In this opinion piece, investor Michael Jackson explains why he has changed his mind about AIM, the sub-market of the London Stock Exchange.
Ten years ago my view was that any market called ‘AIM’ had to be bad news. And it was always described in the literature as ‘unlisted’ – a most unhelpful phrase to all but the cognoscenti, and for the rest of us a connotation similar to a ‘lost persons’ register.
So it will come as no surprise that it was me who was completely wrong. AIM has to date been a sparkling success. With over 900 companies, a market capitalisation of some £23 billion and over £13 billion of monies raised (of which £2.7 billion has been raised so far in 2004), this is not a flea market.
And yet it is very much a market for small companies, 47 per cent of them have a market value of less than £10 million and 73 per cent less than £25 million.
The success of AIM for smaller companies is based on a number of very good reasons both for companies and investors – so what are they?
Let’s start with tax
There is real and considerable tax-based money ready and waiting to invest in good, small companies including most of those on AIM, and you don’t have to go through all the pain and agony of the complicated financings structure associated with private equity financings.
If your company is a ‘qualifying’ one – in practice those with gross assets less than £15 million – carrying out ‘politically correct’ activities (ie, not property investment or financial services) – investors putting up new money for shares you issue could get 40 per cent capital gains tax rollover relief and 20 per cent income tax relief through the Enterprise Investment scheme. This means that the net cost for new shares in a qualifying company can be as low as 40 per cent.
Venture Capital Trusts (VCTs) can also invest in new shares in your business if it comes to AIM and your company is a qualifying one. And substantial money has been raised, and is being raised, by VCTs to invest in AIM.
Finally, AIM investments are inheritance tax-free, something that is becoming increasingly relevant for a number of people now that houses are worth so much more.
Far less rules and regulations
But the attractions of AIM don’t stop there.
Many small companies are going to AIM rather than the main stock market because the rules and regulations are so much less onerous.
For a fully-listed company, if you want to do any deal involving more than 15 per cent of your share capital, you have to produce an expensive circular to shareholders and then wait 28 days for their approval.
This is time-consuming but also, for small companies, just plain impractical. On AIM, by contrast, unless your deal is more than 100 per cent of your size (i.e., a reverse takeover) you just do it. Quick, easy and relatively cheap.
AIM is not an exit
But, you may say, what is so important about doing deals? Acquiring companies is a dodgy business at the best of times, but for small companies it can be a disaster.
Yet for me this is the compelling reason for small companies to go on AIM. Existing investors, founders, VCs or whoever will not usually be able to exit the business when it comes to AIM. This does not mean that shares cannot be sold, but they can only be sold in small amounts and only when there is market demand – usually before and after half year and full year results. So selling a small number of shares is sporadic at best, and if you want to sell your business, sell 100 per cent of your business to a trade buyer and be done with it.
Acquisitions are the compelling reason
But if you are a small company and want to expand your business by acquisition, carrying out your strategy using your AIM quote is one of the few and best ways you can do it.
Imagine two private companies trying to get together for strong, compelling reasons such as product and cost synergies, and let’s say one is VC-backed, the other is not.
How do you value either company as comparables? Every business has something that makes it different and always better than its peers.
Now if you have a quoted company that has a price, you at least have a starting point. It may be wrong but it is a benchmark and you are only haggling about one parameter and not two. Take it from me, this makes it so much easier.
Deals are just easier to make
In addition, ordinary shares are used in nearly all cases. Not preferred shares, preference shares, liquidation preference shares, upside down and inside out shares, but plain old vanilla, bog standard ordinary shares. By using the same currency, it has a value and people can then do deals.
In many cases, payment may be a mix of shares and cash. Offer some cash so that the sellers have their walk-away money and some shares so that you can lock them in for some of the purchase consideration. It also allows you to say that they can share in the upside potential you know is going to happen post-deal.
Achieve the elixir of life – an AIM quote
First, it will cost you about £300,000 to £400,000 in advisers’ fees. At this level you had better make sure that you feel comfortable you will get your flotation away – remember AIM sponsors do not pick up the costs if ‘sudden, unexpected, totally irrational’ market conditions close the new issues market.
But the nice thing is you can, in extremis, raise next to nothing, wait for your shares to rise and then do your once in a lifetime deal.
AIM, the ‘flexible friend’ – hardly what we thought the Stock Exchange had in mind, but probably they knew something we didn’t!
Michael Jackson is chairman of Elderstreet Investments, the leading technology venture capitalist which he founded in 1990. He is also chairman of Sage, the FTSE-100 accounting software group which he has been closely involved with for the last 20 years, since its unquoted days. Michael is an entrepreneur and legendary investor in his own right.