London's AIM - U.S. Company Performance - Share Price and Liquidity - 2011

For the fifth year in a row, the 56 U.S. companies listed on the London Stock Exchange's AIM have outperformed the FTSE AIM All-Share Index, achieving a weighted return of 20% versus a loss of 26%.  A few U.S. companies listed on London's AIM recently took the next step in their evolution by accessing the U.S. public markets via NASDAQ.  With seven London Stock Exchange AIM IPOs of U.S. companies during 2011, the pipeline remains healthy.  The post below provides additional insights.

Highlights

• U.S. domiciled companies* listed on the London Stock Exchange's AIM achieve a weighted return of 1%
• Foreign domiciled U.S. operating companies** listed on London's AIM achieve a weighted return of 23%
• In aggregate, U.S. weighted return of 20% vs. FTSE AIM All-Share Index loss of 26%
• Significant liquidity difference between U.S. and foreign domiciled U.S. companies listed on London's AIM

There were 23 U.S. domiciled companies listed on the London Stock Exchange's AIM and 33 foreign domiciled U.S. operating companies listed on London's AIM as of the beginning and end of 2011, with seven delisting and seven joining via London AIM IPOs during 2011.  Of the seven U.S. companies listed on London's AIM that left London's AIM; one was acquired by another U.S. London AIM-listed company for six times its, arguably depressed, market cap, one completed its London Stock Exchange AIM IPO in 2003 and a NASDAQ IPO in 2007 and had now fully integrated itself into the U.S. public markets, one completed its London AIM IPO in 2006 and a NASDAQ IPO during 2011 and chose to delist from London's AIM, one acquired a 70% stake in a NASDAQ listed company a couple years ago, recently acquired the vast majority of the balance and took over the targets NASDAQ listing and delisted from the London Stock Exchange's AIM and three failed with two going private and the other restructuring itself into a non-U.S. focused investment company.  The seven additions to London's AIM from the U.S. were all via IPO.

The seven U.S. companies that left the London Stock Exchange's AIM are not included in the chart and analysis below because most happened to delist in January or their market caps on London's AIM were relatively small, therefore, the effect on the share price return analysis would be immaterial.  The seven that joined London's AIM are also not included because their London Stock Exchange AIM IPOs occurred during the second half of 2011.

 

*   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 for the U.S. companies listed on London's AIM in the table below were calculated using the average market capitalizations on London's AIM 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	(20%)	1%
Foreign Domiciled Companies	(15%)	23%
FTSE AIM All-Share Index	N/A	(26%)

The weighted return contributions for the U.S. domiciled companies listed on the London Stock Exchange's AIM were tightly packed between +1% and -3% with five exceptions; three companies contributed weighted losses in the 7% - 9% range (absolute losses ranging from 60% to 69%) and the other two companies contributed weighted gains of 13% and 24% (absolute gains of 82% and 237%).  One of the gainers filed a registration statement with the SEC during 2011 for a proposed U.S. IPO and intends to remain listed on the London Stock Exchange's AIM after the completion of its U.S. IPO.  The weighted return contributions for the foreign domiciled U.S. operating companies listed on London's AIM were also tightly packed at +/-5% with one exception.  This company contributed a 27% weighted gain (absolute gain of 141%) and is one of the largest companies on the London Stock Exchange's AIM with a market cap on London's AIM equivalent to $1.7 billion.

In some respects, weighted results are a self-fulfilling prophesy.  Companies listed on London's AIM with increasing share prices, and therefore increasing market capitalizations, become more heavily weighted relative to those with decreasing share prices/market capitalizations.  In addition, a company listed on the London Stock Exchange's AIM that is performing well has a better chance of completing a secondary offering on London'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 as of the beginning of 2011, as expected, the 21 U.S. domiciled companies listed on the London Stock Exchange's AIM lost 33% and the 28 foreign domiciled U.S. operating companies listed on London's AIM gained 9%.

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 the the London Stock Exchange's AIM market 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 London'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 the London Stock Exchange's AIM indicates that relative trading volumes were slightly larger for companies listed on London's AIM with smaller market capitalizations.  For the U.S. domiciled companies listed on London'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, as evidenced by their share price underperformance relative to the foreign domiciled U.S. operating companies listed on London's AIM.  For the foreign domiciled U.S. operating companies listed on the London Stock Exchange's AIM, the reversed relationship 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	3.82%	0.94%	4.31%
Unweighted	5.23%	1.07%	2.87%

The chart below provides the monthly detail of the unweighted liquidity for companies listed on London's AIM for each of the three categories in the table above.  The slight negative slope during the first eight months of 2011 and the slight positive slope during the final four months of 2011 is identical to the pattern exhibited during 2010, although, this is not because of seasonality.  The launch of QE2 during the summer of 2010 and the debt ceiling debate et al. during the summer of 2011 created volatility within the global equity markets.

 

The key takeaway from the chart above is that there is a liquidity advantage 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 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 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 Nominated Adviser (Nomad), Nominated Broker(s), financial PR/IR firm and Independent Equity Research firm.