Tuesday, February 4, 2014

London's AIM - Secondary Offering Activity - 2013

Secondary offerings on London's AIM stock exchange raised £2.7 billion ($4.3 billion) during 2013 and it appears as if London's AIM has just entered a new IPO cycle for two main reasons; one connected to the London AIM secondary offering market and the other driven by the global economy.

Since we are now several years out from the worst of the global financial crisis, valuations on London's AIM are now 'fair' and, as these companies have naturally matured, they simply require less growth capital, causing investors to shift towards AIM IPOs.

The macroeconomic healing process in the developed economies is largely complete and sustainable growth is gathering pace in the UK and the U.S. in particular.  While 57% of the 1,087 companies listed on London's AIM are based in the UK, only 40% of London AIM IPOs from 2011 - 2013 were for UK companies.  Over that same timeframe, there has been a relative surge of London AIM IPOs from Africa, China and the U.S., accounting for 11%, 10% and 9%, respectively.

The internationalization of London's AIM is expected to continue, however, the focus should shift towards the U.S. since the vast majority of African AIM IPOs were natural resource focused, which is currently out-of-favor, and China finally lifted its moratorium on domestic IPOs that had been in place since October 2012.

Highlights
  • £2.7 billion ($4.3 billion) raised in secondary offerings on London's AIM during 2013
  • Secondary offerings on London's AIM raise 10% more during 2013 and London's AIM just entered a new IPO cycle
    • Valuations for the 1,087 companies currently listed on AIM are now ‘fair’
    • Companies are maturing, as is London's AIM in its 18th year, and simply require less capital
    • Sustainable growth is gathering pace in the UK and the U.S. in particular
    • Since 2010, UK captures 40% of London AIM IPOs, Africa 11%, China 10% and the U.S. 9%
    • Ratio of secondary offering funds raised on London's AIM to IPO funds raised on London's AIM raised was 6:1 in 2011, now 3:1
  • Global macroeconomics exaggerated the natural course of the London AIM secondary offering market
    • QE2’s positive effect during 2010 carried over into 2011
    • Debt ceiling debate during 2011 acted as a counterbalance, spilling over into 2012
    • QE3 launched in late 2012, however, with diminishing effect
    • Data shows these events cut across all aspects of the secondary offering market
      • Gross capital raised
      • Distribution of capital raises
      • Average capital raised
  • Average size of secondary offerings on London's AIM continues to decline but for a positive reason
2011 - £6.90m ($11.04m)               2012 - £4.66m ($7.46m)               2013 - £4.58m ($7.33m)
 2011 - 45%                                      2012 - 48%                                    2013 - 54%



London AIM IPO
Funds Raised
(in £ millions)
London AIM Secondary Offering
Funds Raised
(in £ millions)
2011
   560
3,616
2012
   695
2,478
2013
1,025
2,716
Total
2,280
8,810

Since the London Stock Exchange launched AIM in 1995, an aggregate of £84 billion ($134 billion) has been raised for growth-oriented SMEs, £37 billion ($59 billion) for London AIM IPOs and £47 billion ($75 billion) for London AIM Secondary Offerings.  It appears as if London's AIM just entered a new IPO cycle for two main reasons; one connected to the secondary offering market and the other driven by the global economy.

Since we are now a several years out from the global financial crisis, valuations for the vast majority of the companies listed on 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 evidence of this shift in that the ratio of secondary offering funds raised on London's AIM to IPO funds raised on London's AIM was 6.5:1 during 2011, reducing to 3.6:1 during 2012 and further reducing to 2.6:1 during 2013.

The macroeconomic healing process in the developed world is largely complete and sustainable growth is gathering pace in the UK and U.S. in particular.  While 57% of the 1,087 companies listed on AIM are based in the UK, only 40% of London AIM IPOs from 2011 - 2013 were for UK companies.  Over that same timeframe, there has been a relative surge of London AIM IPOs from Africa, China and the U.S., accounting for 11%, 10% and 9%, respectively.  The internationalization of London's AIM is expected to continue, however, the focus should shift towards the U.S. since the vast majority of African AIM IPOs were natural resource focused, which is currently out-of-favor, and China finally lifted its moratorium on domestic IPOs that had been in place since October 2012.

Global macroeconomic developments exaggerated, and are highly correlated with, secondary offering activity.  The pattern is easy to spot with respect to the gross secondary offering funds raised on London's AIM since an average of 1,130 companies have been listed on AIM since 2011 (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 year.

QE2’s positive effect in 2010 carried over into 2011.  When the debt ceiling debate unfolded during the summer of 2011, secondary offering activity contracted.  The launch of QE3 in 2012 had a diminished effect.  These events cut across all aspects of the secondary offering market.

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.  The chart provides more detail.

(in £ millions)
2011
2012
2013
< 3
 67%
 70%
 71%
  3 - 10
 16%
 20%
 17%
  10 - 50
 14%
   9%
 11%
  > 50
   3%
   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 Secondary Offerings*
Gross London AIM Secondary Offering Funds Raised
(in £ millions)
Average London AIM Secondary Offering Funds Raised
(in £ millions)
2011
   524
3,616
6.90
2012
   532
2,478
4.66
2013
   593
2,716
4.58
Total
1,649
8,810
5.34
*   This is the number of discrete secondary offering transactions.  Some companies completed more than one secondary offering per year.

On the surface, one might conclude that the companies that completed secondary offerings on London's AIM during 2012 and 2013 simply could not raise more capital; however, the fact is that these companies, and London's AIM now in its 18th year, have matured quite a bit since 2011 and simply require less growth capital.

The chart below shows that approximately 50% of all AIM-listed companies complete a secondary offering on London's AIM each year, which is the litmus test of success for a stock exchange focused on growth-oriented SMEs.


If one were to look back to 2008 - 2010, the vast majority of weak companies were expelled from London's AIM 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 from 2011 - 2013 have been used to execute on organic and/or acquisitive growth opportunities.

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