London's AIM - U.S. Company Performance - Share Price and Liquidity - H1 2014

The 52 U.S. companies listed on London's AIM stock exchange lost 17%, versus a loss of 8% for the FTSE AIM All-Share Index, during the first half of 2014, reinforcing the fact that AIM is a 'stock picker's market'.  The 42 AIM IPOs during the first half of 2014, however, achieved average and median share price gains of 8% and 5%, respectively, from the median IPO date of April 9, 2014.

Two of the U.S. companies that left AIM during the first half of 2014 did so in order to concentrate their public listings in the U.S.  They completed their initial IPOs on AIM during 2007 and 2006 and their U.S. IPOs on the NYSE MKT, the small cap tier of the NYSE Euronext, and NASDAQ during 2011 and 2013, respectively.  This is the natural evolution for U.S. companies that complete their initial IPOs on AIM; using it as a platform for raising capital, the achievement of commercial success and a dual listing on the U.S. public markets.

There was a significant increase in the weighted liquidity level on AIM during the first half of 2014 at 5.49% compared to 3.69% during 2013 for a number of reasons.  From August 2013, AIM shares can be held in U.K. Individual Savings Accounts (ISAs), the U.S. equivalent of IRAs, which provided a liquidity boost from retail investors into some of the larger, more well-known companies listed on AIM.  In addition, at the start of the new tax year in early April 2014, the annual ISA allowance was raised from £11,520 to £15,000.  Finally, the 0.5% stamp duty (tax) on the purchase of AIM shares was abolished at the end of April 2014.

AIM shares can be one of the most tax-advantaged investments; avoiding capital gains tax, income tax, inheritance tax and now stamp duty.  The benefits for companies considering an AIM IPO, and for those already listed on AIM, should be a further reduction in the cost-of-capital and an increase in aftermarket liquidity; both positively impacting valuations.

Highlights

• U.S. domiciled companies register a weighted loss of 5%
• Foreign domiciled U.S. operating companies register a weighted loss of 20%
• FTSE AIM All-Share Index lost 8%
• Significant liquidity difference between U.S. and foreign domiciled U.S. companies

There were 20 U.S. domiciled and 35 foreign domiciled U.S.operating companies listed on AIM at the beginning of 2014.  During the first half of 2014, four companies delisted and one joined by way of reverse takeover.  Of the four companies that left AIM; two completed their U.S. IPOs on the NYSE MKT, the small cap tier of the NYSE Euronext (the old NYSE AMEX), and NASDAQ in 2011 and 2013, respectively, and simply decided to concentrate their public listings in the U.S., one was a large oil and gas exploration and production company that was acquired at a 15% premium and the final one was an investment fund that wanted to issue a class of shares that weren’t eligible for AIM, therefore, they used the London Stock Exchange’s Specialist Fund Market (SFM) for that purpose and then migrated their AIM-listed shares to the SFM.

The four leavers during the first half of 2014 are not included in the chart and analysis below because they left during the early part of the half-year, however, the one joiner is included since that occurred in January.  The distribution of returns during the first half of 2014 was relatively normal, although, the slight negative bias is due to fact that the junior mining and oil and gas exploration and production companies were adversely impacted by global macroeconomic force, such as central bank policies and slowing growth in emerging markets.

The weighted returns in the table below were calculated using the average market capitalizations of the companies during the half-year, similar to how an index fund would calculate returns.

Index	Unweighted	Weighted
U.S. Domiciled Companies	3%	(5)%
Foreign Domiciled Companies	(12%)	(20)%
FTSE AIM All-Share Index	N/A	(8)%

The weighted return contributions for the U.S. domiciled companies were tightly packed at +/-2%, with two exceptions, one where a 3% weighted gain was achieved (absolute gain of 81%) and one where a weighted loss of 5% was recorded (absolute loss of 58%).  The company that gained 81% is a life sciences company focused on nature-derived insect and parasite control products that recently achieved significant commercial traction through multiple channels.  The company that lost 58% is an aquaculture biotech company that gained 168% during 2013 after receiving regulatory clearance for commercial production in Canada, however, continuing delays with the U.S. FDA caused a retracement in the share price to early 2013 levels.

The weighted return contributions for the foreign domiciled U.S. operating companies were also tightly packed at +/-1%, and also with two exceptions, where weighted losses of 12% and 6% were recorded (absolute losses of 69% and 14%).  The company that lost 69% fell victim to a blog posted by a consultant who was paid by unnamed parties in which the company’s business model and practices were questioned.  The company strongly refuted the assertions made, completed a thorough internal and external review and published a detailed response.  During 2013, this company gained 215% after integrating several acquisitions and achieving exceptional financial results, all of which was wiped out, likely temporarily, by an apparently malicious act.  The company that lost 14% is an oil and gas exploration and production company that continued to encounter some unforeseen operational difficulties after losing 12% during 2013.

In terms of average monthly liquidity (see the table below), the foreign domiciled U.S. operating companies outperformed the U.S. domiciled companies and AIM as a whole on both measures.  One would expect all of the weighted results to exceed all of the unweighted results, reflecting the positive relationship between a company’s liquidity and its market capitalization.  The unweighted results represent the level of monthly liquidity that the average company can expect to achieve.

Since the reversal of this relationship was small for the U.S. domiciled companies, a firm conclusion cannot be drawn, however, since relative trading volumes were significantly larger for the larger foreign domiciled U.S. operating companies, it appears as if investors exited the larger companies because they were no longer comfortable with the risk/reward relationship, which is evidenced by the underperformance of the weighted share price return compared to the unweighted share price return.

Average Monthly Liquidity	Foreign Domiciled U.S. Operating Companies	U.S. Domiciled Companies	Entire AIM Market
Weighted	7.36%	1.17%	5.49%
Unweighted	5.60%	1.65%	3.50%

The chart below provides the monthly detail of the unweighted liquidity for each of the three categories in the table on the previous page.  While the unweighted liquidity levels have been stable, there has been a significant increase in the weighted liquidity level on London's AIM as a whole during the first half of 2014 at 5.49% compared to 2013 at 3.69% for the reasons outlined below.

From August 5, 2013, AIM shares can be held in U.K. Individual Savings Accounts (ISAs), the U.S. equivalent of IRAs, which provided a liquidity boost from retail investors into some of the larger, more well-known companies listed on AIM.  In addition, at the start of the new tax year on April 6, 2014, the annual ISA allowance was raised from £11,520 to £15,000.  Finally, the 0.5% stamp duty (tax) on the purchase of AIM shares was abolished from April 28, 2014.

AIM shares can be one of the most tax-advantaged investment; avoiding capital gains tax, income tax, inheritance tax and now stamp duty.  The benefit for companies considering an AIM IPO, and for those already listed on AIM, should be a further reduction in the cost-of-capital and an increase in aftermarket liquidity; both positively impacting valuations.

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 AIM via a U.K. holding company.  The four main reasons being:

1. Once the Reg. S period expires, the 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. Institutional investors only allocate a portion of their investments to non-U.K. companies

Nevertheless, irrespective of where a company is domiciled, liquidity can be improved.  The reasons for a lack of liquidity 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 AIM IPO to minimize the risk of lack of liquidity becoming a problem in the first instance; including, selection of the most appropriate Nomad, Broker(s), Financial PR/IR firm and Independent Equity Research firm.