Alternatives find a market
The success of the LSE’s AIM has highlighted a sentiment shift among investors and issuers to alternative listing platforms. A rise in international listings has played a big part in the growth but, if the US relaxes its rules, that impact could be diluted as Ian Forrest reports.
There is no disputing the success of AIM since inception in 1995. The real growth, however, began in 2004 when admissions leapt from 162 to 355. The amount of money raised, both from IPOs and follow-on offerings, has also grown substantially. In 1995 flotations raised £514m, rising to £9.9bn for 2006. Secondary offerings, which are possibly a greater demonstration of the faith that investors have in a market, grew from £302m to £5.7bn over the same period.
Overseas companies have played a large part in that growth, particularly over the past three years. Just 16 overseas companies were listed in 2003, rising to 124 in 2006. So far this year, a further 39 have joined the market, meaning that 24% of its members now come from outside the UK.
Much of this is down to a growing awareness of AIM around the world, helped by the LSE’s decision to set up teams focusing on different regions. The recent takeover of Italian exchange Borsa Italiana should also give a welcome boost to AIM’s visibility in continental Europe.
Lower listing fees are a big part of the attraction, with added benefits of no minimum freefloat required and no minimum track record rule. Another big attraction is the location. London has long been regarded as the ideal place to list, because of the size of the investor base and the number of investors with knowledge of the small-to-mid-cap sector in the UK. And small to mid-caps can gain the sort of visibility on AIM that would be difficult on a senior market.
“Companies with a market capitalisation of less than US$1bn find it hard to generate interest from institutional investors and analysts”. Tracey Pierce, head of global business development at the LSE.
The tightening of US market regulations, following Sarbanes-Oxley, and the US requirement for quarterly reporting has also driven an increasing number of North American firms to London’s AIM.
The number of admissions by US companies grew 39% last year to 25, and 13 more have joined the market so far this year. US securities laws require that their shares trade in certificate form for the first two years. That has naturally led to settlement and liquidity problems for some companies.
The huge growth in international admissions, and criticism from oversease exchange operators, particularly in the US, led the LSE to review AIM’s regulatory structure. The LSE’s main market is regulated by the UK Listing Authority. By contrast, AIM is regulated by its own in-house team. The FSA officially supervises the regulation of AIM, but day-to-day management is left in-house.
The review resulted in the introduction of stricter procedures for companies with a market capitalisation above £300m and those listing GDRs. Another outcome was the adoption of a formal rule book for nominated advisers (nomads). Alongside the new nomad rulebook, regulations have also been introduced this year requiring companies to maintain a website and disclose information in areas such as corporate governance.
Some of AIM’s success, however, comes down to the fact that many of its members simply did not qualify for a listing elsewhere. It has been described as “dangerous” by US billionaire financier Wilbur Ross, who highlighted that a number of companies had fallen far short of the business performance they had been forecasting when they floated on AIM.
However, other bankers say that investors are aware that AIM is intended for small, early stage growth companies that do not meet the requirements of the main market, and the level of risk is bound to be greater.
“Ultimately, the proof of the pudding has been in the eating. An ever increasing number of institutional investors have been prepared to put their clients’ money into AIM,” said Marcus Stuttard, the deputy head of AIM.
Alternext and First North, the junior markets of Euronext and OMX respectively, are much smaller than AIM but have also grown rapidly. Alternext recently celebrated its 100th listing, raising over €1bn from IPOs and follow-on deals since it was established two years ago. First North started life in May 2006 and now has 116 members.
AIM’s future depends as much on the future of its parent, as it does on expanding the geographic reach. Nasdaq’s influence over the platform through its 31% holding in the LSE looks set to be removed. The US exchange’s stake in the LSE will be reduced to just 22% following the LSE’s acquisition of Borsa Italiana, and Nasdaq is now looking at strategic options for a disposal of its holding.