London's AIM - Secondary Offering Activity - H1 2013

Secondary offerings on London's AIM stock exchange raised £1.1 billion ($1.7 billion) during the first half of 2013, however, their downward trend since 2010 now appears to be signaling the start of a new IPO cycle on London's AIM for three main reasons; two connected to the secondary offering market and one driven by the global economy.

The three main reasons, along with the effects of QE2, the debt ceiling debate et al. and QE3 on the London Stock Exchange's AIM secondary offering market over the last three-and-a half-years, are described in detail in this post.

Highlights

• £1.1 billion ($1.7 billion) raised in London Stock Exchange AIM secondary offerings during the first half of 2013

• Secondary offerings on London's AIM trending downward, signaling a shift towards increasing London AIM IPO activity
• Valuations for the 1,085 companies currently listed on London's AIM are now ‘fair’
• Companies are maturing, as is London's AIM in its 18^th year, and simply require less capital
• Economies outside the U.K. are gathering pace, accounting for 68% of London AIM IPOs
• Ratio of secondary offering to IPO funds raised on London's AIM was 6:1 in 2010/2011, now 3.7:1

• Global macroeconomics exaggerated the natural course of the London Stock Exchange's AIM secondary offering market
• QE2 assisted the surge in activity during H2 2010, which carried into H1 2011
• Debt ceiling debate et al. acted as a counterbalance during H2 2011
• Pent-up demand released during H1 2012
• QE3 launched in H2 2012, however, with no effect
• Secondary offering market on London's AIM appears to have settled into a ‘new normal’
• Data shows these events cut across all aspects of the secondary offering market
• Gross capital raised on London's AIM
• Distribution of capital raises on London's AIM
• Average capital raised on London's AIM

• Average size of secondary offerings on the London Stock Exchange's AIM continues to decline but for a positive reason

H1 2010 - £7m ($11m)    H2 2010 - £9 ($14m)    H1 2011 - £8m ($12m)    H2 2011 - £6m ($9m) 

H1 2012 - £5 ($8m)       H2 2012 - £4 ($6m)       H1 2013 - £4 ($6m)

• Relative number of London Stock Exchange AIM-listed companies completing secondary offerings holds steady

H1 2010 - 24%          H2 2010 - 32%          H1 2011 - 27%          H2 2011 - 18% 

H1 2012 - 25%          H2 2012 - 22%          H1 2013 - 23%

	London's AIM IPO Funds Raised (in £ millions)	London's AIM Secondary Offering Funds Raised (in £ millions)
H1 2010	351	2,185
H2 2010	666	3,553
H1 2011	265	2,451
H2 2011	295	1,165
H1 2012	200	1,505
H2 2012	495	973
H1 2013	258	1,080
Total	2,530	12,912

Since the London Stock Exchange (LSE) launched the Alternative Investment Market (AIM) in 1995, an aggregate of £82 billion ($127 billion) has been raised for growth-oriented SMEs; £36 billion ($56 billion) for London AIM IPOs and £46 billion ($71 billion) for London Stock Exchange AIM Secondary Offerings.  It appears as if London's AIM is about to enter a new IPO cycle for three main reasons; two connected to the secondary offering market and one driven by the global economy.

Since we are now several years out from the worst of the global financial crisis, valuations for the vast majority of the 1,085 companies listed on the London Stock Exchange's AIM are now ‘fair’ and, as these companies have naturally matured, they simply require less growth capital, causing investors to shift towards London AIM IPOs.  There is early evidence of this shift in that the ratio of secondary offering funds raised on the London Stock Exchange's AIM to IPO funds raised on London's AIM was approximately 6:1 during 2010 and 2011, reducing to 3.7:1 during 2012 and the first half of 2013.

The global macroeconomic healing process is still underway and appears to be gathering pace outside the U.K. and Continental Europe.  While approximately 58% of the 1,085 companies listed on London's AIM are based in the U.K., only 41% of the London Stock Exchange AIM IPOs during the first half of 2013 and 31% from 2010 - 2012 were for U.K. companies.  Over that same timeframe, there has been a relative surge of London AIM IPOs from the world’s two largest economies, the U.S. and China, accounting for 10% and 8%, respectively, where growth prospects remain good.  The internationalization of London's AIM is expected to continue.

Global macroeconomic developments exaggerated, and are highly correlated with, secondary offering activity on the London Stock Exchange's AIM.  The pattern is easy to spot with respect to the gross secondary offering funds raised on London's AIM since an average of 1,145 companies have been listed on London's AIM since 2010 (i.e. lots of data points), however, such a firm conclusion cannot be drawn with respect to the London AIM IPO market since, by its very nature, it consists of relatively few discrete transactions during any given half-year.

When QE2 was launched during the summer of 2010, secondary offering activity on the London Stock Exchange's AIM surged, this carried over, with diminishing effect, into the first half of 2011.  When the debt ceiling debate et al. unfolded during the summer of 2011, secondary offering activity on London's AIM contracted, with the pent-up demand released during the first half of 2012.  The launch of QE3 in late 2012 had no effect on Secondary offering activity on London's AIM.  These events cut across all aspects of the London Stock Exchange AIM secondary offering market, which appears to have settled into a ‘new normal’.

The table below shows that the distribution of gross funds raised from secondary offerings on London's AIM is also consistent with this pattern, shifting from larger to smaller.

(in £ millions)	H1 ‘10	H2 ‘10	H1 ‘11	H2 ‘11	H1 ‘12	H2 ‘12	H1 ‘13
< 3	68%	64%	65%	71%	69%	71%	71%
3 - 10	18%	19%	16%	16%	19%	20%	18%
10 - 50	11%	12%	16%	11%	10%	8%	10%
> 50	3%	5%	3%	2%	2%	1%	1%

  

The next table shows that the average funds raised from secondary offerings on London's AIM is also consistent with these patterns.

	Number of London AIM Secondaries*	Gross Funds Raised (in £ millions)	Average Funds Raised (in £ millions)
H1 2010	307	2,185	7.12
H2 2010	384	3,553	9.25
H1 2011	320	2,451	7.66
H2 2011	204	1,165	5.71
H1 2012	284	1,505	5.30
H2 2012	248	973	3.92
H1 2013	250	1,080	4.32
Total	1,997	12,912	6.47

*   This is the number of discrete secondary offerings on London's AIM.  Some companies completed more than one secondary offering on London's AIM per half-year.

On the surface, one might conclude that the companies that completed secondary offerings on London's AIM during the second half of 2012 and the first half of 2013 simply could not raise more capital; however, the fact is that these companies, and the London Stock Exchange's AIM now in its 18^th year, have matured quite a bit and simply require less growth capital.  The chart below supports this conclusion since the relative number of London AIM-listed companies completing secondary offerings actually increased slightly during the first half of 2013.

 

If one were to look back to 2008 and 2009, the vast majority of weak companies were expelled in the wake of the global financial crisis as investors selected those that would remain by providing access to secondary offering funds on London's AIM.  Generally speaking, secondary offering funds raised on London's AIM since then have been used to execute on organic and/or acquisitive growth opportunities.

The Telegraph - Should You Join the Rush into London AIM-Listed Shares?

Richard Evans, Writer, Personal Finance, The Telegraph, London, England

Investors are piling into London's AIM.  Are they heading for a fall or is there a safe way to join the party?

The London Stock Exchange's (LSE) Alternative Investment Market (AIM), home to the smallest and riskiest companies, is suddenly attracting unprecedented attention from London AIM investors.

The question is: are these share buyers cleverly spotting businesses that are about to grow astronomically or are they wasting their money on companies destined never to make a profit?

The rush of interest in shares listed on London's AIM is due to a change in the rules last month that made London Stock Exchange AIM shares eligible for inclusion in tax-free Individual Savings Accounts (ISAs) for the first time.

The effect has been dramatic.  In the two months before the rule change, 15.6% of all share purchases made through Hargreaves Lansdown, the stockbroker, involved London AIM-listed companies.  But in August, this figure increased to 23.6%, a rise of 51%.

In August, 14% of all money put into shares was invested in London Stock Exchange AIM-listed companies, compared to 9.7% in the previous two months.  This is a rise of 44%.  Some of the purchases were the result of investors selling an existing holding of London Stock Exchange AIM shares and repurchasing them within an ISA to shield them from future tax liabilities, said Danny Cox of Hargreaves Lansdown.

Other stockbrokers report similar rises in London AIM-related trading.  Sippdeal said volumes were up by a quarter, while figures from the London Stock Exchange, which also includes trading by institutions, painted the same picture.  One investment website, Interactive Investor, said trading volumes of London AIM shares had doubled.

The increased activity seems to have pushed up the share prices of London AIM-listed companies.  Since the ISA rule change, the FTSE AIM All-Share Index has risen by 4.9%, whereas the FTSE 100 Index has fallen by 2.7%.

The change, which took effect on August 5^th is especially significant because London Stock Exchange AIM shares were already exempt from inheritance tax, as long as they were held for at least two years.  Holding London AIM shares in an ISA now allows you to avoid income, capital gains and inheritance taxes.

Expert view: Oliver Bedford, Co-Manager of the Hargreave Hale AIM Venture Capital Trust, debunks the myths associated with AIM shares.

The commonly held view is that the London Stock Exchange's AIM is synonymous with volatility, risk and poor performance.  Many retail and professional investors have shunned London's AIM since the collapse of the equity markets in 2008 and early 2009.  Fund managers have been known to attribute their underperformance to London's AIM.  We seek to differ.

While it is certainly true that an investor in an London AIM-listed company can lose a significant part, or even all, of their investment, and low levels of liquidity on London's AIM can increase share price volatility, it’s our view that a company’s fundamentals, business model and management ultimately determine the success or failure of an investment, not the exchange on which the company’s shares are listed.

With three times as many companies as the FTSE 350, the scale of the market opportunity on London's AIM presents investors with a challenge that sits alongside the opportunity.  The inefficient flow of information and reduced amount of analyst coverage, which cannot be adequately overcome with traditional desktop tools such as Bloomberg, is another barrier to be overcome.  As a result, London's AIM is large, under-researched, less efficient and therefore more likely to contain pricing anomalies.  The London Stock Exchange's AIM is a place for stock pickers and those prepared to make the necessary investment of time and effort.  Those who do so will find that London's AIM is home to a wide variety of businesses.

Many London AIM-listed companies are young and dynamic, often operating in new and emerging sectors.  U.S-based MyCelx is one such example.  It is a water technology company listed on London's AIM that provides clean water solutions to the oil, gas and petrochemical industries.  Its patented polymer is capable of permanently removing free, emulsified and dissolved hydrocarbons from water.  Revenues are forecast to grow to $24 million in 2013, up from $4 million in 2010.

WANdisco is another example of a young and rapidly growing company listed on London's AIM with an emerging technology.  The London Stock Exchange AIM-listed company operates from Sheffield, England and San Ramon, California and provides computing technology that enables software developers in separate locations to work simultaneously.  Customers include a host of Fortune 1000 companies, such as Hewlett-Packard, Intel, John Deere, Barclays Capital and Nokia.  Its revenues are forecast to grow from $4 million in 2011 to $15 million in 2014.

Yet London's AIM offers much more than “frontier investing”.  It is also home to numerous established and more traditional businesses.  ASOS, the online retailer, Brooks Macdonald in financial services, Majestic Wine, Nichols (which owns the Vimto and Sunkist brands), the restaurant operator Prezzo and Vertu Motors, the automotive retailer, are good examples.