‘This is the worst I’ve seen,’ says Peter Jay, executive chairman of Mountfield, which provides support services in the construction and property sectors and floated on AIM last December. ‘I’ve been working in the markets for over 20 years, and in other recessions it was quiet for a while but the lulls only lasted for about a year and you could always see the end. The current state of the market is unparalleled.’

The index of companies on the Alternative Investment Market (AIM) fell to its all-time lowest ebb during the winter – from over 1,000 points early last year to a murky trough of under 450 points where it remained for most of the six months from November until late April 2009. IPOs on AIM, which numbered in the hundreds each year from the turn of the millennium to 2007, fell from 87 in 2008 to five so far in 2009.

Although Jay’s lament is understandable, reports of the death of AIM – to paraphrase the famous misquote of Mark Twain – have been greatly exaggerated.  

While November to March were very bleak,’ admits Clive Carver, head of corporate finance at specialist small-cap broker FinnCap, ‘from April on, it’s just got stronger and stronger. We’re working on three IPOs that are under way at the moment and all of them are looking for cash.’

End of the night

Looking back, it seems the junior markets never stood a chance. Smaller companies are seen as inherently riskier by retail investors and so when market conditions deteriorated, the money drained out of fund managers’ pots and there was little reason for companies to come to market.

‘IPO expenses, even for smaller companies, total up to £500,000 before commissions,’ notes Carver. ‘It’s a brave company that wanted to go ahead with that [during the downturn]. People perceive smaller companies as high risk and illiquid, so valuations have been lower and companies have not wanted to accept that. It’s not surprising the pipeline’s got blocked.’

While institutional investors are unwilling to back new companies, many are supporting companies they have already backed – a case of better the devil you know. As a consequence, brokers have been able to raise considerable sums via the secondary market.

‘This is the way recoveries in the past have worked,’ recalls Paul Tetlow, capital markets partner at law firm Hunton & Williams. ‘In the post-dotcom era, people started to do secondary fundings to keep businesses alive, even if they were only small. I think that will continue.

‘The money is still there and there is still an appetite. I think that as the economy improves, activity rates will start to improve in secondary and eventually IPO fundraisings – but I believe there will be a retrenchment away from speculative companies.’

Down but not out

In 2008, more than three times the money was raised for existing AIM plcs than for new IPOs (see chart overleaf). Up until the end of July 2009, the £300 million raised by the three AIM newcomers has been dwarfed by £2.3 billion of secondary fundraisings, the fourth-highest in AIM’s history.

FinnCap has helped raise £3.2 million for medical devices hopeful LiDCO, £4.1 million for mobile phone software play Synchronica and £3 million for wireless technology business Toumaz. This fundraising has gone ahead despite all three companies reporting not-inconsiderable losses in their most recent results.  

James Noble, a senior director at entrepreneurial small-cap broker Astaire and AIM-listed investment group Evolve Capital, observes that a public listing remains both a viable and valuable option for growing companies.

‘There is money out there,’ he says. ‘But the options are limited as venture capital firms are running very short of cash and they are imposing stronger demands on their investments. It’s difficult to market a company that’s only just starting up if you want to raise money. One problem is that venture capital firms are insisting on fancier and fancier types of shares to protect themselves. You avoid all that by floating, as you generally have just one type of share.’

While that may be true, there’s a lot more to consider – such as regulatory compliance – when contemplating a float. The strictures of the market are such that only the best projects are getting through – although that doesn’t mean only larger companies are deemed suitable. Noble says that one of the key new tenets is that ‘a business’s milestones must be clearly defined and near term’.

He continues: ‘There’s not a lot of money for really interesting projects that will take five years; that’s very difficult now. There is money if it isn’t being used for pure research and development, but to take products to market.’

Stephen Roberts, corporate finance head at Daniel Stewart, adds that nothing is likely to be going ahead without the say-so of the people with the money. ‘Everything we’re doing now will have a pre-marketing element [where] we get the view of institutions first.’

Likewise, Richard Thornhill, capital markets director at Big Four firm Deloitte, adds that ‘new companies will face a lot more scrutiny. Inexperienced companies, of which there are many on AIM, have disappointed their investors in the past and people need good reputations.’

An acquired taste

Among AIM’s 1,336 companies, 86 per cent now have a market cap of less than £50 million. For these companies, there is the long-standing issue of liquidity as they often fail to appear on the radars of brokers and institutional investors. Moreover, AIM has traditionally been an excellent platform for acquisitions, and this too is proving difficult.  

Mountfield’s Jay argues: ‘Unfortunately, we’ve found that the better-quality businesses have had an unusually high sense of their own value. I would say that valuations for good businesses have even gone up rather than down in the recession as they see themselves as rarities and are therefore asking for more.’

Adds Thornhill: ‘It is still quite fragile out there. If one or two high-profile fundraisings fail and people don’t raise what they expect, that could change sentiment. But things are more optimistic than at any time since the beginning of 2008.’

Broker Hanson Westhouse, whose five fundraisings in the past three months have included £22.4 million for Nighthawk Energy, is unusual in being an adviser to AIM companies and also recently listing on AIM itself, having completed a reverse takeover of Sovgem in June. Chief executive Bill Staple insists that AIM has proved a lucrative stomping ground ‘compared with a lot of private capital and many overseas markets because it is more receptive to new ideas and new areas of investment’.

But there’s no denying that the credit crunch will enforce the adoption of new attitudes in its wake. ‘[AIM] has matured to an extent where there’s not really any longer a market for £5 million and £10 million companies,’ adds Staple. ‘A lot of [investment] funds have been hit very hard by having situations in small companies, and at that size they are not going to be able to easily trade out of their positions.’

Half the companies on AIM currently have a market cap of £10 million or under. Clearly, valuations will rise, but the feeling among many advisers is that the smaller companies will look to go elsewhere, and this is borne out by 273 companies leaving the exchange during the past 12 months – this includes companies moving to the Official List, being acquired, delisting or becoming insolvent.

Says Staple: ‘AIM is not for everyone. I do still think we will see some “micro-cap” companies listing, but many smaller companies are looking to raise pre-IPO money privately and then list at a later stage.’

PLUS signs

A market pitching itself as more suitable for ambitious micro-caps is PLUS-quoted, which forms part of PLUS Markets. This is a Recognised Investment Exchange operated by PLUS Markets Group, which also offers rival share-trading platforms to AIM and several tiers of the full London Stock Exchange.

Noble, who is also chairman of April PLUS entrant 3D Diagnostic Imaging, says: ‘I think being a PLUS company, without the same level of requirements for lots of documentation [as other more regulated exchanges], allows you to keep your head down until you have real news to report.’

January entrant dotDigital has positively thrived since arriving on the market after reversing into PLUS-quoted West End Ventures, a cash shell with a couple of old market hands on the board and £806,000 in its coffers.

Chief executive Peter Simmonds, who has taken the extra demands of listing solely on his shoulders so his fellow directors can carry on regardless, says that although it has been ‘business as usual’, being a plc ‘really helps when we’re selling to customers’, and he thinks it’s been a key factor in a huge leap in the number of clients that the company now has on its books, which has grown from around 1,100 to 2,300.

His advice to prospective entrepreneurs thinking about following his route is to ‘pick the right advisers – and try to get a fixed price from your advisers for the float, otherwise the fees can run away’.

PLUS-quoted has 201 companies registered, with their combined valuation rising by over a third to £2.5 billion according to a new report from Vantis, though the PLUS All-Share Index fell by nearly 20 per cent in the first six months of the year. There have been 12 new admissions in that time, and a total of 27 in the past 12 months.

While companies that choose PLUS typically have smaller fundraising expectations, this year has seen a number of sizeable listings and more than 60 secondary fundraisings.

AIM endures

The hope of many CEOs and advisers is that 2010 cannot possibly be as austere as 2009, especially the situation at the start of this year. Throughout this time, funds have been raised, companies have endured and a number are now intending to go on the offensive and use the exchanges to grow through fundraisings and acquisitions.

Tetlow says: ‘AIM is supposed to be a growth market. People forget that you will always have failures and, of course, not every growing company survives. The thing is that they had promise and, though they may not have brought their product to market or produced profits, they were given an opportunity.

‘AIM is an arena where investors are aware that there is a high degree of risk. I believe there will continue to be people who want opportunities to take risk as that is where there is the potential for the greatest capital growth.’

Jay, for one, is showing no regrets about taking the company public: ‘One reason is the discipline that the listing imposes – through the brokers, nomads, lawyers, accountants and the media. It’s good for the company as it accelerates the integration of its business.

‘When you’re private, you can make up the rules as you go along. But when you’re under the public company spotlight, and you have to report your results twice a year, you can’t put off things until next year. It helps cohesion and focus.’