The past year has been undeniably challenging for global equity markets, and the previously buoyant AIM IPO pipeline, a source of great strength during the bull market run, has come to an abrupt halt in the midst of the current market malaise.

In 2003, M&A’s sister publication Growth Company Investor surveyed the declarable institutional holdings of 702 AIM companies, collectively valued at £14.6 billion, in its inaugural assessment of the market’s institutional investors. By the time of last year’s research, the dramatic development in the size and scope of the market was reflected in a total of 1,688 ventures surveyed, which together were valued at around £119 billion.

Sustaining this pace of growth would have been difficult enough in ideal market conditions, let alone the tightening credit environment that we have experienced over the past 12 months, and more. So it is hardly surprising that our 2008 survey reveals a significant level of retrenchment from the peaks of 2007.

Our sixth report surveys 1,626 companies collectively valued (at the end of August 2008) at £78.1 billion. However, it is important to remember that, while the approximate market value of AIM has declined by about 35 per cent during the past 12 months, the above figure still means that AIM has grown more than fivefold, in value terms, since our research into this topic began.

Sticking to what they know

One key conclusion is that, despite the generally unfavourable background for equity investments, AIM continues to show strong levels of activity in its further issues market, with the money raised in secondary and other further fundraisings in the past two years having outstripped that accumulated at float for the first time since 1999.

Significantly, in the first eight months of 2008, 160 per cent more funds have been attracted through further fundraisings than through IPOs. However, this is a reflection of the fact that IPO activity has pretty much fallen off a cliff, down from £9.1 billion in the 12 months to the end of August 2007 to less than £2.5 billion in the corresponding period to end August 2008.

Secondary fundraising has also shrunk from £9.5 billion to £4.7 billion on the same basis, but at least this demonstrates that investors are more willing to provide cash to companies that have already gone some way to proving their worth, underlining the importance for growing companies of fostering long-term ties with supportive investors, especially institutional ones.

In for the long haul

There is also evidence that institutional investors are taking a longer-term view of their AIM holdings. This year, we have found that institutions still speak for £39 billion worth of AIM shares, representing 50 per cent of the total. So although this represents a sharp drop in terms of the absolute value of total institutional AIM holdings compared to 12 months ago (down from £55.2 billion), the proportion, at around half the total, is significantly higher.

Neither figure matches the peak for institutional AIM market share. Our 2006 survey showed institutional holdings accounting for 56.7 per cent of the total, an investment totalling £42.9 billion, higher than the current total. But the figures in our 2008 survey point to a high degree of “stickability” to institutional cash.

What is happening here is that, as the total value of shares quoted on AIM falls, institutional investors are getting a larger slice of a smaller cake. Of course, most institutional investors have discarded some of their AIM holdings, while seeing the value of others fall, but seem to have been content to ride out the present storms with the bulk of their AIM holdings intact.

And while the IPO pipeline has come to a halt, of the 124 new companies to come to AIM in the past year, institutional investors stlll controlled at least £2.8 billion of a collective capitalisation of £29.4 million, ten per cent of the market value of recent new issues.

The most active institutions

For the second year running, the list of most powerful institutions by investment value (see Table 1) is led by BlackRock, the product of the earlier merger between fund management giants BlackRock and Merrill Lynch Investment Managers. Its 162 investments – in companies ranging from biometrics technology business RCG Holdings to investment bank Numis Corporation – are collectively worth £1.46 billion, reduced from the £1.66 billion of AIM assets controlled a year ago.

This is yet still £488 million higher than the portion of AIM controlled by next-in-line Invesco. This UK investment management giant retains its second spot this year, despite a significant fall in the number of its holdings from 102 to 80 and in value from £1.34 billion to £969.8 million.

Transfer activity

The most significant change in the list of key institutional investors, however, is that AXA Investment Managers has dropped from third spot and out of the top ten altogether. This is due to a dramatic decline in both the value and number of its AIM holdings – from 172 holdings to 138 and a total value of £998.53 million reducing to £424.88 million, a decline of 57.5 per cent.

AXA’s slide down the AIM investors’ pecking order is partially explained by the general retrenchment that has affected the whole market, but a key factor was the fact that it lost the management contract for the portfolio of the Throgmorton Investment Trust in the summer.

Throgmorton is a well-established small-cap specialist investment trust that had been run since the early 1960s by Framlington, a company AXA acquired a couple of years ago. At the time of last year’s survey, Throgmorton had assets of around £353 million, just under half of which was invested in AIM companies.

Over the intervening 12 months, the trust has shrunk significantly in size, and in June its board took the decision to move the management contract to BlackRock, thereby not only removing a pool of AIM assets from AXA’s total (Throgmorton’s AIM portfolio was valued at £145.9 million in its last annual report, to 30 November 2007), but boosting BlackRock’s figures in the process.

Moving up from sixth to third spot is Artemis Investment Management, whose AIM holdings appear to have better weathered market storms. Further down the table, eyes are drawn to the presence of fallen US investment banking institution Lehman Brothers, whose 46 AIM holdings actually increased in value from £384 million to £414.2 million during the period under review.

Serial AIM backers

BlackRock is also the most active institution by number of investments (Table 2), having backed the highest number of AIM companies, with 162. Interestingly, of last year’s top ten institutions, only two, BlackRock and Artemis, have more AIM investments this time around.

Once again, there is much jostling for position, with last year’s leader, AXA Investment Managers, pushed back into joint second with 138 investments, down from 172 last time. This figure is now matched by Artemis, which has increased its number of company holdings by six.

The decline of AXA’s total number of AIM holdings and the comparative stability of BlackRock’s total is at least partially explained by the transfer of Throgmorton Investment Trust. Most of the reduction in the total number of AXA’s AIM holdings is accounted for in the £50 million to £100 million capitalisation range, down from 45 such holdings to just 18.

Tellingly, two serial AIM backers, F&C Asset Management and Fidelity International, have sold out of a number of their positions in the junior market, reducing their investments from 145 to 88 and 155 to 131 respectively.

Similarly RAB Capital, the AIM-quoted hedge fund group that has suffered amid recent unreceptive market conditions, is to be found on just 84 shareholder registers, many of them in the resources sector, a reduction of 18 companies year on year.

Property bubble bursts

Examining institutions’ shifting partiality to various sectors in terms of value (Table 3), an important finding is the decline in the value of the investments within leading sector categories.

Oil and gas producers has knocked real estate off its perch – this on a decline in institutional investment value from £5.95 billion to £5.80 billion, which occurred despite an increase in the number of investments from 511 to 515.

However, the most marked finding of this part of the research is the bursting of the property bubble, with the real estate sector having plummeted from £8.62 billion in 2007 (from 581 investments) to £4.59 billion following a dire year for the credit crunch-hit sector.

Buoyed by new issues and a glut of overseas property funds listing on AIM, the real estate sector had come from nowhere to dominate this table last year. Back in 2005, the number of separate investments in the sector was a mere 102, collectively valued at £415 million, a figure which then burgeoned to £4.7 billion in 2006 as the number of investment ramped up to 301 and then approached 600 investments last year.

Another notable finding is that the mining sector, previously comprised of 920 investments, has declined from £6.59 billion in value to only £5.78 billion from a lesser 869 individual holdings.

New issues

The stream of new companies joining the market has slowed to a trickle, yet investors have continued to back companies they believe in. In AIM IPOs of the past 12 months, Invesco has invested the most money (Table 4), with £70.8 million, helping to fund expansionary vets group CVS, non-life insurer Abbey Protection and quantity surveyor Cyril Sweett. Next are Credit Suisse and listed investment trust Caledonia Investments, with £67.3 million and £64.9 million from their two shareholdings each. In terms of the most active backers, these have been jointly F&C and Artemis, which have each contributed to the fundraisings of nine newcomers.

The lower echelons

Every institution and fund manager has its own guidelines and attitude towards the size of companies they are inclined to back. With AIM containing companies varying in size from over £2 billion to those valued at under £1 million, we thought it useful to examine differing strata at the smaller end of the market: those institutions investing in companies valued at below £5 million (Table 5), between £5 million and £10 million, £10 million and £50 million, £50 and £100 million, £100 and £200 million, and £200 and £500 million, further details of which can be found in the tables in our full report.

Reassuringly, a glut of well-known institutional names remain healthily invested at this end of the AIM market.

Notes to the report

1. The statistics and tables in this report refer to the ‘legally declarable’ holdings of institutions. For AIM companies, this is three per cent or above. Holdings below that threshold have been excluded.

2. All figures are correct as of August 2008, when data was exported from Growth Company Investor’s online database containing comprehensive information and data of all AIM companies.

3. A nominee account is one in which the named holder is the legal owner of the shares, yet holds the assets in it on behalf of another, the beneficiary. To unearth the underlying owner of a nominee stake, a company or its registrar must issue a Section 212 notice requiring the nominee to disclose the name of the beneficial owner of the shares so that it can know for whom the nominee is acting.

4. By ‘institutions’, when calculating their total value held in the market, only those shareholders with at least three declarable holdings were included.

See also: Institutional investors embedded into AIM