London's AIM - U.S. Company Performance - Share Price and Liquidity - 2009

Highlights

• U.S. domiciled companies* listed on the London Stock Exchange's AIM achieve a weighted return of 44%
• Foreign domiciled U.S. operating companies** listed on London's AIM achieve a weighted return of 83%
• FTSE AIM All-Share Index rises 66%
• Significant liquidity difference between U.S. and foreign domiciled U.S. companies listed on London's AIM

While there were 41 U.S. domiciled companies listed on the London Stock Exchange's AIM and 35 foreign domiciled U.S. operating companies listed on London's AIM as of the beginning of 2009, only 26 of the former and 31 of the latter traded on London's AIM for the entire year.  The loss of 19 U.S. companies from London's AIM during 2009 is not unexpected; London's AIM lost 293 companies during 2009 to end the year with just under 1,300 companies listed on London's AIM.  The U.S. share of delistings was only 6.5%, which is less than the 7.8% share of U.S. company IPOs on London's AIM from 2005 – 2009 (66 of 846).  It is during the early years when it typically becomes evident that a company’s commercial aspirations will not be achieved, often resulting in a reevaluation of its public company status, a natural process that has been accelerated by the financial crisis.

Of the 19 U.S. companies that left the London Stock Exchange's AIM during 2009, there was an even split between those citing a lack of liquidity on London's AIM and a low profile on the market and those where the business simply failed.  These companies are not included in the chart and analysis below because their aggregate market capitalization on London's AIM as of the beginning of 2009 was only 19% of the U.S. companies’ market capitalization on the London Stock Exchange's AIM and one large company dominated and actually increased in value, therefore, their effect on the share price return analysis is immaterial.

  

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

**  U.S. operating companies listed on the London Stock Exchange's AIM through a UK or tax haven entity with central operations and/or decision making in the U.S.

2009 was clearly a ‘stock picker’s year’ with 14 of the 57 U.S. companies listed on London's AIM posting returns of more than 100%.

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

Index	Unweighted	Weighted	Weighted Excluding Market Cap. > £150m
U.S. Domiciled Companies	116%	44%	44%
Foreign Domiciled Companies	55%	83%	22%
FTSE AIM All-Share Index	N/A	66%	N/A

The returns for the U.S. domiciled companies listed on London's AIM are heavily skewed by one company which returned a staggering 2,686%.  If this company is excluded, the unweighted return would drop to 13% and the weighted return would actually be negative 9%.  If similar analysis was carried out on the constituents of the FTSE AIM All-Share Index, the likely conclusion is that 2009 was also a ‘stock picker’s year’ on the broader London's AIM.

In some respects, weighted results are a self-fulfilling prophesy in that companies listed on the London Stock Exchange'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 listed on London's AIM that is performing well has a better chance of completing a secondary offering on the London Stock Exchange's AIM and for its share price on London's AIM to hold up relative to the dilutive effects, further increasing its market capitalization on London's AIM and relative weighting.  This was even more true during 2009 compared to 2008 because of the full-year effect of the challenging capital raising environment on London's AIM.  When these factors are controlled for by weighting the companies’ returns by their market capitalizations on London's AIM as of the beginning of 2009, the 26 U.S. domiciled companies listed on the London Stock Exchange's AIM lost 25% and the 31 foreign domiciled U.S. operating companies listed on London's AIM gained 52%.

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 and, in fact, London's AIM as a whole.  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 London's AIM and its market capitalization listed on London's AIM.  The unweighted results represent the level of monthly liquidity on the London Stock Exchange'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.  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 listed on the London Stock Exchange's AIM 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 London's AIM relative to the foreign domiciled U.S. operating companies listed on the London Stock Exchange'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's AIM	Entire London's AIM
Weighted	5.84%	1.30%	5.72%
Unweighted	4.85%	2.65%	3.97%

 

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 UK 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 UK law providing comfort to UK investors
4. London AIM institutional investors only allocate a portion of their investments to non-UK 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 the London Stock Exchange'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 AIM IPO to minimize the risk of lack of liquidity on the London Stock Exchange's AIM becoming a problem in the first instance; including, selection of the most appropriate London AIM Nominated Adviser (Nomad), London AIM Nominated Broker, financial PR/IR firm and Independent Equity Research firm.

London's AIM - U.S. Company IPO and Secondary Offering Activity - 2009

U.S. company IPO and Secondary Offering activity on the London Stock Exchange's (LSE) Alternative Investment Market (AIM) during 2009 and the current suitability criteria for U.S. companies considering listing on London's AIM are contained in the post below.

Highlights

• Unsurprisingly, listing activity on the London Stock Exchange's AIM has been virtually non-existent
• However, secondary offering activity on London's AIM remains resilient

• U.S. companies account for 8% of all London Stock Exchange AIM listings since 2008
• Also account for 8% of gross funds raised from London AIM listings

• U.S. companies account for 14% of all ‘operating company’ listings on London's AIM since 2008
• Account for 24% of gross funds raised from ‘operating company’ listings on London's AIM

• £420m ($672m) raised in secondary offerings on the London Stock Exchange's AIM for 34 U.S. companies listed on London's AIM since 2008
• 60% of all U.S. companies listed on London's AIM have completed at least one secondary offering on London's AIM since 2008
• U.S. companies make up 4.4% of London's AIM but capture 5.2% 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 increases slightly on London's AIM 

• Criteria AIM Advisers' uses to vet potentially suitable U.S. companies for listing on London's AIM via IPOs (see the end of the post)

London AIM IPOs

The IPO market on the London Stock Exchange's AIM during 2009 was challenging with 77% of the IPOs (10 of 13) for ‘investment vehicles’ which were funded to target distressed real estate / commercial businesses, or small specialty finance companies.

Entire Market      All Companies	Number of London AIM IPOs	Gross Funds Raised (in £ millions)	Average Funds Raised (in £ millions)
2008	38	918	24
2009	13	610	47
Total	51	1,528	30

Exclusive of ‘investment vehicles’:

Entire Market      ‘Operating Companies’	Number of London AIM IPOs	Gross Funds Raised (in £ millions)	Average Funds Raised (in £ millions)
2008	25	507	20
2009	3	16	5
Total	28	523	19

All of the U.S. companies listed on London's AIM in the table below that completed London Stock Exchange AIM IPOs in 2008 are ‘operating companies’.  Historically, U.S. companies listed on London's AIM have not been investment vehicles.

U.S. Companies	Number of London AIM IPOs	Gross Funds Raised (in £ millions)	Average Funds Raised (in £ millions)
2008	4	123	31
2009	-	-	N/A
Total	4	123	31

U.S. companies listed on the London Stock Exchange's AIM have accounted for 8% of all London AIM IPOs and 14% of all ‘operating company’ listings on London's AIM since 2008.  While activity on London's AIM has been muted over the last two years, it is relevant to note that these companies have garnered 8% and 24%, respectively, of the gross IPO funds raised on London's AIM since 2008.

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

London AIM Secondary Offerings

While the 57 U.S. companies listed on London's AIM account for 4.4% of the 1,293 companies listed on the market, they have captured 5.2% of the secondary offering funds raised on London's AIM since 2008.  However, when two large secondary offerings during 2008 that raised an aggregate of £101 million for one U.S. company listed on the London Stock Exchange's AIM are excluded, the remaining U.S. companies listed on London's AIM are in line with the broader market at 4.0%.  Excluding this company also brings the average funds raised by the U.S. companies listed on London's AIM during 2008 down to £6.75 million which is also more in line with the broader market and the U.S. company average on the London Stock Exchange's AIM of £8.00 million for 2009.

Entire Market           All Companies	Number of London AIM Secondaries*	Gross Funds Raised (in £ millions)	Average Funds Raised (in £ millions)
2008	597	3,214	5.38
2009	762	4,861	6.38
Total	1,359	8,075	5.94

*  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 each year.

All U.S. Companies	Number of London AIM Secondaries*	Gross Funds Raised (in £ millions)	Average Funds Raised (in £ millions)
2008	21	236	11.24
2009	23	184	8.00
Total	44	420	9.55

*  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 44 U.S. companies listed on London's AIM that completed secondary offerings on London's AIM since 2008, 10 completed secondary offerings on London's AIM in both years, therefore, 60% of the U.S. companies listed on London's AIM (34 of 57) have completed at least one secondary offering on London's AIM since 2008.

The distribution of the gross funds raised by these 44 U.S. companies listed on the London Stock Exchange's AIM is illustrated by the chart below.  Since 2008, 89% (39 of 44) of the U.S. companies listed on London's AIM that have completed secondary offerings on London's AIM have raised between £1 and £30 million.

London AIM Industry Dispersion

The companies listed on the London Stock Exchange's AIM are organized into 90 sub-sectors which feed into 40 sectors which feed into 10 super sectors.  The 57 U.S. companies 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., in Florida 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 listed on London's AIM.  Within Basic Materials, 50% of the companies listed on the London Stock Exchange's AIM produce chemicals/compounds for the health and growth of fish, plants and agriculture.  Within Consumer Goods, 50% of the companies listed on London's AIM are developing fuel cells for vehicles.  Within Consumer Services, 67% of the companies listed on the London Stock Exchange's AIM are media companies with some unique technology.

 

London AIM Selling Shareholder Activity

The ability of existing shareholders to sell some or all of their holdings in a London Stock Exchange 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 IPOs 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 Stock Exchange AIM IPO.  Two of the four U.S. company IPOs on London's AIM during 2008 included selling shareholders.  In one of those London AIM IPOs, the Chairman and President, who had been with the company since 1969, sold 30% of his stake for £26 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 were performing exceptionally well on London's AIM 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 2008 or 2009.

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

U.S. accredited investors and QIBs are permitted to participate in London Stock Exchange AIM IPOs and secondary offerings on London's AIM.  Historically, from 2005 – 2007, 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.

While none of the four U.S. companies that listed on London's AIM during 2008 included accredited investors or QIBs, 24% (5 of 21) of the U.S. companies that completed secondary offerings on London's AIM during 2008 included such investors, contributing 40% of the total funds raised on London's AIM, however, this is skewed by £76 million of the £101 million discussed above and would have otherwise been only 11%.  During 2009, 26% (6 of 23) of the U.S. companies 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 the London Stock Exchange's AIM.

The following is a non-exhaustive list of the criteria that AIM Advisers' uses to vet potentially suitable U.S. companies for listing on the London Stock Exchange's AIM via IPOs, effectively looking through the lens of prospective AIM Nominated Advisers (Nomads) and AIM Nominated Brokers.  Obviously, overall consideration necessitates the use of judgment.  This list is meant to provide a starting point for discussions.

1. ‘Growth-oriented’ company[1]
2. Minimum opening market cap. 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]

3. Minimum opening market cap. 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

4. Maximum opening market cap. on London's AIM of £250 million ($400 million)[4]
5. International scope to the London Stock Exchange AIM-listed business (sales and/or operations), current or post-IPO, preferably UK/EU[5]

6. Outstanding management team with a real track record[6]
7. Solid Board of Directors or the ability to formulate one during listing process for a London AIM IPO[7]
8. Willingness to fully and fairly disclose any potential ‘skeletons in the closet’[8]
9. Sound internal controls and good corporate governance, or willingness to put in place during the listing process for a London AIM IPO

10. Reasonable valuation expectations, willingness to take a long view[9]
11. Free float of at least 25% post-IPO on London's AIM, ideally around 50%[10]
12. Strategic investor(s) and/or existing shareholder(s) anchoring the London AIM IPO[11] 

While historically 15% of the U.S. companies listed on the London Stock Exchange's AIM have been backed by VCs/PEGs, given the changing landscape of London's AIM and the factors above, the future outlook is that closer to 50% of the U.S. companies listing on London's AIM will come from VC/PE portfolios.

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[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. on the London Stock Exchange's AIM of £50 million ($80 million), however, with a credible acquisition strategy that can executed with the capital raised from the London AIM IPO and/or the company’s new AIM-listed shares over the first year or two on London's AIM, the opening market cap. 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 London AIM-listed 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 consider a listing on London's AIM will either already be profitable or will be able to clearly demonstrate self-sufficient post-IPO on London's AIM.

[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.  The London Stock Exchange's (LSE) Main Market might be a consideration but the rationale is weak.  No U.S. company has its primary listing on the Main Market of the London Stock Exchange (LSE).

[5]  Many technology companies meet this listing test for London's AIM since they are often not reliant on physical locations.  London AIM investors will not accept U.S. companies seeking to list 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 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 listing on 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 have gone into administration, liquidation, etc. will typically not cause a company / management team to be deemed unsuitable for listing on London's AIM.

[9]  If these are present, companies that consider listing on London's AIM during 2010 should be able to negotiate lower professional fees, given increased competition for fewer listings on the London Stock Exchange's AIM, and attract meaningful media attention.

[10] UK institutional investors on London'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 London Stock Exchange's 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 on London's AIM.  The 50% free float target on London's AIM is usually achieved through a combination of new shares issued by the company for cash in the London AIM IPO and existing shareholders reducing their positions at the time of the London AIM IPO.

[11]  Given current London AIM conditions, this would likely be a requirement for a listing on London's AIM in the ultra-high-risk biotech space, however, moving down the continuum of less risky sectors, the traditional view of institutional investors in London's AIM is that pure financial investors can exit entirely at the time of listing on London's AIM and insiders / management can sell down 20 - 25% of their holdings at the time of listing on the London Stock Exchange's AIM, all on a case-by-case basis.