London's AIM - U.S. Company Performance - Share Price and Liquidity - H1 2012

The 23 U.S. domiciled companies listed on the London Stock Exchange's AIM achieved a weighted return of 31% and the 31 foreign domiciled U.S. operating companies listed on London's AIM registered a weighted loss of 8%; versus a loss of 3% for the FTSE AIM All-Share Index during the first half of 2012.  The post below provides additional insights.

One of the three largest contributors to the 31% weighted gain achieved by the U.S. companies listed on London's AIM filed a registration statement with the SEC during 2011 for a proposed U.S. IPO on NASDAQ and intends to remain listed on the London Stock Exchange's AIM and another completed its U.S. IPO during 2011 on NYSE MKT, the small cap tier of NYSE Euronext.  The absolute returns for these two U.S. companies listed on London's AIM during the first six months of 2012 were 59% and 270%, respectively.  This is the natural, 3 - 5 year evolution for U.S. companies that complete their initial IPOs on the London Stock Exchange's AIM, using it as a platform for the achievement of commercial success and a dual listing on the U.S. public markets.

With two London AIM IPOs of U.S. companies during the first half of 2012, the pipeline remains healthy.

Highlights

• U.S. domiciled companies* listed on the London Stock Exchange's AIM achieve a weighted return of 31%
• Foreign domiciled U.S. operating companies** listed on London's AIM register a weighted loss of 8%
• FTSE AIM All-Share Index lost 3%
• Significant liquidity difference between U.S. and foreign domiciled U.S. companies listed on London's AIM

There were 23 U.S. domiciled companies listed on London's AIM and 33 foreign domiciled U.S. operating companies listed on the London Stock Exchange's AIM as of the beginning and end of the first half of 2012, with two delisting and two joining via London AIM IPO.  Of the two U.S. companies that left London's AIM; one was acquired by its largest shareholder (30%) at the market price as a result of the company’s exposure to MF Global as a large customer and, more importantly, a significant creditor and the other simply never developed its business to sufficient scale and, as a result, suffered from a low market cap and lack of trading liquidity on the London Stock Exchange's AIM in its shares.  The two additions to London's AIM from the U.S. were both via IPO.

The two U.S. companies that left the London Stock Exchange's AIM are not included in the chart and analysis below because their market caps were relatively small; therefore, the effect on the share price return analysis would be immaterial.  The two that joined London's AIM are also not included because their London AIM IPOs occurred towards the end of the first half of 2012.

 

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

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

Index	Unweighted	Weighted
U.S. Domiciled Companies	5%	31%
Foreign Domiciled Companies	0%	(8%)
FTSE AIM All-Share Index	N/A	(3%)

The weighted return contributions for the U.S. domiciled companies listed on London's AIM were tightly packed between +2% and -3%, with three exceptions, where 10%, 12% and 14% weighted gains were achieved (absolute gains of 59%, 93% and 270%).  One of the gainers filed a registration statement with the SEC during 2011 for a proposed U.S. IPO on NASDAQ and intends to remain listed on London's AIM after the completion of its U.S. IPO, the other U.S. company listed on London's AIM had some success with its copper and gold mines and the final gainer is a U.S. biotech company listed on London's AIM that completed its U.S. IPO on NYSE MKT, the small cap tier of NYSE Euronext (the old NYSE AMEX) during 2011 and achieved some clinical trial and related regulatory success.  The weighted return contributions for the foreign domiciled U.S. operating companies listed on the London Stock Exchange's AIM were all tightly packed between +1% and -3%.

Weighted results are typically a self-fulfilling prophecy.  Companies listed on London's AIM with increasing share prices, and therefore increasing market capitalizations, become more heavily weighted relative to those with decreasing share prices/market capitalizations.  In addition, a company listed on the London Stock Exchange's AIM that is performing well has a better chance of completing a secondary offering on London's AIM and for its share price to hold up relative to the dilutive effects, further increasing its market capitalization and relative weighting.  When these factors are controlled for by weighting the companies’ returns by their market capitalizations on London's AIM as of the beginning of 2012, as expected, the 23 U.S. domiciled companies listed on the London Stock Exchange's AIM only gained 13% and the 31 foreign domiciled U.S. operating companies listed on London's AIM lost more at 12%.

In terms of average monthly liquidity on the London Stock Exchange'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's AIM 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 on London's AIM.  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.  For the U.S. domiciled companies listed on the London Stock Exchange's AIM, the reversed relationship likely reflects a slight bias towards investment in smaller companies listed on London's AIM that are viewed as undervalued.  For the foreign domiciled U.S. operating companies listed on London's AIM, this was likely the result of London AIM investors exiting small companies listed on the London Stock Exchange's AIM in which they were no longer comfortable with the risk/reward relationship, as evidenced by the foreign domiciled U.S. operating companies share price underperformance relative to the U.S. domiciled companies listed on London'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's AIM
Weighted	1.63%	1.14%	5.81%
Unweighted	4.78%	1.35%	3.36%

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.  Liquidity on London's AIM was improving during the first three months of the first half of 2012; however, an escalation of the Eurozone crisis, the Queen’s Diamond Jubilee and the start of summer caused a pullback in liquidity on the London Stock Exchange's AIM during the final three months.

 

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

London's AIM - Secondary Offering Activity - H1 2012

Secondary Offering activity on the London Stock Exchange's AIM rebounded by 29% during the first half of 2012 with £1.5 billion ($2.4 billion) raised.  25% of the 1,100 companies listed on London's AIM completed a secondary offering on London's AIM during the first half of 2012, raising an average of £5 million ($8 million).

The effects of QE2 and the debt ceiling debate et al. over the last two years, along with the current state-of-play and future outlook, are described in detail in this post.

Highlights

• Secondary offering market on the London Stock Exchange's AIM rebounds by 29% during H1 2012 

• £1.5 billion ($2.4 billion) raised in secondary offerings on London's AIM during H1 2012

• Unsurprisingly, global macroeconomics are correlated with London Stock Exchange AIM secondary offering activity
• QE2 created a surge in activity during H2 2010 that carried into H1 2011
• Debt ceiling debate et al. caused a contraction in activity during H2 2011
• Data shows these events cut across all aspects of the secondary offering market
• Gross capital raised on London's AIM
• Relative number of London AIM-listed companies accessing the market
• Distribution of capital raises on London's AIM
• Average capital raised on London's AIM

• Relative number of London AIM-listed companies completing secondary offerings rebounds

    H1 2010 - 24%        H2 2010 - 32%        H1 2011 - 27%        H2 2011 - 18%        H1 2012 - 25%

• Distribution of secondary offerings on the London Stock Exchange's AIM improve during H1 2012 but back to H1 2010 levels

• Average size of H1 2012 secondaries on London's AIM lower than before QE2 but for a positive reason

H1 2010 - £7m ($11m)                      H2 2010 - £9m ($14m) 

H1 2011 - £8m ($13m)                      H2 2011 - £6m ($10m)

H1 2012 - £5m ($8m)

• Companies are maturing, as is London's AIM in its 17^th year, and simply require less growth capital

• Current level of uncertainty mirrors H1 2010, leaving investors cautious and selective

• QE3 would certainly create an uptick in London Stock Exchange AIM secondary offering activity but not nearly as dramatic as QE2

	London AIM IPO Funds Raised (in £ millions)	London AIM Secondary Offering Funds Raised (in £ millions)
H1 2010	351	2,185
H2 2010	666	3,553
H1 2011	265	2,451
H2 2011	295	1,165
H1 2012	200	1,505
Total	1,777	10,859

The success of the secondary offering market on the London Stock Exchange's AIM is indisputable, which is the defining characteristic of a mature market.  Since 2010, secondary offering funds raised on London's AIM have outpaced IPO funds raised on London's AIM by more than 6:1.  The expectation is that this ratio will cut in half over the next few years, in line with the macroeconomic healing process, as investors’ risk profiles gradually shift back towards London AIM IPOs.  The early-stage growth profile and/or attractive valuations for companies listed on London's AIM that are ‘known quantities’ have been the main drivers of secondary offering activity.

Unsurprisingly, global macroeconomic developments are highly correlated with secondary offering activity on London's AIM.  The pattern is easy to spot with respect to the gross secondary offering funds raised on the London Stock Exchange's AIM since an average of 1,200 companies have been listed on London AIM since 2010 (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 half-year.

When QE2 was launched during the summer of 2010, secondary offering activity on the London Stock Exchange's AIM surged, which carried over, with diminishing effect, into the first half of 2011.  When the debt ceiling debate et al. unfolded during the summer of 2011, secondary offering activity on London's AIM contracted and began to recover during the first half of 2012.  These events cut across all aspects of the London AIM secondary offering market.

The chart below shows that the relative number of London Stock Exchange AIM-listed companies completing secondary offerings is consistent with the pattern of gross secondary offering funds raised on London's AIM described above.

 

The table below shows that the distribution of gross funds raised from secondary offerings on London's AIM is also consistent with these patterns; shifting from smaller to larger to even smaller, with the first half of 2012 essentially back to the distribution during the first half of 2010.

(in £ millions)	H1 2010	H2 2010	H1 2011	H2 2011	H1 2012
< 3	68%	64%	65%	71%	69%
3 - 5	18%	19%	16%	16%	19%
10 - 50	11%	12%	16%	11%	10%
> 50	3%	5%	3%	2%	2%

The final table below shows that the average gross funds raised from secondary offerings on London's AIM also follows the pattern; however, there is one very important exception, the average during the first half of 2012 remained broadly in line with the average during the second half of 2011, as opposed to rising back up to, or around, pre-QE2 levels.  On the surface, one might conclude that the companies listed on London's AIM that completed secondary offerings on the London Stock Exchange's AIM during the first half of 2012 simply could not raise more capital; however, the fact is that these companies, and London's AIM now in its 17^th year, have matured greatly over the last two years and simply require less growth capital.

	Number of Secondaries*	Gross Funds Raised (in £ millions)	Average Funds Raised (in £ millions)
H1 2010	307	2,185	7.12
H2 2010	384	3,553	9.25
H1 2011	320	2,451	7.66
H2 2011	204	1,165	5.71
H1 2012	284	1,505	5.30
Total	1,499	10,859	7.24

*   This is the number of discrete secondary offering transactions.  Some companies completed more than one secondary offering per half-year.

If one were to look back to 2008 and 2009, the vast majority of weak companies listed on London's AIM were expelled in the wake of the global financial crisis as investors selected those that would remain listed on London's AIM by providing access to secondary offering funds on the London Stock Exchange's AIM.  Generally speaking, secondary offering funds raised on London's AIM since 2009 have been used to execute on organic and/or acquisitive growth opportunities.

The current level of uncertainty mirrors the first half of 2010, leaving investors cautious and selective.  If QE3 is launched, one would certainly expect an uptick in secondary offering activity on London's AIM, however, the effect will likely not be nearly as dramatic as QE2.