London's AIM - Secondary Offering Activity - 2008

Highlights

• Number of secondary offerings on the London Stock Exchange's AIM and aggregate funds raised on London's AIM drop by 39% and 68%, respectively
• £3.1b raised in secondary offerings on London's AIM during 2008….240% more than raised in IPOs on London's AIM
• 36% of London AIM-listed companies completed secondary offerings on London's AIM during 2008

• Average size of secondary offerings on the London Stock Exchange's AIM shrinks by 50% to £5m as London's AIM remains cautious
• 2008 number, average size and distribution of secondary offerings on London's AIM reminiscent of 2005
• London's AIM seen as shifting back to its original purpose of funding growth-oriented SMEs

• Access, or lack of access, to funds on the London Stock Exchange's AIM separate strong from weak and cleanses London's AIM
• Outlook:  H1 2009, very slow; H2 2009 modest recovery on London's driven by the strong companies

The success of the secondary offering market on London's AIM is indisputable; however, that success should not be viewed in isolation, but rather through the lens of the broader market for London Stock Exchange AIM IPOs.  The trend which began in 2006, and continued throughout 2007, of a significant number of Special Purpose Acquisition Corporations (SPACs) and Investment and Real Estate Funds completing IPOs on the London Stock Exchange's AIM has largely come to an end.  The effect on the London AIM IPO market was dramatic but the effect on the secondary offering market on London's AIM was more modest.

‘Operating companies’ listed on the London Stock Exchange's AIM captured 57% of the London AIM IPO funds raised during 2008 but only 32% during 2007.  The comparable metrics for the secondary offering market on London's AIM were 81% during 2008 and 68% during 2007.

All Companies	London AIM IPO Funds Raised (in £ billions)	London AIM Secondary Offering Funds Raised (in £ billions)
2007	6.26	9.71
2008	0.92	3.13

Exclusive of SPACs and Investment and Real Estate Funds:

‘Operating Companies’	London AIM IPO Funds Raised (in £ billions)	London AIM Secondary Offering Funds Raised (in £ billions)
2007	1.99	6.59
2008	0.52	2.54

The average size of secondary offerings shrunk by 50% as the market remains cautious.

All Companies	Number of Secondary Offerings	Gross Funds Raised (in £ billions)	Average Funds Raised (in £ millions)
2007	949	9.71	10.23
2008	578	3.13	5.41

During 2008, 80% of all secondary offerings on London's AIM were for less than £5 million whereas 80% of all secondary offerings on the London Stock Exchange's AIM in 2007 were for less than £10 million, reflecting a cautious London's AIM.  Interestingly, the number, average size and distribution of secondary offerings on the London Stock Exchange's AIM during 2008 is reminiscent of 2005, supporting the view that London's AIM is shifting back to its original purpose of funding growth-oriented SMEs.

 

The relative number of companies listed on London's AIM that were able to complete secondary offerings on London's AIM during 2008 remains healthy at 36%; however, this does represent a decrease from 57% in 2007. 

   

The London AIM outlook for 2009 is for secondary offering activity on the London Stock Exchange's AIM during H1 to be very slow with a modest recovery during H2.  It is believed that London's AIM will shift strongly back to its original purpose of funding growth-oriented SMEs and that access, or lack of access, to secondary offering funds on London's AIM during 2009 will separate the strong companies from the weak companies listed on the London Stock Exchange's AIM and ultimately cleanse London's AIM.

London's AIM - IPO Activity - 2008

Highlights

• Number of London AIM IPOs and aggregate funds raised on London's AIM drop by 79% and 85%, respectively
• Decreases for ‘operating companies’ listing on London's AIM slightly less at 76% and 74%, respectively
• Average funds raised for ‘operating companies’ listing on London's AIM increases slightly to £19m
• 75% of London Stock Exchange AIM IPOs in both years raise between £3m and £100m

• First time since 2005 that majority of funds raised on London's AIM (57%) was for ‘operating companies’
• Substantial decrease in London Stock Exchange AIM IPO dilution of existing shareholders of ‘operating companies’ listing on London's AIM

2007 – 34%                             2008 – 25% 

• Very selective market with funds available for high quality companies at less dilution
• London's AIM seen as shifting back to its original purpose of funding growth-oriented SMEs

• Outlook:  H1 2009 London AIM IPOs, very slow; H2 2009 London AIM IPOs, tepid recovery with a strong flight to quality

The trend which began in 2006 on the London Stock Exchange's AIM, and continued throughout 2007, of a significant number of Special Purpose Acquisition Corporations (SPACs) and Investment and Real Estate Funds listing on London's AIM, has largely come to an end.  During 2008, only 10 Investment Funds and one Real Estate Fund listed on London's AIM with no SPAC IPOs.  These ‘investment vehicles’ cause the overall London AIM metrics to be misleading.

The key takeaway from comparing the tables below is that only 61% of the London Stock Exchange AIM IPOs during 2007 were for ‘operating companies’ listing on London's AIM and those companies only captured 32% of the gross funds raised on the London Stock Exchange's AIM.  During 2008, 71% of the listings on the London Stock Exchange'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.

All Companies	Number of London AIM IPOs	Gross Funds Raised (in £ billions)	Average Funds Raised (in £ millions)
2007	182	6.26	34
2008	38	0.92	24

Exclusive of SPACs and Investment and Real Estate Funds:

‘Operating Companies’	Number of London AIM IPOs	Gross Funds Raised (in £ billions)	Average Funds Raised (in £ millions)
2007	111	1.99	18
2008	27	0.52	19

Notwithstanding the bifurcation of the London AIM IPO market between ‘investment vehicles’ and ‘operating companies’, 75% of the listings on the London Stock Exchange's AIM in each year raised between £3 and £100 million.

While London's AIM has certainly not been immune to the global slowdown in IPOs, the codification of the AIM Rules for Nominated Advisers (Nomads) in early 2007 has increased the scrutiny of prospective companies listing on London's AIM 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.  Consequently, the quality of the companies listing on the London Stock Exchange's AIM has increased and, as a result, the IPO dilution of existing shareholders has decreased. 

 

The outlook for 2009 is for London AIM IPO activity during H1 to be very slow with a tepid recovery during H2.  It is believed that London's AIM will shift strongly back to its original purpose of funding growth-oriented SMEs listing on the London Stock Exchange's AIM and that there will be an extreme flight to quality with London AIM IPO fundraisings for more mature ‘operating companies’ pushing up above £20 million.

The Financial Times - Economic Winter Bites on London AIM's Hopeful Minnows

I am pleased to share the Financial Times' press coverage of AIM Advisers. 

David Blackwell, Small Companies Editor, The Financial Times, London, England

The yearning for better times expressed in the 1960s pop classic “California Dreamin’” might strike a chord with many London AIM boards as the junior market languishes in its own economic winter.

The bleak October figures revealed that for the first time in 10 years a calendar month had passed on London's AIM with no new money being raised.  The London Stock Exchange statistics for November show a slight improvement – new money raised was £12.4m.  But secondary fundraising on London's AIM was down to £65.2m from £81.6m in October.

Compared with November 2007, last month’s figures look worse.  In that month £192.2m of new money was raised on the London Stock Exchange's AIM and £243.1m of secondary funding was raised on London's AIM.

But US optimism is hard to quench, as a look at a Santa Monica-based London AIM minnow shows.  DDD Group specializes in the development and licensing of software to create three-dimensional images on television, laptop and mobile phone screens.

It was founded in 1993, and arrived on the London Stock Exchange's AIM in 2002, raising £7m at 65p a share in its London AIM IPO.

Its technology has been developed from software originally designed to create three-dimensional images of industrial plants for scientists and engineers.  Clients include Samsung, Sharp and Hyundai.

Product has been shipped to South Korea, Japan and the US.  But, as Chris Yewdall, chief executive, says, nothing has happened in the UK, leaving his company in obscurity.

The shareholder list is just as impressive.  Nigel Wray, the entrepreneur and investor, has 7%; Hans Snook, the former head of Orange, has 3% and is a non-executive director; and Arisawa Manufacturing, the Japanese group that makes flat-screen TV parts, has 29%.

The company has also been able to keep raising money on the London Stock Exchange's AIM.  The last placing was in November 2006, when it raised £1.6m at 10p a share on London's AIM.  Then in April this year it issued £510,000 of convertible loan notes to existing shareholders, with a conversion price of 10p a share up to April 2010.

The first-half results, announced in September, showed turnover up from £91,000 to £354,000 – above the total for each of the past two years.  The company has never made a profit, but the interim pre-tax loss was down from £743,000 to £609,000.

But in spite of the clear support of the shareholders and the better results the share price has continued to slide, closing unchanged at 2½p yesterday, which gives it a market capitalization on London's AIM of just £1.86m.

Mr. Yewdall is quick to describe the company’s experience on London's AIM as “positive”, having provided access to capital and the ability to continue development.

Flight to quality

DDD caught my attention because Mark McGowan, its former chief financial officer for several years, sent me an e-mail about his consultancy, also based in Santa Monica and entitled AIM Advisers.  Mr. McGowan launched AIM Advisers in 2001 and uses his experience and expertise to identify and assist suitable U.S. companies with London AIM IPOs.

Assuming there are compelling reasons for a company to go public, if the company is not expected to command a market capitalization of at least $500m, it should favour the London Stock Exchange's AIM over the US markets, he argues.  Companies below this threshold are too small for the US markets.  They would get little attention from institutional investors, research analysts and the public.  The result is often a languishing share price, illiquidity and an inability to raise additional capital.

Sounds familiar, doesn’t it?  Well over 500 companies, or about a third of the dwindling total on London's AIM, have a market capitalization on the London Stock Exchange's AIM of less than £5m, including DDD, and suffer from the same problems.

DDD would not be able to join London's AIM now – it is too small.  So Mr. McGowan looks for U.S. companies with an international aspect that would have a market capitalization on London's AIM of about £100m and raise £20m to £25m.

He believes that when the international market revives on the London Stock Exchange's AIM, there will be a flight to quality that can be serviced from the myriad ranks of US small companies.  He hopes the next candidate will surface towards the end of next year.  It will be great if he is not just California Dreamin’.

London's AIM - U.S. Company IPO and Secondary Offering Activity - H1 2008

Highlights

• Number of listings on the London Stock Exchange's AIM and aggregate funds raised in London AIM IPOs drop by 77% and 82%, respectively
• Average funds raised for ‘operating companies’ listing on London's AIM increases from £20m to £23m
• IPO dilution on London's AIM decreases slightly from 30% to 28%
• £725m raised from IPOs on London's AIM for 25 U.S. companies listed on London's AIM across 16 industries since 2006
• U.S. ‘operating companies’ listed on the London Stock Exchange's AIM account for 17% of all operating company IPOs on London's AIM since 2006 

• Secondary offering market on London's AIM is healthy and stable with average holding firm at £7m
• 50% of all U.S. companies listed on London's AIM have completed at least one secondary on London's AIM since 2006
• £460m raised from secondary offerings on the London Stock Exchange's AIM for 45 U.S. companies listed on London's AIM since 2006

• Selling shareholder activity on London's AIM and U.S. accredited investor and QIB participation on London's AIM continues 

London AIM IPOs

While the London Stock Exchange's AIM has certainly not been immune to the global slowdown in IPOs, the codification of the AIM Nominated Adviser (Nomad) Rules in early 2007 has increased the scrutiny of prospective new company listings on London's AIM 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.  In addition, the trend which began in 2006, and continued throughout 2007 on London's AIM, of a significant number of Special Purpose Acquisition Corporations (SPACs) and Investment and Real Estate Funds completing IPOs on London's AIM has come to an end.  These factors cause the overall London Stock Exchange AIM market metrics to be misleading; therefore, the following tables distinguish between the London's AIM as a whole, which includes ‘investment vehicles’, and the ‘operating companies’ listed on London's AIM on a stand-alone basis.

The overall London Stock Exchange AIM market had a high proportion of ‘investment vehicle’ IPOs; 43%, 35% and 29% during H1 2007, H2 2007 and H1 2008, respectively.  While the number of ‘operating company’ IPOs on London's AIM increased during H2 2007, the average funds raised decreased but has since rebounded back up to the H1 2007 level of £21 million.

Entire Market      All Companies	Number of London AIM IPOs	Gross Funds Raised (in £ billions)	Average Funds Raised (in £ millions)
H1 2007	90	3.33	37
H2 2007	92	2.93	32
H1 2008	31	0.83	27

Exclusive of SPACs and Investment and Real Estate Funds:

Entire Market      ‘Operating Companies’	Number of London AIM IPOs	Gross Funds Raised (in £ billions)	Average Funds Raised (in £ millions)
H1 2007	51	1.05	21
H2 2007	60	0.94	16
H1 2008	22	0.46	21

The U.S. companies listed on London Stock Exchange's AIM were relatively immune from the ‘investment vehicle’ phenomenon on London's AIM with only two, one and none occurring during H1 2007, H2 2007 and H1 2008, respectively.  The increase in the average funds raised from listings on London's AIM during H2 2007 was an anomaly since five London Stock Exchange AIM IPOs which raised a total of £250 million came to market in July and August 2007.  While the limited number of London AIM IPOs in any given half year makes it difficult to draw firm conclusions, the results below are consistent with the £24 million average raised on London's AIM by the 50 U.S. ‘operating companies’ listed on London's AIM that completed IPOs on the London Stock Exchange's AIM from 2005 – 2007.

U.S. Companies      All Companies	Number of London AIM IPOs	Gross Funds Raised (in £ millions)	Average Funds Raised (in £ millions)
H1 2007	13	380	29
H2 2007	9	277	31
H1 2008	3	70	23

U.S. Companies      ‘Operating Companies’	Number of London AIM IPOs	Gross Funds Raised (in £ millions)	Average Funds Raised (in £ millions)
H1 2007	11	215	20
H2 2007	8	216	27
H1 2008	3	70	23

Since 2006, 25 U.S. companies listed on the London Stock Exchange's AIM and have raised an aggregate of £725 million via London AIM IPOs with 68% raising between £5 million and £50 million.  It should be noted that of the London AIM IPOs that individually raised more than £50 million, half (3 of 6) were for ‘investment vehicles’.

 

London AIM Dilution

As noted in the opening paragraph, market conditions on the London Stock Exchange's AIM have been challenging and, separately, AIM Nominated Advisers (Nomads) have increased their scrutiny of prospective new company listings on London's AIM.  The natural consequence of these two factors is that 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.  Since the decrease in dilution for the overall London AIM market has been significantly more pronounced than for the U.S. companies listed on London's AIM, it may be that the U.S. companies listed on the London Stock Exchange's AIM have, on average, typically been of higher quality with more compelling business propositions and stronger management teams.

 

London AIM Industry Dispersion

The 16 industries in which the 25 U.S.companies listed on London's AIM operate are quite diverse; however, there is a concentration of oil and gas producers listed on London's AIM in Texas and concentrations in technology, including; digital media, biotech and cleantech, between Boston and Washington D.C., in Florida and in California.  In fact, the “Automobiles & Parts” company listed on the London Stock Exchange's AIM in the chart below is a zero emissions vehicle manufacturer and the “Aerospace & Defense” company listed on the London Stock Exchange's AIM is a developer and manufacturer of composite armor products for military and commercial uses.

 

London AIM Secondary Offerings

The secondary offering market for U.S. companies listed on the London Stock Exchange's AIM is healthy and has been remarkably consistent; exclusive of two anomalies.  The first is the £50 million NASDAQ listing during H1 2007 of a U.S. company that completed a £25 million IPO on London's AIM in 2003.  The NASDAQ listing is considered a secondary offering on London's AIM.  The second is a U.S. company listed on the London Stock Exchange's AIM which raised a total of £101 million during H1 2008.  When these are excluded from the table below, the average secondary offering on London's AIM during H1 2007 and H1 2008 is £7.24 million and £6.66 million, respectively.  50% of all U.S. companies listed on London's AIM have completed at least one secondary offering on London's AIM since 2006.

All U.S. Companies	Number of London AIM Secondary Offerings	Gross Funds Raised (in £ millions)	Average Funds Raised (in £ millions)
H1 2007	16	161	10.08
H2 2007	13	98	7.56
H1 2008	16	201	12.56

London AIM Selling Shareholder Activity

The ability of existing shareholders to sell some or all of their holdings in a London Stock Exchange AIM IPO depends on a variety of factors; the most important of which are the strength of the company and the level of investor support.  Historically, from 2005 – 2007, 22% of U.S. company listings on London's AIM included selling shareholders who were often either founders of the company, longstanding members of executive management or the board or directors, commercial partners who had made a strategic investment in the company or VCs/PE Firms who invested in and nurtured the company for several years prior to its London Stock Exchange AIM IPO.  There were no such transactions on London's AIM during the first half of 2007 and only one during the first half of 2008 in which the Chairman and President, who had been with the company since 1969, sold 30% of his stake for £26 million.

While selling shareholders are most common in conjunction with a London AIM IPO, U.S. company insiders have sold in the aftermarket on London's AIM in organized transactions on three occasions since 2004; twice as part of secondary offerings on London's AIM and once on a standalone basis.  In all three instances, the companies were performing exceptionally well on London's AIM with the organized insider selling driven by a need to “satisfy excess demand” for the company’s London AIM-listed shares.  One such transaction occurred during the first half of 2007 in which executive management and certain non executive directors and employees realized £9 million for themselves as part of a £17 million secondary offering on the London Stock Exchange's AIM.  There were no such transactions during the first half of 2008.

U.S. London AIM Accredited Investor and Qualified Institutional Buyer (QIB) Activity

U.S. accredited investors and QIBs are permitted to participate in London Stock Exchange AIM IPOs and secondary offerings on London's AIM.  Historically, from 2005 – 2007, they have provided 20% of the funding for U.S. company listing on London's AIM and 20% of the secondary offering funds raised on London's AIM for those companies.  During the first half of 2007, one U.S. company listed on London's AIM completed a £61 million IPO which was entirely backed by U.S. accredited investors with no such transactions on London's AIM occurring during the first half of 2008.  In terms of secondary offerings on London's AIM, 37% of the funds raised for U.S. companies listed on the London Stock Exchange's AIM were provided by U.S. accredited investors during the first half of 2007; however, this is heavily skewed by the £50 million NASDAQ listing discussed above and would have otherwise been only 8%.  During the first half of 2008, U.S. accredited investors participated in 31% (5 of 16) of the secondary offerings on London's AIM, contributing 47% of the total funds raised on London's AIM, however, this too is skewed by £76 million of the £101 million discussed above and would have otherwise been only 14%.