Off to market

During the past few years, the junior markets have courted mid-market firms in the UK and abroad. But what makes them enduringly popular?

During the past few years, the junior markets have courted mid-market firms in the UK and abroad. But what makes them enduringly popular?

Stock market flotations are en vogue once more, especially on AIM and PLUS, with tens of companies joining each month and many more considering it. But why are the markets so popular for small to medium-sized businesses?

When Canadian mining firm Nautilus Minerals Inc completed its launch on AIM on February 2, it joined more than 1,600 other companies on the UK’s second share trading platform.

For Nautilus it was the end of months of planning, meetings, business investigations and administration to get itself ready to join the market. But the £50 million it raised as part of its IPO to fund its exploration of the ocean floor for mineral deposits will go some way to ensuring the effort was worth it.

While Nautilus was aided in it’s fund raising because it is typical of the type of company popular on AIM in the past year or so – based overseas and involved in mining – its share price nevertheless increased in its first three weeks on the market, demonstrating investors’ appetite for such companies.

It also shows how effective joining the market can be to help businesses to fund their growth plans. Indeed, in 2006 alone, AIM-listed companies raised £15.6 billion, including secondary issues, according to Marcus Stuttard, deputy head of AIM.

Stuttard stressed that it is not just at IPO that companies can raise significant sums. “Partly because of the rules and regulations, it’s easy to do follow-on issues and makes acquisitions much easier on AIM than other markets,” he said. “We’ve seen year-on-year about 40% of the amount of money raised by AIM companies has been through further issues.”

But the ability to raise capital is not the only benefit of joining AIM. “You hear time and time again that companies that have come to AIM have been able to secure major contracts with suppliers that, prior to coming to the market, they just wouldn’t have been able to⦠because those suppliers have the confidence that the company is quoted on AIM, one of the London Stock Exchange markets,” Stuttard said.

A listing on AIM can also motivate employees. Not only with the carrot of share options but also because they can see the value of what they do by the effect it has on the share price, according to Stuttard.

Stuttard said another advantage of AIM, and a key difference between it and other stock markets, is the ongoing support provided by the company’s nominated adviser. This has enabled AIM to put together a relatively ‘light-touch’ regulatory framework, compared to the LSE or New York Stock Exchange.

“A lot of AIM’s regulation is market driven, so in areas like corporate governance, for example, we don’t have to put detailed, prescriptive rules in place because we know the nominated adviser will be advising the company on best standards and best practice and crucially what their investors are going to expect,” Stuttard said. “You’ve got that bridge between the company and the investors that you don’t have on many other markets. It means the AIM rules don’t need to be as prescriptive but standards are still maintained at a very high level.”

This is important because AIM remains a platform targeted towards growing medium-sized businesses and costly corporate governance could put many off.

Indeed, the majority of AIM-listed companies have a market capitalisation of less than £50 million, according to Stuttard. But he added that the average capitalisation is rising, with a lot of admission activity currently from companies’ worth between £50 million – £100 million.

But with increasing popularity has come criticism that AIM is in danger of becoming overheated, with too many companies competing for too few investors. However, Stuttard rejects the idea; “If the pool of capital had stayed static but the number of companies had increased disproportionately, you could possibly start to run that argument,” he said. “AIM is a whole community⦠supporting a developing market. At the same time as the number of companies has expanded the number of advisers [and]⦠investors supporting those companies has grown very significantly as well.”

On the PLUS side

Nevertheless, for smaller companies, joining PLUS can be a more effective strategic move. Due to the numbers on AIM, smaller companies can be lost in the clamour for investor attention and find their profile falls, rather than receiving the intended boost, but PLUS is a much smaller market.

“On a dedicated smaller companies market â“ there are around 200 companies and around 850 traded on our market – a smaller company can often attract profile that is disproportionate [to what] it might obtain on a larger and more crowded marketplace,” said Nemone Wynn-Evans, communications manager at PLUS. “We have seen a number of our companies move from our market to another in the recent past and have suddenly found their profile has dropped off a cliff.”

A PLUS listing can benefit early-stage and/or small companies because it also offers access to dedicated smaller company investors, Wynn-Evans added. “We also have a regulatory framework that offers cost-effective access to capital,” she said. “For smaller companies, raising up to £5 million can be significantly less costly coming to a market such as PLUS as against going to a more senior market.”

All change

Nevertheless, some entrepreneurs may not be aware of PLUS and what it offers because the market has undergone a comprehensive shake-up in the past two years, culminating in October 2006 with the introduction of the PLUS brand, replacing its previous incarnation as Ofex.

Wynn-Evans said that two years ago the structure of the then Ofex was changed. “We ripped up the rule book, put a brand new set of rules and regulations in place, [and] put a brand new trading platform in place to trade shares for our competing market makers.”

This move was to break away from Ofex’s traditional position as a stepping stone to AIM, Wynn-Evans explained. “A company would come to Ofex, it would grow a little bit, and then it would step onto a more senior market.”

Wynn-Evans stressed that PLUS is not a feeder market but a dedicated smaller companies market. “PLUS has much more in common with AIM in the mid-1990s than it does with Ofex,” Wynn-Evans said.

The move appears to have been successful, with an increase in companies listed on PLUS in the past two years, as opposed to a decrease in the previous five.

An example of the type of company now being attracted to PLUS is London-based primary healthcare business General Medical Clinics plc, which joined the market as a means of increasing the liquidity of its shares, and broadening its shareholder base and a route to exit for existing shareholders.

General Medical joined on December 29, 2006, after raising £1.5 million in its pre-IPO fundraising. Since joining, its share price has risen by 10p, at the time of writing.

Harry Hyman, chairman of General Medical, puts the company’s success down to it being in a sector that investors favour and because it is a sound business with the finance to expand.

For General Medical, choosing PLUS over other markets and fund raising options was easy. “We liked the PLUS market because⦠it is a relatively low-cost, light regulatory touch solution, which is suitable for a company like Gen Med which has about a £7 million annual turnover,” Hyman said.

The listing process was also relatively straightforward. “You have to prepare an information memorandum, but as a well-regulated, well-run company with a proper board of non-executive directors, proper financial information [and] a good set of projections, then⦠it was very straightforward,” Hyman said. “It’s not for every company but for a lot of smaller public companies it’s a good market to be on.”

But while the listing process is straightforward, PLUS is not an easy market to join, according to Wynn-Evans. “We exercise a rigorous vetting process that means a significant proportion of companies that try and come to our market are turned down [because] we don’t believe they are appropriate [or] offer quality returns to investors,” she said. “There are very specific quality criteria which companies have to satisfy.”

PLUS’ vetting process demonstrates that it, like AIM, is not for every company, but listing on either market should be considered by managers of any growing business. “Ultimately the choice of market is all about the right market for the right company,” Wynn-Evans said. “It’s horses for courses.”

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

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