By the tail end of 2008, there was real fear in the air as each day brought forth a new market calamity. In a week of utter panic last October, £2.7 trillion was wiped off the value of shares globally.
Investors are now acclimatised to the markets and CEOs have rolled up their sleeves to get on with the job of running their companies. Rex Orton, FD of the Main Market-listed company Latchways, which makes fall-arrest safety systems, says, ‘It’s been a difficult 12 months if I’m honest. Just over a quarter to a third of our business is construction facing and that has suffered quite significantly.’
Things are improving. Orton observes that those parts of the business not exposed to the recession, such as clients in the energy and military sectors, have performed ‘quite well’. It’s also helped having a spread of clients outside the UK. ‘Holland, Germany and to some extent France and Spain have held up well for us,’ he says.
For the most recent year end, Latchways grew revenue by five per cent to £37 million. Orton says the strategy has been to keep running the company as a long-term proposition. ‘We’re not going to slash marketing and new product spend, as that’s our future.’
Given the market turmoil, he says the share price has remained steady. ‘We are still on a decent multiple in relation to the market and shareholders have been very supportive throughout,’ he says, noting that the company has yet to raise secondary funds and the focus will be very much on organic growth next year.
Early mover
Jonathan Straight, the CEO of AIM-listed Straight plc, a supplier of waste containers, observes that changes to the business made in 2008 have served the company well. ‘I have to say that, so far, we haven’t seen the effect of the macro-economic conditions. Without sounding complacent, we had basically fixed our problems and our performance in 2009 has been significantly better than in the previous two years,’ he says.
As for being a listed company, the only concern Straight has relates more to the mechanics of AIM’s share trading system. ‘I feel there is too much that happens in terms of trade that seems to circumvent the market. Someone recently bought 25,000 of our shares and the price fell. Now that obviously happened because someone sold them for lower than the market price. Why would someone do that? Why is someone able to do that? There is a lot with the market that I think isn’t right.’
Straight is sceptical about a solution being found. ‘How can there be a solution to the share price issue when everyone denies it’s happening?’ he states.
Peter Hagerty describes himself as a ‘markets fanatic’. However, like Straight, he has concerns. The chairman of listed software company Arteon says ‘AIM is the best example of its kind in the world, but it has a lot to do in order to regain the confidence of its investor base’.
Primarily, he questions the validity of having market-makers, who set a buy-and-sell price for equity. ‘I’m not sure the economics of being a market-maker lead to improved liquidity for a significant number of AIM stocks. I wonder to what extent they do provide liquidity and whether the cost of them as an industry is worthwhile,’ he argues.
The number of companies leaving AIM is also damaging the reputation of the market, claims Hagerty. ‘From a company law point of view, it’s possible to demonstrate that it’s in your investors’ interest to delist. But it’s easy to forget that when people buy listed stock, regardless of the risk warning, they generally speaking expect it to remain listed.’
Overall, Hagerty believes that AIM needs to shake the ‘dangerous perception’ that it is run for the benefits of the companies and advisers on it, rather than the shareholders. ‘The establishment protects itself,’ he claims.
Cash to burn
How widespread such concerns are is open to debate. Evidently, many CEOs are turning their attention to using the full potential of the junior markets, such as AIM-listed professional services firm Tenon looking to raise £40 million to acquire rival firm RSM Bentley Jennison.
In fact, there are signs that confidence is returning to the growth markets. On PLUS-quoted, the junior exchange steered by former AIM boss Simon Brickles, Frontier IP recently raised just shy of £1 million.
Chilton Taylor, head of capital markets at accountancy firm Baker Tilly, observes that he fully expects to see IPOs make a comeback next year. He draws great encouragement from the secondary fundraising activity on AIM and observes that the attractions of equity finance can only grow.
‘Institutions do have funds to invest,’ he says. ‘Moreover, without the availability of bank debt, we have a situation where the equity markets will become a sort of exit route for private equity firms.’
Unlike Hagerty, Taylor sees the companies leaving AIM as a positive step. ‘Over 500 companies have delisted since the beginning of last year. That’s a healthy thing for the market as over half of those had a market cap below £3 million. It has cleared out a lot of the small, possibly unsuitable companies.’
Any sensible CEO won’t be taking too much notice of their company’s share price at the moment, although many will be reassured to see that institutions are backing companies with significant sums when necessary.
The priority, as ever, will be to run the business efficiently and try to grow. ‘In the current climate, good businesses can do better but companies that have fundamental problems will fall off a cliff,’ warns Straight.
