Tuesday, September 10, 2013

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 18th 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 18th 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.

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