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Who's afraid of Aim?

The announcement from UK biotech 4D Pharma last week that it was calling in the administrators would not, or should not, have come as a huge shock to its shareholders, given the state of its finances and the generally high risk nature of all young biotechs. 

But news that yet another Aim company has been suspended will reinforce the view of some investors that London’s junior market is simply too risky to touch, and persuade others that 'something should be done' to make it a safer place. Especially as it comes on top of the market’s derating this year thanks to investors fearing the worst for Aim’s mix of companies in a high interest rate, high inflation environment and the disruption a recession might inflict. 

4D describes itself as a pioneer in a revolutionary new class of medicines known as biotherapeutics, with a goal of making safe and efficacious therapies for common and life threatening diseases such as asthma and cancer. With such an enticing chat-up line, it’s little wonder that it briefly became a stock market darling with big name fans, among them Neil Woodford. I have sympathy for employees who could now lose their jobs, and for investors who are likely to suffer significant losses, even if there were plenty of warning flags. Like many Aim companies, 4D was built on an innovative idea. Aim is exactly where investors go to find diverse, exciting and interesting companies with growth potential: such as FeverTree – a fellow new arrival on Aim in 2014 – Hotel Chocolat, Novacyt – Aim’s top performer during the pandemic when all of a sudden this diagnostics company's ability to produce Covid-19 tests propelled it to a share price of 1,318p – or even ITM Power and Gamma Communications. 

Often, when the introductions are made, a lasting and rewarding relationship follows. When we published our most recent Aim 100 guide, almost a third of the companies had market caps in excess of £1bn. Link Group, which monitors dividend trends, expected Aim companies to pay out more than £1bn in 2021 when it reviewed the market last September. Interestingly, and underlining the success of many higher risk investments, Link Group’s Investment Trust dividend monitor, published this week, reveals that the biggest increase in payouts in that sector came from venture capital trusts with a rise of almost 66 per cent. Renewable energy infrastructure funds paid out £583mn, up 38.3 per cent.   

But investors need to be alert to Aim company danger signs and know when it’s time to question their commitment to them. Companies can fail or falter for a range of reasons – fraud (as at Patisserie Valerie); bad behaviour (Boohoo) or because of the inherent risks which are especially high when it comes to exploration companies and biotech. The well may turn out to be dry and there may be too many hurdles for the idea to become a commercial success. Some are ne’er-do-wells from the start. 

Now more than ever investors need to pay attention to financial strength, because accessing funding is almost certainly going to become a good deal harder in the current climate for revenue-poor companies. In any market conditions, investors need to remember that Aim companies are less likely to have access to the funding resources of bigger companies and that risk is now heightened. 

Generally, it’s wise either to be sceptical about companies’ promises or to strictly limit the amount you invest in riskier shares. Doubly so if they have yet to generate revenues and if losses are mounting. Your own research, at this end of the market, should be thorough – expect to spend more time on this than you would do with a company on the main market. The most successful fund managers who specialise in Aim and VCTs have expert analysts to hand to advise, and access to specialists in particular fields for a judgement on how likely the company is to succeed. 

Our cover feature this week offers pointers to picking out great small-cap bosses, those who run companies for the benefit of all stakeholders not just the management team. As the author Mark Lauber comments, a bad jockey can put even the best horse into a ditch – "the holy grail is a fast horse and a good jockey".