London's AIM - Several Factors Positively Influencing London AIM IPO Activity

A confluence of factors have positively influenced the London Stock Exchange's AIM, yielding 45 London AIM IPOs during the first 10 months of 2013 versus 35 London AIM IPOs during the first 10 months of 2012, with a number of high-profile healthcare and technology IPOs on London's AIM over the last 18 months.

At a macro-level, the UK economy is expected to grow by 1.6% this year, more than double the Government's forecast back in March, optimism among UK manufacturers rose last month at the fastest rate since April 2010, households' optimism in the recovery improved for the 10th straight month in October and the FTSE 100 has been above 6,000 for the entire year.

On the legislative/tax front, London AIM shares can now be held in UK Individual Savings Accounts (ISAs), the US equivalent of IRAs, and the current 0.5% stamp duty (tax) on the purchase of shares will be abolished from April 2014.  London AIM shares can be one of the most tax-advantaged investments; avoiding capital gains tax, income tax, inheritance tax and, soon, stamp duty.  The benefit for companies considering a London Stock Exchange AIM IPO (and those already listed on London's AIM) should be a further reduction in the cost-of-capital and an increase in aftermarket liquidity; both positively impacting valuations.  A few relevant articles on these topics can be accessed here:

The Telegraph - Should You Join the Rush Into AIM Shares?

The Telegraph - Shares Listed on AIM Can Now be Held in ISAs

The Financial Times - Stamp Duty on AIM Shares Abolished

All of the above follows on from a relaxation of the Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) rules introduced in the UK's Finance Act 2012, which increased the limits on the size of qualifying companies from up to 50 employees and gross assets of £7 million to up to 250 employees and gross assets of £15 million, increased the annual maximum amount that can be invested in a qualifying company from £1 million to £5 million and, importantly for foreign companies contemplating a London Stock Exchange AIM IPO, the EIS and/or VCT funds raised can now be used anywhere in the world, provided the company has a UK 'permanent establishment'.  The 'permanent establishment' test can most easily be met by having someone in the UK who has the authority to 'bind the company to contracts', therefore, an office, branch, etc. is not necessarily required.

London's AIM - U.S. Company Performance - Share Price and Liquidity - H1 2013

The 22 U.S. domiciled companies listed on the London Stock Exchange's AIM achieved a weighted return of 16% and the 32 foreign domiciled U.S. operating companies listed on London's AIM stock exchange registered a weighted loss of 4%; versus a loss of 2% for the FTSE AIM All-Share Index during the first half of 2013.  This post provides additional insights.

The three triple digit gainers listed on the London Stock Exchange's AIM returned 100%, 111% and 278%.  One is an industrial technology company listed on London's AIM, one is a clean water technology and engineering company listed on London's AIM and one is an investment management firm listed on London's AIM.

Four of the 22 IPOs on the London Stock Exchange's AIM during the first half of 2013 were for companies with their main place of operation in the U.S. and the pipeline remains healthy.

Highlights

• U.S. domiciled companies* listed on the London Stock Exchange's AIM achieve a weighted return of 16%
• Foreign domiciled U.S. operating companies** listed on London's AIM register a weighted loss of 4%
• FTSE AIM All-Share Index lost 2%
• Significant liquidity difference between U.S. and foreign domiciled U.S. companies listed on London's AIM

There were 22 U.S. domiciled and 34 foreign domiciled U.S. operating companies listed on the London Stock Exchange's AIM as of the beginning of 2013, with one net gain in each category during the first half of 2013.  Four companies joined London's AIM via IPO and two delisted from London's AIM.  One of the companies that left London's AIM encountered commercial/financial difficulties and was likely headed for liquidation and winding up and the other company listed on the London Stock Exchange's AIM simply never developed its business to sufficient scale and, as a result, suffered from a low market cap and lack of trading liquidity in their shares listed on London's AIM.

The four U.S. companies that joined the London Stock Exchange's AIM via IPO and the two that left London's AIM during the first half of 2013 are not included in the chart and analysis below because the effect on the share price return analysis would be immaterial.  The distribution of returns for the U.S. companies listed on London's AIM during the first half of 2013 was normal, with exception of 19 companies that lost between 25% and 49%.  The majority are junior mining and oil and gas exploration and development companies listed on the London Stock Exchange's AIM that were negatively impacted by global macroeconomics forces, such as central bank policies and slowing growth in emerging markets.

 

*    U.S. operating companies listed on London's AIM directly through a U.S. entity.

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

Index	Unweighted	Weighted
U.S. Domiciled Companies	(1%)	16%
Foreign Domiciled Companies	(8%)	(4%)
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 at +/-3%, with four exceptions, where 5%, 6% and 10% weighted gains were achieved (absolute gains of 100%, 278% and 111%) and a weighted loss of 5% was recorded (absolute loss of 48%).  One of the gainers, who was also on the list during 2012, continued to achieve commercial success coming out of the Global Financial Crisis, particularly in major emerging markets, one secured a number of significant commercial contracts with large companies/partners and the final one is subject to a takeover bid by their majority shareholder.  The U.S. company listed on AIM that lost 48% during the first half of 2013 is a biotech that gained 188% during 2012, therefore, they are back where they started 18 months ago, which isn’t uncommon in the life sciences space.

The weighted return contributions for the foreign domiciled U.S. operating companies listed on the London Stock Exchange's AIM were also tightly packed at +/-1%, with three exceptions, where 3% and 5% weighted gains were achieved (absolute gains of 52% and 67%) and a weighted loss of 10% was recorded (absolute loss of 31%).  One of the gainers modified their business model and launched some new technology in the oil and gas services space and the other is an internet media platform that integrated two acquisitions and is achieving exceptional financial results.  The U.S. company listed on the London Stock Exchange's AIM that lost 31% encountered some unforeseen operational difficulties in their oil and gas exploration and development activities.

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 London 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 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.  During the first half of 2013, London AIM investors exited smaller companies in which they were no longer comfortable with the risk/reward relationship, as evidenced by the underperformance of the unweighted share price returns versus the weighted share price returns for both categories of U.S. companies listed on the London Stock Exchange'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 AIM
Weighted	2.88%	1.43%	3.76%
Unweighted	4.44%	1.75%	3.31%

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.  The liquidity pattern on London's AIM is relatively stable with the typical seasonal pullback at the start of summer.

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 AIM Nominated Adviser (Nomad), AIM Nominated Broker(s), financial PR/IR firm and Independent Equity Research firm.