse.  Consequently, the quality of the companies listing on London's AIM has increased and, as a result, the IPO dilution of existing shareholders has decreased on London's AIM.

London AIM Secondary Offerings (see tables and chart below)

When reviewing the “Entire Market, All Companies” listed on London's AIM table below, one anomaly should be adjusted for in order to arrive at a fair comparison.  During the second half of 2009, there were three large London Stock Exchange AIM Placing & Open Offers which raised an aggregate of £1.0 billion on London's AIM for real estate investment, development and management companies.  Historically, the vast majority of secondary offerings on London's AIM take the form of Placings and are much smaller in size.  When the adjustments are made, the aggregate secondary offering funds raised on London's AIM during the second half of 2009 drops from £3.4 billion to £2.4 billion and the average drops from £7.93 million to £5.63 million.

While the 54 U.S. companies listed on the London Stock Exchange's AIM account for 4% of the 1,235 companies listed London's AIM, they have captured 5% of the secondary offering funds raised on London's AIM since 2009.  However, when one large secondary offering on London's AIM during the first half of 2010 that raised £152 million ($243 million) is excluded, the U.S. company share of secondary offering funds raised on London's AIM drops to 3%.  Excluding this company also brings the average funds raised by the U.S. companies listed on London's AIM during the second half of 2010 down to £2.14 million, however, there wasn’t enough activity for this average to be meaningful, therefore, the average for the two half years comprising 2009 of £5.94 million is more representative.

Entire Market All Companies	Number of London AIM Secondaries*	Gross Funds Raised (in £ millions)	Average Funds Raised (in £ millions)
H1 2009	335	1,433	4.28
H2 2009	427	3,387	7.93
H1 2010	308	2,107	6.84
Total	1,070	6,927	6.47

*  This is the number of discrete secondary offerings on London's AIM.  Some companies completed more than one secondary offering on London's AIM in some periods.

All U.S. Companies	Number of London AIM Secondaries*	Gross Funds Raised (in £ millions)	Average Funds Raised (in £ millions)
H1 2009	14	64	4.57
H2 2009	17	120	7.06
H1 2010	8	167	20.88
Total	39	351	9.00

*  This is the number of companies that completed secondary offerings on London's AIM as opposed to the number of discrete secondary offerings on London's AIM.

Of the 39 U.S. companies that completed secondary offerings on the London  Stock Exchange's AIM since 2009, 13 completed secondary offerings on London's AIM in more than one half year, therefore, 48% of the U.S. companies listed on London's AIM (26 of 54) have completed at least one secondary offering on London's AIM since 2009.

Since 2009, 62% (24 of 39) of the U.S. companies listed on the London Stock Exchange's AIM that have completed secondary offerings on London's AIM have raised between £1 and £10 million.

 

U.S. London AIM Industry Dispersion

Companies listed on the London Stock Exchange's (LSE) Alternative Investment Market (AIM) are organized into 90 sub-sectors which feed into 40 sectors which feed into 10 super sectors.  The 54 U.S. companies that are listed on London's AIM are quite diverse and operate in all 10 super sectors; however, there is a concentration of oil and gas producers listed on London's AIM in Texas and concentrations in technology, including; digital media, biotech and cleantech, between Boston and Washington D.C. and in California.  Industrial companies listed on London's AIM contain a mixture of cleantech companies (fuel cells and solar) and B2B electronic payment companies.  Within Basic Materials, 50% of the London AIM-listed companies produce chemicals/compounds for the health and growth of fish, plants and agriculture.  Within Consumer Services, 67% of the London Stock Exchange AIM-listed companies are media companies with some unique technology.  Within Consumer Goods, one company listed on London's AIM is developing fuel cells for vehicles and the other is a winery.

 

  

U.S. London AIM Selling Shareholder Activity

The ability of existing shareholders to sell some or all of their holdings in an London AIM IPO depends on a variety of factors; the most important of which are the strength of the company and the level of investor support.  Historically, from 2005 – 2007, 22% of U.S. company listings on London's AIM included selling shareholders who were often either founders of the company, longstanding members of executive management or the board of directors, commercial partners who had made a strategic investment in the company or VCs/PEGs who invested in and nurtured the company for several years prior to its London AIM IPO.  Two of the four U.S. company listings on the London Stock Exchange's AIM during 2008 included selling shareholders.  In one of the 2008 listings on London's AIM, the Chairman and President, who had been with the company since 1969, sold 30% of his stake for £26 million ($42 million).

While selling shareholders are most common in conjunction with a London AIM IPO, U.S. company insiders have sold in the aftermarket on London's AIM in organized transactions on three occasions since 2004; twice as part of secondary offerings on London's AIM and once on a standalone basis.  In all three instances, the companies listed on London's AIM were performing exceptionally well with the organized insider selling driven by a need to “satisfy excess demand” for the company’s London Stock Exchange AIM-listed shares.  There were no such transactions during 2009 or the first half of 2010.

U.S. London AIM Accredited Investor and Qualified Institutional Buyer (QIB) Activity

U.S. accredited investors and QIBs are permitted to participate in London AIM IPOs and secondary offerings on London's AIM.  Historically, from 2005 – 2008, they have provided 20% of the funding for U.S. companies listing on London's AIM and 20% of the secondary offering funds raised on London's AIM for those companies.

During 2009, 26% (6 of 23) of the U.S. companies listed on the London Stock Exchange's AIM that completed secondary offerings on London's AIM were at least partially financed by accredited investors or QIBs, providing 29% of the total funds raised on London's AIM.  During the first half of 2010, 38% (3 of 8) of the U.S. companies listed on London's AIM that completed secondary offerings on London's AIM were at least partially financed by accredited investors or QIBs, providing 92% of the total funds raised on London's AIM, however, this is skewed by the £152 million ($243 million) discussed above and would have otherwise only been 7%.