London's AIM - Secondary Offering Activity - H1 2009

Highlights

• Number of secondary offerings on the London Stock Exchange's AIM increase 6% from H1 2008 and 27% from H2 2008
• Secondary offering funds raised on London's AIM down 35% from H1 2008 but up 54% from H2 2008
• £1.4b raised in secondary offerings on the London Stock Exchange's AIM during H1 2009….six fold more than raised in London AIM IPOs
• 23% of London AIM-listed companies completed secondary offerings on London's AIM during H1 2009

• Average size of secondary offerings on London's AIM shrinks from H1 2008 but increases from H2 2008

      H1 2008 – £6.97m               H2 2008 – £3.54m               H1 2009 – £4.28m

• 75% of secondary offerings on London's AIM raise < £3m but noticeable increase in the £5 - £10m range
• ‘Operating companies’ listed on the London Stock Exchange's AIM continue to capture ~80% of secondary offering funds raised on London's AIM

• London's AIM continues the cleansing process, access to funds separate strong from weak
• Outlook:  H2 2009, flat compared to H1 2009 as London's AIM continues to stabilize

The success of the secondary offering market on London's AIM is indisputable, which is the defining characteristic of a mature market.  From 2003 – 2006, the ratio of aggregate funds raised in London AIM IPOs to aggregate funds raised in London Stock Exchange AIM secondary offerings was 1.8; a relationship which reversed during the period from 2007 – H1 2009.

‘Operating companies’ listed on London's AIM captured 80% of the secondary offering funds raised on London's AIM over the last year-and-a-half which supports the view that the London Stock Exchange's AIM is shifting back to its original purpose of funding growth-oriented SMEs and away from ‘investment vehicles’ such as SPACs and Investment and Real Estate Funds.

All Companies	London AIM IPO Funds Raised (in £ millions)	London AIM Secondary Offering Funds Raised (in £ millions)
H1 2008	830	2,195
H2 2008	88	932
H1 2009	222	1,433
Total	1,140	4,560

Exclusive of SPACs and Investment and Real Estate Funds:

‘Operating Companies’	London AIM IPO Funds Raised (in £ millions)	London AIM Secondary Offering Funds Raised (in £ millions)
H1 2008	455	1,701
H2 2008	68	838
H1 2009	-	1,108
Total	523	3,647

The extreme caution on the London Stock Exchange's AIM during the second half of 2008 has abated with a 27% increase in the number of secondary offerings on London's AIM and a 54% increase in gross funds raised on London's AIM.

All Companies	Number of London AIM Secondaries	Gross Funds Raised (in £ millions)	Average Funds Raised (in £ millions)
H1 2008	315	2,195	6.97
H2 2008	263	932	3.54
H1 2009	335	1,433	4.28
Total	913	4,560	4.99

Exclusive of SPACs and Investment and Real Estate Funds:

‘Operating Companies’	Number of London AIM Secondaries	Gross Funds Raised (in £ millions)	Average Funds Raised (in £ millions)
H1 2008	267	1,701	6.37
H2 2008	226	838	3.71
H1 2009	301	1,108	3.68
Total	794	3,647	4.59

The pattern from the second half of 2008 has persisted into the first half of 2009 with 75% of secondary offerings on the London Stock Exchange's AIM raising less than £3 million.  The sub-£1 million secondaries are for companies listed on London's AIM where London AIM investors want more time to determine whether or not the business is viable, whereas the noticeable increase in £5 – £10 million secondaries on London's AIM are for companies listed on the London Stock Exchange's AIM where London AIM investors want them to capitalize on organic and/or acquisitive growth opportunities.

 

The relative number of companies listed on London's AIM that were able to complete secondary offerings on the London Stock Exchange's AIM during the first half of 2009 spiked to 23% from 16% during the second half of 2008 and even exceeded the 19% that completed secondary offerings on London's AIM during the first half of 2008.  As mentioned above, the breadth and depth of secondary offering activity on the London Stock Exchange's AIM is the defining characteristic of a mature market.

The outlook on London's AIM for the second half of 2009 is for secondary offering activity on the London Stock Exchange's AIM to be flat compared to the first half of 2009 as London's AIM continues to stabilize.  London's AIM will continue its shift back to its original purpose of funding growth-oriented SMEs to the exclusion of ‘investment vehicles’ listed on London's AIM.  Access, or lack of access, to secondary offering funds on London's AIM during the second half of 2009 should largely complete the process of London AIM investors selecting the viable companies that will remain listed on the London Stock Exchange's AIM.

London's AIM - IPO Activity - H1 2009

Highlights

• Unsurprisingly, London Stock Exchange AIM IPO activity has been virtually non-existent
• However, ‘channel checks’ indicate a small pipeline of IPOs on London AIM is building
• Unavailable, or frozen, banking facilities seen as driving SMEs towards London AIM IPO equity financing
• Swapping debt for London AIM-listed equity to deleverage; reducing risk and interest expense
• Raising cash on London's AIM for growth, both domestically and internationally
• Obtaining London AIM-listed shares to affect acquisitions of weak competitors

• 60% of London Stock Exchange AIM IPOs since 2008 raise between £5m and £100m
• Majority of funds raised on London's AIM in 2008 (57%) for ‘operating companies’ listed on London's AIM, first year since 2005
• Substantial decrease in London AIM IPO dilution of existing shareholders of ‘operating companies’

     2005 – 35%                 2006 – 32%                 2007 – 34%                 2008 – 25% 

• Minimum opening market cap. upon listing on London's AIM seen as shifting up to £50m, larger for non-UK companies
• Outlook:  H2 2009 London Stock Exchange AIM IPOs, very tepid activity post summer with a strong flight to quality

After a five month hiatus dating back to December 2008, two companies listed on the London Stock Exchange's AIM during the final two months of the first half of 2009, however, both were anomalies.  One was a ‘vulture’ property fund listing on London's AIM that raised £220 million and the other was a small specialty finance company listing on London's AIM that raised £2 million.

Feedback gathered from meetings during the month of June in London with securities lawyers, accountants, London AIM Nominated Advisers (Nomads), London AIM Nominated Brokers, financial PR/IR firms, independent equity research firms service London's AIM and the London Stock Exchange’s AIM Team indicate that a small pipeline of IPOs on the London Stock Exchange's AIM is building.  The common comment was that there “appear to be small signs of life over the last 6 – 8 weeks and, while the summer will be quiet, there is a bit of a backlog waiting to be fulfilled for listings on London's AIM”.  SMEs are being driven towards equity financing on London's AIM given the fragile state of the banking system.  Funding is not available for companies that simply need cash for survival but rather for those that are profitable and generating cash (or are very close) and want to recapitalize their balance sheets to reduce risk and interest expense, raise additional cash on the London Stock Exchange's AIM for domestic and/or international growth and, perhaps most strategically important, use London AIM-listed shares as a currency to acquire weak competitors that have valuable intellectual property (IP), customer lists and human capital.  Companies in this position view the current economic climate as an opportunity to accelerate growth and supercharge profitability by listing and raising capital on London's AIM coming out of the recession.

All Companies	Number of London AIM IPOs	Gross Funds Raised (in £ millions)	Average Funds Raised (in £ millions)
H1 2008	31	830	27
H2 2008	7	88	13
H1 2009	2	222	111
Total	40	1,140	29

Exclusive of SPACs and Investment and Real Estate Funds:

‘Operating Companies’	Number of London AIM IPOs	Gross Funds Raised (in £ millions)	Average Funds Raised (in £ millions)
H1 2008	22	455	21
H2 2008	5	68	14
H1 2009	-	-	N/A
Total	27	523	19

During 2008, 71% of the IPOs on London's AIM were for ‘operating companies’ and, for the first time since 2005, they captured a majority (57%) of the gross funds raised on London's AIM.  As mentioned above, the first half of 2009 is viewed as an anomaly.

Since 2008, 60% of IPOs on the London Stock Exchange's AIM raised between £5 and £100 million.

 

One interesting shift in the market that occurred during 2008 is the substantial decrease in London AIM IPO dilution of existing shareholders (see chart below).  There are two main reasons for this shift.  First, the London Stock Exchange codified the London AIM Nominated Advisers (Nomads) Rules in early 2007 which has increased the scrutiny of prospective new entrants by Nominated Advisers (Nomads) since the Nominated Adviser (Nomad) vouches to the London Stock Exchange (LSE) as to a company’s suitability for listing on London's AIM.  Second, London Stock Exchange AIM investors have become more risk adverse in the current economic climate.  Consequently, the quality of the companies listing on London's AIM has increased and, as a result, the London AIM IPO dilution of existing shareholders has decreased. 

 

The outlook for the second half of 2009 is for very tepid IPO activity on the London Stock Exchange's AIM post summer with a strong flight to quality.  It is believed that the London's AIM will continue its shift back, which started in 2008, to its original purpose of funding growth-oriented SMEs via London AIM IPOs in contrast to the proliferation of ‘investment vehicles’ listing on London's AIM during 2006 and 2007.

The London AIM of the future will look different than the London AIM of the past.  Minimum opening market capitalizations upon listing on London's AIM are seen as shifting up to £50 million for UK companies listing on the London Stock Exchange's AIM and slightly higher for non-UK companies listing on London's AIM to compensate for the perceived increase in risk.