Autumn will be a crucial testing time for companies anxious to float on AIM.

There is no shortage of entrepreneurs keen to tap AIM at the moment but it remains to be seen how keen investors will be to respond.

Lately, several have managed to pull it off. But others have stalled, and brokers and advisers are tempering their professional optimism with a strong measure of caution.

Recently formed broking and investment group XCap, backed by Chris Potts, the celebrated former Evolution Securities market-maker once knuckle-rapped by regulators over short selling, is trawling the City for a £5 million float. Smith’s Anglo-African Minerals is looking for the same amount to develop a claimed £360 million worth of resources, from bauxite to gold, in Armenia and Africa.

Broker Keith Bayley Rogers has been working since the spring to raise £5 million to £10 million for the Wine Investment Company, whose policy is to invest in the top 5 per cent of the Bordeaux wine market for consistent medium-term returns. With £5 million ‘guaranteed’, the broker is making optimistic noises about reaching the higher target.

As main market backers fret over losses on the online supermarket delivery float Ocado and the failure of North Sea group Fairfield Energy’s £330 million flotation and speculate over the impending £25 million launch of coal miner Scottish Resources Group, AIM investment advisers speak of ‘cautious optimism’ and a ‘stronger deal pipeline’. However, figures from the London Stock Exchange show how tough it has become to raise new money on AIM.

In 2005, at the height of the resources boom and with property surging too, floats on AIM raised £6.5 billion. Last year, in the aftermath of the credit crunch and recession, that figure had fallen to £740 million.

The first half of 2010 saw a mere 16 new AIM issues, with a paltry £195 million raised. ‘In late 2009, we got optimistic that the market would reopen in 2010,’ reflects Tim Metcalfe, director of Westhouse Securities, ‘but it did not happen.’

He adds that ‘we have quite a lot of companies looking at AIM’ and warns that ‘there will be a deluge when the market reopens’. Signs of a possible thaw came recently when oil and gas explorer Argos Resources tapped AIM for £22 million in a placing underwritten by Evolution Securities. Advisers report keen interest from private investors, reminiscent of the days of the dotcom boom, in the company’s plan to develop prospects perhaps holding between 747 million and 1.75 billion barrels of oil in the North Falkland Basin, though, of course, the resources sector and the Falklands in particular can sometimes be a law unto themselves.

A ‘queue for September’

London’s international role helps, maintains Metcalfe. He suggests that overseas companies see it as a ‘prestigious’ stepping stone to other markets, citing Chinese solar power play ReneSola’s parallel listing on the New York Stock Exchange.

In theory, tougher market conditions should mean that successful new issues are better and cheaper than the bull market froth of boom times, and some, at least, of the current candidates deserve serious consideration. As Table 2 shows, most of the recent AIM floats have at least held their value so far or even made modest gains.

‘There is a queue forming for September,’ agrees Simon Clements, head of corporate finance at broker Merchant Securities, which raised £1.4 million at 0.6p for asset tracking specialist SureTrack Monitoring while it was on the even more junior PLUS-quoted market ahead of its new move to AIM.  He recalls how the new issue market seemed to be improving late last year and carried on into 2010 before catching ‘indigestion’.

Clements comments, ‘The small-cap fund managers have put their radar screens up and so it is a question of going to private client brokers and venture capital trusts.’ However, he does have ‘one or two’ float candidates hoping to launch soon and argues that the very toughness of today’s market has ‘dragged up the quality’ of the businesses that can float in current conditions.

He contends that the market is still open for companies with proven management and future ‘profits visibility’. Peter Shea, executive chairman of broker Daniel Stewart, detects ‘a bit of life in the IPO market’, after raising £12 million in April for South America-focused mining hopeful Metminco, and has three issues hopefully ‘maturing’ for September and October. However, in his view, ‘the market is still far from getting back to health’.

Even where institutional investors are willing to reach for their chequebooks, the companies can be reluctant to accept that the market has significantly lowered the valuations it is prepared to pay. Shea recalls finding the money that a mining group needed in an AIM float, but ‘only at a third of the price the company wanted’. He adds that he has been advising ‘a big hospitality company’, which wants to float but prefers to wait until it can extract a flotation price-to-earnings ratio of ten to 12 from institutions, rather than the six which is all the market will wear now.

Bigger can be better

One consequence of today’s market climate is, ironically, that the less money a company wants to raise, the harder it can sometimes be to sell it. Metcalfe explains, ‘Previously, institutions were happy to back small AIM companies, but, following the downturn, they found they could not exit because the market had become too illiquid.’

He argues, ‘The minimum market value now is £50 million, with a free float of at least 30 per cent of the equity.’ Shea is of the same mind: ‘If your company has a market cap of less than £50 million, you are going to be really up against it.’

Yorkshire-based healthcare software specialist EMIS Group certainly fitted that bill when broker Evolution Securities brought it to AIM in March with a £50 million fundraising that valued the company at £200 million. Two mining floats, southern Africa-focused Ncondezi Coal and West African iron ore play Bellzone Mining, both raised around £35 million, with a flotation value of £147 million and £184.5 million respectively.

Elsewhere, antipodean entrepreneur Ian Gowrie Smith’s New Zealand-focused Kea Petroleum has put in a robust performance since raising £6 million, for a market value of £37 million, despite coming back later on for another £7 million to buy new assets. Brazilian shopping mall developer Squarestone Brasil has inched marginally forward after raising £28.3 million through Liberum Capital for an initial value of £39.5 million.

Even so, some much smaller floats have also fared respectably. Two of those showing modest gains are healthcare concern Oxford Nutrascience and mining hopeful Scotgold Resources, which were floated with market values of £8 million and £5.8 million respectively.

Several are doing as SureTrack did – raising the float money while still listed on another market, in this case PLUS-quoted, and joining AIM by way of introduction. Will Hirons, SureTrack’s boss, contends that several institutions, including Axa Framlington, backed the company’s fundraising, while several others said they could not back a PLUS-quoted company, but would be interested in considering subsequent issues once it was on AIM.

Another case in point is cancer vaccine developer Scancell Holdings, headed by Professor Lindy Durrant of Nottingham University, which has moved to AIM after raising £2.5 million on PLUS-quoted earlier this year, £207,000 of it from the Aspire Fund, the government’s flagship fund for women-led businesses. The company is working on a pipeline of DNA vaccines to treat cancer based on its patented ImmunoBody platform.

International line-up

Apart from XCap, Anglo African and the Wine Investment Company, prospective candidates for AIM also include Regiscard, a Minneapolis-based but Israel-focused pre-paid card company. And, inevitably, resource-linked companies are prominent among those hoping to come to AIM.

Private US technology developer Bixby Energy Systems, whose patent-pending Bixby Process converts coal into clean-burning energy, is understood to be embarking on a $25 million (£16.6 million) funding ahead of a possible AIM launch soon. Based like Regiscard in Minneapolis, the company uses the Bixby Process to produce synthetic natural gas.

Bixby cites evidence that this produces 65 per cent lower carbon emissions from power stations than conventional coal-fired electricity generation. The company claims that the next stage of its process can produce semi-refined crude oil for less than $30 a barrel.

Elsewhere, PLUS-quoted Oracle Coalfields is girding itself for a long-mooted move to AIM, either later this year or early next. After raising £1 million-plus through broker Libertas Capital, the company needs to conduct a bankable feasibility study on its major Thar lignite (brown coal) deposit in Pakistan’s Sindh Province.

Chaired by well-connected Pakistani businessman Shahrukh Khan, Oracle cites a proven reserve of 371 million tonnes at Thar, with estimated potential resources of 1.4 billion tonnes, with a large and energy-hungry market on its doorstep, but much more money will be needed to take it to production.

Aussie-quoted uranium play Aura Energy, with an exploration target of between 800,000 and 1.2 million lbs of uranium oxide at its Storsjon project in Sweden and ambitious potential projects in West Africa and Australia, has been debating whether an AIM foray would make sense. AIM candidate Anglo-African Minerals also has a stake in China-based, Canada-quoted West African iron ore play CIC Mining, which also hopes to list on AIM this year.