London's AIM - U.S. Company Performance - Share Price and Liquidity - H1 2012

The 23 U.S. domiciled companies listed on the London Stock Exchange's AIM achieved a weighted return of 31% and the 31 foreign domiciled U.S. operating companies listed on London's AIM registered a weighted loss of 8%; versus a loss of 3% for the FTSE AIM All-Share Index during the first half of 2012.  The post below provides additional insights.

One of the three largest contributors to the 31% weighted gain achieved by the U.S. companies listed on London's AIM filed a registration statement with the SEC during 2011 for a proposed U.S. IPO on NASDAQ and intends to remain listed on the London Stock Exchange's AIM and another completed its U.S. IPO during 2011 on NYSE MKT, the small cap tier of NYSE Euronext.  The absolute returns for these two U.S. companies listed on London's AIM during the first six months of 2012 were 59% and 270%, respectively.  This is the natural, 3 - 5 year evolution for U.S. companies that complete their initial IPOs on the London Stock Exchange's AIM, using it as a platform for the achievement of commercial success and a dual listing on the U.S. public markets.

With two London AIM IPOs of U.S. companies during the first half of 2012, the pipeline remains healthy.

Highlights

• U.S. domiciled companies* listed on the London Stock Exchange's AIM achieve a weighted return of 31%
• Foreign domiciled U.S. operating companies** listed on London's AIM register a weighted loss of 8%
• FTSE AIM All-Share Index lost 3%
• 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 London's AIM and 33 foreign domiciled U.S. operating companies listed on the London Stock Exchange's AIM as of the beginning and end of the first half of 2012, with two delisting and two joining via London AIM IPO.  Of the two U.S. companies that left London's AIM; one was acquired by its largest shareholder (30%) at the market price as a result of the company’s exposure to MF Global as a large customer and, more importantly, a significant creditor and the other simply never developed its business to sufficient scale and, as a result, suffered from a low market cap and lack of trading liquidity on the London Stock Exchange's AIM in its shares.  The two additions to London's AIM from the U.S. were both via IPO.

The two U.S. companies that left the London Stock Exchange's AIM are not included in the chart and analysis below because their market caps were relatively small; therefore, the effect on the share price return analysis would be immaterial.  The two that joined London's AIM are also not included because their London AIM IPOs occurred towards the end of the first half of 2012.

 

*   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 of the U.S. companies listed on the London Stock Exchange's AIM during the half-year, similar to how an index fund would calculate returns.

Index	Unweighted	Weighted
U.S. Domiciled Companies	5%	31%
Foreign Domiciled Companies	0%	(8%)
FTSE AIM All-Share Index	N/A	(3%)

The weighted return contributions for the U.S. domiciled companies listed on London's AIM were tightly packed between +2% and -3%, with three exceptions, where 10%, 12% and 14% weighted gains were achieved (absolute gains of 59%, 93% and 270%).  One of the gainers filed a registration statement with the SEC during 2011 for a proposed U.S. IPO on NASDAQ and intends to remain listed on London's AIM after the completion of its U.S. IPO, the other U.S. company listed on London's AIM had some success with its copper and gold mines and the final gainer is a U.S. biotech company listed on London's AIM that completed its U.S. IPO on NYSE MKT, the small cap tier of NYSE Euronext (the old NYSE AMEX) during 2011 and achieved some clinical trial and related regulatory success.  The weighted return contributions for the foreign domiciled U.S. operating companies listed on the London Stock Exchange's AIM were all tightly packed between +1% and -3%.

Weighted results are typically a self-fulfilling prophecy.  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 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 2012, as expected, the 23 U.S. domiciled companies listed on the London Stock Exchange's AIM only gained 13% and the 31 foreign domiciled U.S. operating companies listed on London's AIM lost more at 12%.

In terms of average monthly liquidity on the London Stock Exchange'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 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 larger for companies listed on London's AIM with smaller market capitalizations.  For the U.S. domiciled 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.  For the foreign domiciled U.S. operating companies listed on London's AIM, this was likely the result of London AIM investors exiting small companies listed on the London Stock Exchange's AIM in which they were no longer comfortable with the risk/reward relationship, as evidenced by the foreign domiciled U.S. operating companies share price underperformance relative to the U.S. domiciled companies listed on London's AIM.

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	1.63%	1.14%	5.81%
Unweighted	4.78%	1.35%	3.36%

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.  Liquidity on London's AIM was improving during the first three months of the first half of 2012; however, an escalation of the Eurozone crisis, the Queen’s Diamond Jubilee and the start of summer caused a pullback in liquidity on the London Stock Exchange's AIM during the final three months.

 

From a U.S. perspective, 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 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(s), financial PR/IR firm and Independent Equity Research firm.