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

For the sixth 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, with eight posting triple digit returns.

The eight triple digit gainers returned between 101% and 473%.  Four are biotechnology companies listed on London's AIM (personalized medicine, gene silencing, aquaculture and agtech), two are oil and gas shale plays listed on the London Stock Exchange's AIM, one is an oil and gas services technology company listed on London's AIM and one is an industrial technology company listed on London's AIM.  One of these eight companies listed on London's AIM completed its U.S. IPO during 2011 on NYSE MKT, the small cap tier of NYSE Euronext.  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.

Highlights

• U.S. domiciled companies* listed on the London Stock Exchange's AIM achieve a weighted return of 7%
• Foreign domiciled U.S. operating companies** listed on London's AIM achieve a weighted return of 15%
• FTSE AIM All-Share Index only gained 2%
• Significant liquidity difference between U.S. and foreign domiciled U.S. companies listed on London's AIM

There were 23 U.S. domiciled and 33 foreign domiciled U.S. operating companies listed on the London Stock Exchange's AIM as of the beginning and end of 2012.  During 2012, three companies delisted from London's AIM, two joined by completing London AIM IPOs and one joined London's AIM via Admission.  Of the three 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 two simply never developed their businesses to sufficient scale and, as a result, suffered from a low market cap and lack of trading liquidity on London's AIM in their shares.  The U.S. company that joined the London Stock Exchange's AIM via Admission was, and still is, listed on the Australian Securities Exchange and raised capital in on London's AIM the month after having its shares admitted to trading on London's AIM.

The three U.S. companies that left the London Stock Exchange's AIM and the three U.S. companies that joined London's AIM during 2012 are not included in the chart and analysis below because the effect on the share price return analysis would be immaterial.  The bifurcation of the share price returns on London's AIM during 2012, with 24 of the 53 companies listed on London's AIM losing 25% or more of their value and eight posting triple digit returns, is reminiscent of 2010.

 

*    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 year, similar to how an index fund would calculate returns.

Index	Unweighted	Weighted
U.S. Domiciled Companies	4%	7%
Foreign Domiciled Companies	27%	15%
FTSE AIM All-Share Index	N/A	2%

The weighted return contributions for the U.S. domiciled companies listed on the London Stock Exchange's AIM were tightly packed between +3% and -4%, with three exceptions, where 5%, 5% and 17% weighted gains were achieved (absolute gains of 220%, 429% and 188%).  Two of the gainers simply achieved commercial success coming out of the Global Financial Crisis and the other is a biotech company 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 London's AIM were also tightly packed between +1% and -3%, with three exceptions, where 2%, 6% and 9% weighted gains were achieved (absolute gains of 473%, 365% and 29%).  One of the gainers is an oil and gas shale play listed on the London Stock Exchange's AIM that gained commercial traction, the other modified its business model and launched some new technology in the oil and gas services space and the final gainer is simply one of the largest companies on London's AIM.  It is noteworthy that the unweighted return of 27% for the foreign domiciled U.S. operating companies listed on London's AIM exceeded the weighted return of 15%, which is indicative of London AIM investors identifying the other three triple digit gainers from the smaller end of the high-quality U.S. companies listed on the London Stock Exchange's AIM.

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 the London Stock Exchange'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.  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 London's AIM, the reversed relationship is the result of London AIM investors exiting smaller companies listed on the London Stock Exchange's AIM in which they are no longer comfortable with the risk/reward relationship, as evidenced by the  unweighted share price return on London's AIM of 4% being less than the weighted share price return on London's AIM of 7%.  For the foreign domiciled U.S. operating companies listed on London's AIM, the reversed relationship indicates a strong bias towards investment in smaller companies listed on the London Stock Exchange's AIM that are viewed positively and/or as undervalued, as evidenced by the unweighted share price return on London's AIM of 27% exceeding the weighted share price return on London's AIM of 15%.

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	1.56%	1.37%	4.96%
Unweighted	4.15%	1.43%	3.08%

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 was strong during the first three months of 2012; however, an escalation of the Eurozone crisis, the Queen’s Diamond Jubilee and the Olympics caused a pullback in liquidity on London's AIM through the summer, with a rebound in autumn.

From a U.S. perspective, 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 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 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.