- Fewer UK small-caps are going bust
- Is that a good thing?
- Plenty of idea-generating content
Aim stocks aren’t blowing up like they used to. Data published this week showed insolvencies on the junior bourse fell to a record low of three in the year to 31 March, despite fears that fallout from the pandemic would lead to a spate of collapses among thinly capitalised firms.
Contrast that with the 48 insolvencies recorded in the 12 months to March 2010, as the effects of the global financial crisis finally came to bear, and something appears to have changed in the world of UK small-caps.
“The comparison with the last major economic crisis could not be more stark,” says Peter Kubik at accountancy group UHY Hacker Young, which put together the findings. “Over the past two years, Aim has acted as an excellent platform for businesses to raise money and thrive.”
Clearly, no two crises are the same. While many companies crumbled under a mix of falling demand and deteriorating credit conditions post-Lehman, the public and private sectors have been much more accommodating of business since Covid-19 overran the global economy two years ago.
In fact, the UK government was prepared to underwrite much riskier businesses. In May 2020, it launched the Future Fund and issued loans of up to £5mn to help “innovative and high-growth British businesses” get through the pandemic.
The fund, the brainchild of venture capital fan (and chancellor) Rishi Sunak, has recently come in for criticism after it was revealed 34 companies it supported are in the process of being wound up.
Although the data is patchy and some of the recipients of questionable business acumen, reported losses of around £40mn on a debt fund that eventually grew to £1.1bn do not look wildly out of step with the world of high-growth start-ups. Any fund ploughing capital into small firms in the eye of an economic hurricane would expect to take some hits.
All of which begs the question: does the sharp drop-off in Aim-traded failures suggest the market’s potential rewards for investors have been blunted in favour of lower risks?
The evidence is mixed, and not helped by limits to readily available data. While more than half of Aim’s current constituents were listed the year insolvencies peaked (come for the capital, stay for the light-touch regulation), the combination of mergers, take-privates, de-listings and the odd insolvency means we do not have a full picture of risk and reward.
Nonetheless, here are three observations. First, the Aim All-Share’s 4 per cent average annual total return over the past decade shows capital-weighted performance has been middling. Second – and unsurprisingly given the first point – the chances of randomly selecting an Aim winner have always been poor – the median share price return has been negative in seven of the past 10 years.
Third, there has been no long-term uptick in the number of wild Aim successes, defined as stocks whose prices have doubled on a rolling one-year basis. But broadly speaking, the wild successes have outweighed the number of failures, defined as a one-year share price drop of at least three-quarters.
If Aim is showing signs of maturing, it may be by necessity rather than design. Over the past decade, the explosion and evolution of early-stage finance has meant many of the world’s most exciting smaller companies have been able grow, retain founder control and raise all the capital they need without going public.
That won’t stop penny-stockpickers hunting for the next multi-bagger. But a drop-off in complete duds and signs of a maturing market mean pickings won't always be rich.
