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.