AIM has been a constant for growth companies seeking scale-up capital for close to a quarter of a century. In its best year, 2005, it facilitated 387 IPOs and now boasts some 920 listings. Yet, in recent years, a whole range of funding alternatives have emerged to challenge AIM’s pre-eminence, including regional debt and equity funds, peer-to-peer lending platforms, SME direct lending funds, institutions such as the British Business Bank, as well as private equity and venture capital houses flush with funds to invest.
Private equity and venture capital funds probably represent the most substantial competition. The former invested close to £5 billion in SMEs over the last five years and in 2018 alone VC funds raised some £2.3 billion to invest in growth companies. P2P lending has also grown fast and now totals £2.4 billion, according to the most recent British Business Bank, Small Business Finance Market report, and although SME direct lending has moderated it is still a substantial sector.
These alternative forms of investment present challenges for AIM.
Some analysts have suggested that AIM no longer fulfils its original objective of helping growth companies raise capital, and is now a market dominated by established, profitable and dividend-paying companies. They also argue that there is a lack of liquidity and it neglects areas such as life sciences.
Yet this overlooks AIM’s evolution and how, although it has matured over its existence, it continues to play a vital role in enabling the scaling-up of SMEs, while also being able to accommodate larger companies, which offers a better balance of risk for investors.
Last year AIM was responsible for 59 per cent of the funding secured by growth companies across European bourses, raising £5.5 billion across 398 separate deals, which compares well with £17.7 billion for the entire main market in London.
Furthermore, there were 42 IPOs on AIM in 2018 raising £1.6 billion for growth companies, compared with 49 IPOs a year earlier raising £2.1 billion – itself a 97 per cent increase on the money raised in 2016. The listing of our company, finnCap Group, which provides growth capital and advises ambitious companies, on AIM last December illustrates our confidence in the market as a source of growth capital and its key role in helping to further their growth.
AIM remains the first choice to raise capital for a broad range of companies from across the economy, with the sheer diversity of its constituents a key strength. Although the EU’s MiFID II rules have resulted in a dip in research coverage, it has not really diminished the pipeline of IPOs. At finnCap we have decided to try and help address this issue by making our research publicly available.
AIM has given birth to some fantastic growth stories. For example, if an investor had committed £1,000 in ASOS when it listed in 2001, the initial investment would now be worth over £160,000, equal to an annualised return of 45 per cent.
AIM also remains the most attractive junior market in the EU and hosts companies from over 40 countries. For example, France attempted to build its own junior market soon after AIM launched but within a decade it had been absorbed by the wider Euronext market, as it was unable to establish itself.
The growth of the main alternative funding challengers has also been slowing. According to the British Business Bank’s latest Small Business Finance Market report, P2P lending rose by less than 20 per cent last year compared with growth of over 50 per cent in 2017; asset finance’s growth in 2018 was one third of its growth rate in the previous year.
Plenty of opportunity
In terms of its ethos, regulation and costs, AIM, of course, needs to be mindful of the broader array of capital raising opportunities available today. Yet, at the age of 24, AIM remains a very inexpensive way to raise money once the IPO has completed and has matured into a market which facilitates the scaling-up of SMEs, while also supporting more mature companies determined to grow and provide a decent return for those who have shown enough faith to invest in them.
This does not seem a bad outcome for an exchange that is still relatively young and has plenty of opportunity to further mature and develop, so that it keeps in step with the changing funding requirements of growth companies and continues to help accelerate their expansion.
Despite the challenges, AIM is still well-positioned, has some considerable advantages, and should continue to be the exchange champion for the UK’s growth businesses.
Sam Smith is chief executive of finnCap Group