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

For the fourth year in a row, the U.S. companies listed on the London Stock Exchange's AIM stock exchange have outperformed the FTSE AIM All-Share Index, achieving a weighted return of 82% vs. 43%.  In addition, there was a noticeable increase in trading liquidity on the London Stock Exchange's AIM during the final four months of 2010.  The post below provides additional insights.

Highlights

• U.S. domiciled companies* listed on London's AIM register a weighted loss of 9%
• Foreign domiciled U.S. operating companies** listed on London's AIM achieve a weighted return of 101%
• In aggregate, U.S. companies’ weighted return 82% vs. FTSE AIM All-Share Index 43%
• Significant liquidity difference between U.S. and foreign domiciled U.S. companies listed on the London Stock Exchange's AIM

While there were 26 U.S. domiciled companies listed on London's AIM and 31 foreign domiciled U.S. operating companies listed on London's AIM as of the beginning of 2010, by the end of 2010, there were only 23 of the former but 33 of the latter.  During 2010, seven U.S. companies left London's AIM; two cited a lack of liquidity on the London Stock Exchange's AIM, two were acquired (one in a positive transaction and the other in a negative transaction), one was unable to raise additional capital on London's AIM, one moved its listing up to NASDAQ and one was on the verge of failing.  The six additions to London's AIM from the U.S. during 2010 included; two London Stock Exchange AIM IPOs, two that AIM Advisers identified during the year that should have always been considered U.S. companies listed on London's AIM, one private U.S. company that reversed into an existing U.K. London AIM-listed company and an existing London Stock Exchange AIM-listed company that acquired a substantial private U.S. company.

The seven U.S. companies that left London's AIM, the two that joined via London AIM IPOs and the one that joined via reverse merger are not included in the chart and analysis below because they were not listed on the London Stock Exchange's AIM for the entire year and their aggregate market capitalization on London's AIM and effect on the share price return analysis would be immaterial.  While 2009 was a ‘stock picker’s year’, with 14 of the 57 U.S. companies listed on the London Stock Exchange's AIM posting returns of more than 100%, 2010 was a year of bifurcation with 21 of the 53 U.S. companies listed on London's AIM losing 26% - 75% of their value and seven posting triple digit returns.

 

*   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 U.K. or tax efficient jurisdiction with central operations and/or decision making in the U.S.

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

Index	Unweighted	Weighted
U.S. Domiciled Companies	3%	(9%)
Foreign Domiciled Companies	34%	101%
FTSE AIM All-Share Index	N/A	43%

The weighted return contributions for the U.S. domiciled companies listed on London's AIM were tightly packed with no one company accounting for more or less than 7%.  This was not the case for the foreign domiciled U.S. operating companies listed on the London Stock Exchange's AIM.  Two companies listed on London's AIM accounted for 75% of the 101% weighted return; one contributing 53% (absolute return of 201%) and the other 22% (absolute return of 397%), with the others reasonably tightly packed, ranging from a loss of 2% to a gain of 9%.  If similar analysis was carried out on the constituents of the FTSE AIM All-Share Index, the likely conclusion is that a relatively small number of companies listed on London's AIM accounted for the 43% rise.

In some respects, weighted results are a self-fulfilling prophesy.  Companies listed on the London Stock Exchange's AIM with increasing share prices, and therefore increasing market capitalizations listed 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 to hold up relative to the dilutive effects, further increasing its market capitalization on London's AIM and relative weighting.  When these factors are controlled for by weighting the companies’ returns by their market capitalizations on the London Stock Exchange's AIM as of the beginning of 2010, as expected, the 21 U.S. domiciled companies listed on London's AIM lost more at 25% and the 32 foreign domiciled U.S. operating companies listed on London's AIM gained less at 54%.

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 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 both categories of U.S companies listed on London's AIM indicates that relative trading volumes were slightly larger for companies with smaller market capitalizations listed on London's AIM.  During 2009, the reversal of this relationship was very dramatic and only existed for the U.S. domiciled companies listed on the London Stock Exchange's AIM.  This was likely the result of London AIM investors exiting small companies listed on London's AIM in which they were no longer comfortable with the risk/reward relationship.  While this may have still been the case for the U.S. domiciled companies listed on London's AIM during 2010, as evidenced by their share price underperformance relative to the foreign domiciled U.S. companies listed on the London Stock Exchange's AIM and London's AIM as a whole, the reversed relationship for the foreign domiciled U.S. operating companies listed on London's AIM likely reflects a slight bias towards investment in smaller companies listed on London's AIM that are viewed as undervalued.

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	3.88%	1.26%	4.24%
Unweighted	4.04%	1.45%	2.80%

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.  The slight negative slope during the first eight months is noticeable as is the more dramatic positive slope during the final four months.  It will be interesting to examine if this brief trend of increased liquidity on the London Stock Exchange's AIM continues into 2011, plateaus as the ‘new normal’ or recedes.

 

The key takeaway from the chart above is that there is a liquidity advantage on London's AIM for U.S. companies that list on London'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 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 London'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.