The Alternative Investment Market (Aim) was launched in 1995 as an incubator for smaller businesses, providing these with access to the external funds needed for rapid growth. And in a glowing demonstration of its ability to foster such expansion, at the time of our last Christmas review, the Aim All-Share Index was up more than a fifth on 2017’s opening price.
But as we write, that very same index has fallen 15 per cent since the start of 2018 – dampened by a particularly downhill October and November. This might well raise questions about whether Aim is still, in the London Stock Exchange’s words, “powering the companies of tomorrow”.
Arguably, Aim’s reversal of fortune this year is an important reminder of its intrinsic riskiness. Lighter-touch regulation and relatively few listing criteria can render some of the exchange’s constituents vulnerable to illiquidity, volatility or even collapse – particularly at the smaller end of the market. A major weakness is that the prospect of high growth can engender high expectations – which, as we’ve seen in recent weeks, are susceptible to swift deflation.
That all said, the FTSE All-Share index has also declined by 12 per cent – reflecting the fact that the past couple of months have been challenging for equity markets in general against a backdrop of macroeconomic disquiet.
Among various global tensions at play, trade disputes continue between the US and China; there’s the possibility of interest rate hikes across the pond, which could lift borrowing costs for businesses; Italy’s budget proposals have rubbed the European Commission up the wrong way; and the UK’s imminent divorce from the EU looms ever closer. Indeed, to the latter point, accountancy firm UHY Hacker Young notes that companies have shelved merger and acquisition plans due to Brexit uncertainty – leading merger and acquisition (M&A) activity on Aim to drop 28 per cent in 2017-18 versus 2016-17. This uncertainty might also have quelled initial public offering (IPO) ambitions. As at the end of November, 58 companies had floated on Aim during the year – down by 10 year on year.
Of course, such events and statistics should inform our analysis of Aim stocks – as they should any decision around portfolio construction. And yet, as we enter 2019, there are still many reasons to remain optimistic about the growth credentials of the so-called ‘junior market’ – especially at a time when such growth could prove elusive elsewhere.
A maturing market
True, the number of companies on Aim has fallen since the pre-financial crisis days, and even since last year. But – exploring a different interpretation of growth – Aim has, in some regards, become more mature since its inception.
For starters, the market today plays host to behemoths including online retailer Asos (ASC), drinks group Fevertree Drinks (FEVR) and litigation financing company Burford Capital (BURF) – all of which are valued in the billions. And while the presence of such giants does suggest that Aim is no longer a dedicated small-cap haven, these organisations can also offer excellent examples for minnow peers to follow, in the hope of achieving similar scale.
Second, according to financial services provider Link Asset Services, Aim companies are increasingly paying out an income to their shareholders – helped by the progressing maturity of many companies, the larger size of new listings, and new companies paying dividends at an earlier stage. Indeed, Link’s Aim Dividend Monitor expects dividends paid by Aim-traded UK companies to bypass £1bn for the first time this year.
Justin Cooper, Link Market Services’ chief executive, says: “We rightly associate Aim with young companies, hungry for capital to grow... [and the] value of capital being returned to investors via dividends is still much smaller than the amount being raised for investment”. But the rate at which dividends are growing suggests that more companies are “reaching that important milestone where they generate more cash than they absorb”.
Moreover, the report, published in September 2018, finds that Aim dividends are less concentrated and more diversified than the main market. Thus, perhaps counterintuitively, Aim could help income-seekers to hedge their bets.
Law and order
In last year’s review, we counted three Aim-traded law firms: Gateley (GTLY), Gordon Dadds (GOR) and Keystone Law (KEYS). The former went public in 2015, and the latter two in 2017. Such IPOs seem a clever move, against a highly saturated legal milieu where the elite ‘Magic Circle’ and ‘Silver Circle’ garner the best lawyers and biggest clients, and where it can be difficult to raise one’s head above the crowd – particularly as a mid-market firm.
We had thus envisaged more IPOs in 2018. Accordingly, Rosenblatt (RBGP), a City law firm specialising in dispute resolution, listed in May. It has a market cap of £62m today. In June, legal services group Knights Group Holdings (KGH) floated. It now has a market cap of £145m. And in the same month, Anexo (ANX) – a provider of credit hire and legal services – also went public. It is currently valued at £136m.
True, these flotations occurred in the first half of the year. Some would-be peers perhaps preferred to avoid the choppy pre-Brexit waters in the second half. That said, a quasi-peer did publish its intention to float in November: Manolete Partners, a UK insolvency litigation financing business. It expects to join Aim on 14 December, with a market cap on admission of £76.3m.
It may be a while before we see other law firm flotations, as companies generally await clarity on what post-Brexit life will hold. But, reflecting our optimism in this sector, we tipped Keystone Law, Gordon Dadds and Gateley over the course of 2018. And reflecting some transactional activity, Gordon Dadds’ shares are currently suspended from trading, as it has agreed terms of the reverse takeover of international law firm Ince & Co. Were this deal to complete, Gordon Dadds would become the UK’s largest listed law firm. It is currently valued at £52m, signalling the scale of this hypothetical combination.
Video games
During 2018, two video games companies joined Aim: Team17 (TM17) in May, and Codemasters (CDM) in June. Both businesses are still reasonably small – valued at under £300m at the time of writing, in keeping with Aim predecessor and IC buy tip Sumo Group (SUMO). But all three operate in a pool with bigger fish, including Frontier Developments (FDEV) and larger IC tip Keywords Studios (KWS) – suggesting there could be room for expansion.
That said, Keywords’ shares have fallen in recent months. And industry expert Newzoo has cut its global games forecast for 2018 from $138bn to $135bn, due to regulatory changes in China and the absence of new global blockbusters. Still, it says the industry is growing at a healthy pace, at 10.9 per cent from 2018, or $13.2bn. A trend worth keeping an eye on.
Again, it’s possible that IPO activity will slow, as companies monitor broader economic influences. Green Man Gaming had released its intention to float on Aim in September, but we understand this has since been delayed due to tough market conditions.
Broader trends
It can also prove fruitful to consider shifting behavioural patterns. For example, the rise of digital payments could engender opportunities for specialist payments businesses on Aim, such as buy tip Eckoh (ECK). The increasingly flexible workplace might drive demand for conference-call technology, such as that supplied by LoopUp (LOOP), or for other software that can facilitate remote communications.
Shocks and scandals
Aim has seen its share of high-profile scandals this year – although, arguably, these could have occurred on any market. A reminder, perhaps, that equity investment always entails some risk.
Conviviality sold its wholesale business to C&C (CCR) and its retail business to grocery retailer Bestway Direct Limited in April after the drinks company called in administrators. This followed a profit warning from the drinks company, the discovery of a £30m payment due to HMRC, and its subsequent failure to raise sufficient rescue funds to keep going.
Cake purveyor Patisserie Holdings (CAKE) hit the headlines in October, and thereafter, following an initial announcement that the board had been notified of “significant, and potentially fraudulent, accounting irregularities and therefore a potential material mis-statement of the Company’s accounts”. The company’s shares on Aim remain suspended.
Long-term view
It seems wise to anticipate more general market turbulence in the new year, but that shouldn’t prevent long-term investors from taking a punt on Aim. Judicious calls on smaller companies could ultimately prove to be bargain buys – although large hypothetical rewards do often sit beneath a ‘hazard’ sign.
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