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Aiming to do better

Created:
13 November 2008
Written by:
Martin Li

Earlier this week, Gemfields Resources allowed its offer for Aim-traded gemstone producer Tanzanite One to lapse. Although the offer was oversubscribed, the deal was killed by the Tanzanite One directors, who issued a blocking tranche of nil paid, unlisted B shares carrying 50.2 per cent of the voting rights. Elsewhere, the directors of Griffin Mining cancelled "inappropriate" (out-of-the-money) executive share options and replaced them with new options priced at a lower level. Neither of these actions was illegal, but both have angered investors - and that's before we start on the fate of ZTC Communications and Canton Property Investment (see Missing in China )

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Such shenanigans don't help the image of the Alternative Investment Market (Aim), especially when the index of its 100 largest companies has fallen 62 per cent over the past year. They come on top of long-standing gripes over the lack of liquidity in some shares, the dubious quality of some companies and problems with the market-maker trading system.

Aim is partly a victim of its own success: since its launch in 1995, more than 2,900 companies have joined, of which nearly 1,600 remain on the market today. The sheer number of companies renders tight regulation impossible and the exchange admits its "crucial dependence" on nominated advisers for ensuring good governance.

However, one broker, who asked not to be named, bemoaned the fact that during the small-cap bull market a few years ago, due diligence was all but abandoned by nomads. "The quality of due diligence was verging on zero, and the quality of deals getting through the system was horrendous," he said.

Sam Smith, managing director of broker FinnCap, estimates that 600-700 companies need to come off Aim for it to become a manageable market. She points out that 750 Aim companies are capitalised below £10m, and 436 below £5m, although this in itself does not necessarily mean they are unsuitable for public trading.

IC VIEW:

Fund redemptions and the increasing value offered by, for example, companies in the better-performing FTSE250, have prompted investors to retreat from Aim. The market cannot control capital flows or company valuations - but it can and must change perceptions about corporate governance, regulation and liquidity.

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