- After 13 months (Aug. '08 - Aug. '09, inclusive) with only 4 London Stock Exchange AIM IPOs, are the 11 London AIM IPOs during the last four months of 2009 indicative of a return to more 'normal' levels of London AIM IPO activity?
- Have investors abandoned London's AIM or the London markets more generally?
- What criteria are London AIM Nominated Advisers (Nomads), who solely determine the suitability of companies for listing on the London Stock Exchange's AIM, and London AIM Nominated Brokers, the proxy for London AIM investors, looking for from potential London AIM issuers?
Given the sparse activity on the London Stock Exchange's AIM over the last two years, it is
necessary to examine London's AIM at a more granular level in order to spot
trends, if any, that may exist. After
five quarters (Q3 ’08 – Q3 ’09, inclusive) of virtually no London AIM IPO activity, there
were two London AIM IPOs in September 2009 and three in each month of Q4 2009. On the surface, this may appear to be a very
positive sign of future London Stock Exchange AIM IPO activity but the vast majority on London AIM IPOs were for ‘investment
vehicles’, funded to target distressed real estate / commercial businesses, or
small specialty finance companies.
During 2009, 10 of the 13 companies listing on London's AIM (77%) were for ‘investment vehicles’
whereas during 2008 only 13 of the 38 companies listing on the London Stock Exchange's AIM (34%) were of this nature,
consistent with the historic levels of 39% and 38% in 2007 and 2006.
Quarter |
Number of
London AIM IPOs
|
Gross Funds Raised
(in £ millions)
|
Investment
Vehicles
|
Operating
Companies
|
Q1 ‘08
|
11
|
275
|
2
|
9
|
Q2 ‘08
|
20
|
555
|
9
|
11
|
Q3 ‘08
|
6*
|
85
|
2
|
4
|
Q4 ‘08
|
1
|
3
|
0
|
1
|
Q1 ‘09
|
0
|
0
|
0
|
0
|
Q2 ‘09
|
2
|
222
|
2
|
0
|
Q3 ‘09
|
2**
|
34
|
1
|
1
|
Q4 ‘09
|
9
|
354
|
7
|
2
|
Total
|
51
|
1,528
|
23
|
28
|
* Five of which were in July.
** Both of which were in September.
The lack of ‘operating company’ listings on the London Stock Exchange's AIM is also evident in the
chart below. These companies typically
raise between £7.5 million and £50 million ($12 million - $80 million) of
growth capital on London's AIM and/or to take out existing shareholders.
While any London AIM IPO activity is a necessary precursor to the
possible return of more ‘normal’ activity on the London Stock Exchange's AIM, it is reasonable to question whether
there are other factors, structural or otherwise, that may impede the eventual
resurgence of ‘operating company’ listings on London's AIM or the London markets more
generally. In addition to AIM, the London Stock Exchange
operates three other markets; the Main Market, the Professional Securities
Market and the Specialist Fund Market.
In the aggregate, only nine IPOs were completed on these three markets
during 2009, six of which (67%) were for ‘investment vehicles’. Seven of the nine IPOs (78%) were on the Main
Market with the other two markets capturing one IPO each. Interestingly, the three largest IPOs on the London Stock Exchange's AIM
during 2009, which raised an aggregate of £472 million ($755 million) of the £610
million ($976 million) total (77%) are, in theory, better suited for the Main
Market or the Specialist Fund Market but chose London's AIM primarily because of its
sensible regulatory model and the speed at which London Stock Exchange AIM IPOs can be completed without
the ‘interference’ of the UK Listing Authority (UKLA) and the Financial
Services Authority (FSA).
At first glance, the table on the next page leaves one with
a positive impression of the robustness of the secondary offering markets in
London
during 2009, particularly the Main Market; however, it is important to
understand the types of offerings and why they are occurring.
Rights Issues are often undertaken by companies
facing severe financial distress where new investors can not be identified and
existing shareholders don’t necessarily want to invest more, therefore, all
shareholders are faced with a choice; invest to hold their positions or face
dilution and the possible collapse of the company, the ultimate dilution! Rights Issues on the Main Market spiked in
2009 to £51 billion ($82 billion) from £28 billion ($45 billion) in 2008.
Placing & Open Offers are not necessarily good or
bad and consist of a Placing tranche, consisting of new shareholders and/or existing
shareholders eager to invest to hold or increase their positions, and an Open
Offer tranche, an invitation to the balance of the existing shareholders to
participate which can be for the positive reasons of their being broader
appetite amongst existing shareholders and for good corporate governance or the
negative reason of the Placing tranche not being adequate to finance the
continuing operations of the company.
Placing & Open Offers on the Main Market held firm in 2009 and 2008 at
£19 billion ($30 billion).
Placings are straight issuances of shares for cash,
perhaps to new and/or select existing shareholders, without extending an
invitation to participate to the balance of the existing shareholders. Placings on the Main Market are not too
common given the increased shareholder protections compared to London's AIM. Placings on the Main Market decreased
substantially to £6 billion ($10 billion) from £13 billion ($21 billion) in
2008.
In summary, secondary offerings on the Main Market
attracted an additional £16 billion ($26 billion) during 2009, however, it was
all directed towards Right Issues and Placings dropped by £7 billion ($11
billion), which was also directed towards Rights Issues.
London's AIM is much easier to analyze in terms of secondary
offering activity since the vast majority of transactions take the form of Placings. Indeed, during 2008, £3.1 billion ($5.0
billion) of the £3.2 billion ($5.1 billion) raised on London's AIM in secondary
offerings were through Placings which increased by 16% during 2009 to £3.6
billion ($5.8 billion).
While Placing & Open Offers are rare on the London Stock Exchange's AIM
(there were only three during 2008 which raised an aggregate of only £25
million ($40 million)), 2009 witnessed three large transactions which raised an
aggregate of £1.0 billion ($1.6 billion) of the £1.1 billion ($1.8 billion)
total on the London Stock Exchange's AIM. All three transactions were for real
estate investment, development and management companies with one moving up to
the Main Market a few months later.
In order to conclude on the health of the secondary
offering market on London's AIM, one needs to dig a little deeper into the
Placings. There were 580 Placings on London's AIM
during 2008 which raised £3.1 billion ($5.0 billion) for an average Placing of
£5.34 million ($8.54 million). During
2009, there were 673 Placings on the London Stock Exchange's AIM which raised £3.6 billion ($5.8 billion) for
an average Placing of £5.36 million ($8.58 million), virtually identical
averages. The differentiating factor
however is the relative number of companies that were able to access the
secondary offering market on London's AIM; only 36% during 2008 but 54% during 2009,
which is consistent with the historic levels of 57%, 50% and 48% in 2007, 2006
and 2005, respectively. This is a good
sign that the London Stock Exchange's AIM has expelled the vast majority of the weak and is
enthusiastically supporting those that remain.
Type of
Secondary
Offering
|
Main Market |
Gross
Raised
(in £ billions)
|
Average
Raised
(in £ billions)
|
London's AIM
|
Gross
Raised
(in £ billions)
|
Average
Raised
(in £ millions)
|
RI*
|
50
|
50.699
|
1.014
|
2
|
0.008
|
4.000
|
P&OO**
|
36
|
18.747
|
0.521
|
21
|
1.123
|
53.476
|
Placing
|
81
|
5.773
|
0.071
|
673
|
3.607
|
5.360
|
Other
|
153
|
1.092
|
0.007
|
66
|
0.123
|
1.864
|
Total
|
320
|
76.311
|
0.238
|
762
|
4.861
|
6.379
|
* Rights Issue
** Placing & Open Offer
The future for London AIM
IPOs. What are AIM Nominated Advisers (Nomads) and AIM Nominated Brokers
looking for from companies hoping to list on London's AIM?
In order to answer this question, I undertook an informal survey
of the vast majority of AIM Nominated Advisers (Nomads) and AIM Nominated Brokers.
Since the 60 AIM Nominated Advisers (Nomads) and 100 AIM Nominated Brokers generally serve different types of
companies in terms of size (i.e. proposed capital raises and opening market caps.)
and sector (i.e. industry), I posed the same questions to other key London AIM market
participants who may have a broader view of the market; securities lawyers,
accountants in the areas of audit and corporate finance, financial PR/IR firms,
etc. as a cross-check on the views expressed by the AIM Nominated Advisers (Nomads) and AIM Nominated Brokers.
At the macro level, the general belief is that London Stock Exchange AIM investor
appetite for larger, typically Main Market IPOs will first have to return
before serious consideration can be given to investor appetite returning for
London AIM IPOs. Many of these larger, Main
Market IPOs will likely come from Private Equity portfolios; however, the
obvious challenge will be synchronizing valuation expectations. Caution surrounds the UK economy, which has
the dubious distinction of being the only G20 nation still in recession (Q3 ’09
GDP shrunk by -0.2%), there is an upcoming general election to be held no later
than June 3rd where current indications are that there will be a
change of government and tax rate increases are likely given UK debt/GDP levels
comparable to the U.S.
From a sectoral perspective on London's AIM, there has always been
appetite in London for commodity-focused
companies given the development of the North Sea
oil and gas assets in the 1970s/80s which attracted world-class equity research
analysts to London's AIM and a sophisticated institutional London AIM investor base. Oil and gas and mining, such as gold, other
precious metals and gems, should continue to prove attractive for listing on the London Stock Exchange's AIM. Positive comments were also made about the
technology sector in general, and cleantech in particular, renewables and/or
industrial technologies that promote energy efficiency, since technology
companies listed on London's AIM are inherently international and often have high growth prospects. There is definite apprehension towards consumer-facing
business listing on the London Stock Exchange's AIM, those in the consumer goods and consumer services super-sectors on
London's AIM, given the fragile state of the UK
economy and the perhaps even more fragile state of UK household finances.
The consensus view for H1 2010 is that London AIM investors will
continue to focus on supporting the companies listed on London Stock Exchange's AIM,
are performing well and are in need of additional growth capital. AIM IPOs during H1 2010 will largely be
confined to the same types of ‘investment vehicles’ which listed on the London Stock Exchange's AIM during 2009; those focused on distressed real estate / commercial business and small,
niche players in the specialty finance space.
London AIM investors will look for signals from the Main Market, in the form of
larger company IPOs, before more broadly entertaining IPOs of companies that
have been the traditional mainstay of the London Stock Exchange's AIM.
While the bar is set high for ‘operating companies’ wishing
to complete a London AIM IPO during 2010, it is not insurmountable. The fundamental debate often comes down to
valuation, and rightfully so, in some respects.
A key feature of London's AIM is the breadth and depth of its secondary offering
market. Companies that are willing to
accept a reasonable valuation, with a view towards proving that they can meet
or exceed their operational promises and financial targets while listed on London's AIM, will have ready
access to London AIM's secondary offering, presumably at ever increasing
valuations. The net effect is often less
dilution. Companies joining the London Stock Exchange's AIM at an
unrealistic valuation where the share price plummets, liquidity evaporates and trust
is lost leaves the London AIM-listed company with little ability to raise additional capital or use
its new public shares as an acquisition currency.
The following is a non-exhaustive list of the criteria that
AIM Advisers' uses to vet potentially suitable U.S. company for London Stock Exchange AIM IPOs,
effectively looking through the lens of prospective AIM Nominated Advisers (Nomads) and AIM Nominated Brokers. Obviously, overall consideration necessitates
the use of judgment. These points are meant
to provide a starting point for discussions.
- ‘Growth-oriented’ company[1]
- Minimum opening market cap. upon listing on London's AIM of £30 million ($48 million), with acquisition strategy[2]
- At least $24 million of annual revenue and $2.4 million of net income[3]
- Minimum opening market cap. upon listing on London's AIM of £50 million ($80 million), without acquisition strategy
- At least $40 million of annual revenue and $4.0 million of net income
- Maximum opening market cap. upon listing on London's AIM of £250 million ($400 million)[4]
- International scope to the London AIM-listed company (sales and/or operations), current or post-IPO, preferably UK/EU[5]
- Outstanding management team with a real track record[6]
- Solid Board of Directors or the ability to formulate one during the London AIM IPO listing process[7]
- Willingness to fully and fairly disclose any potential ‘skeletons in the closet’[8]
- Sound internal controls and good corporate governance, or willingness to put in place
- Reasonable valuation expectations, willingness to take a long view[9] (see prev. page also)
- Free float of at least 25% post-IPO, ideally around 50%[10]
- Strategic investor(s) and/or existing shareholder(s) anchoring the London AIM IPO[11]
[1] This would be
characterized by growth of revenues and/or profits of at least 20% per annum,
whether organic or through acquisition.
[2] Current market
appetite is for a minimum opening market cap. upon listing on London's AIM of £50 million ($80 million),
however, with a credible acquisition strategy that can executed with the
capital raised from the London Stock Exchange AIM IPO and/or the company’s new London-AIM listed shares over the
first year or two on London's AIM, the opening market cap. upon listing on London's AIM can be as low as £30 million
($48 million).
[3] This is a
rule-of-thumb. Valuation is ultimately
determined by reference to the company’s DCF model. There is no requirement that companies listing on London's AIM be profitable, however, the London's AIM is currently risk adverse,
therefore, companies will either already be profitable or will be able to
clearly demonstrate self-sufficient post-IPO.
[4] Above this
level, U.S. companies are
better served on the U.S.
public markets from the perspectives of valuation and liquidity and should be
large enough to bear the internal and external costs of Exchange Act reporting
and SOX compliance. London’s Main Market might be a consideration
but the rationale is weak. No U.S. company
has its primary listing on the Main Market.
[5] Many technology
companies listing on the London Stock Exchange's AIM meet this test since they are often not reliant on physical
locations. London-based AIM investors will
not accept U.S. companies
seeking to raise capital on London's AIM as the ‘venue of last resort’ and/or because of
an inability to be able to comply with the Exchange Act or SOX; however, a
conscious decision to avoid onerous U.S. regulation for companies in
the $48 million - $400 million market cap. range upon listing on London's AIM is viewed as sensible.
[6] An added bonus
would be a management team that has previously made money for public company
investors.
[7] In a U.S. context,
many companies considering London's AIM are quite small and often need to augment their
Board of Directors.
[8] Voluntary disclosure
of any personal bankruptcies, corporate bankruptcies, companies that havc gone
into administration, liquidation, etc. will typically not cause a company /
management team to be deemed unsuitable.
[9] If these are
present, companies that consider completing an IPO on London's AIM during 2010 should be
able to negotiate lower professional fees, given increased competition for
fewer listings on London's AIM, and attract meaningful media attention.
[10] UK institutional investors on the London Stock Exchange's AIM are very reluctant to
invest in London AIM-listed companies that will not have a free float of at least 25%
(this is a requirement on the Main Market) for fear of Special Resolutions
being ‘crammed down’ and to increase the chance of achieving strong aftermarket
liquidity on London's AIM and the derivation of a ‘fair’ share price / market cap. upon listing on London's AIM. The 50% free float target is usually achieved
through a combination of new shares issued by the company in the London AIM IPO for cash and existing
shareholders reducing their positions.
[11] Given current
London AIM market conditions, this would likely be a requirement in the ultra-high-risk
biotech space, however, moving down the continuum of less risky sectors, the
traditional view of London AIM institutional investors is that pure financial investors can
exit entirely at the time of the London Stock Exchange AIM IPO and insiders / management can sell down 20
- 25% of their holdings, all on a case-by-case basis.