By Raymond Greaves, Head of Equity Funds, TIME Investments
The Alternative Investment Market (AIM) has been in operation for almost 30 years and over that time has gone from strength to strength.
Although more than 4,000 companies have been listed since its launch in 1995, today there are 800 companies listed on the exchange, which hints at how AIM has moved from something of a ‘wild west’ in its early days to a more refined investment market today. But what are the attributes that make AIM investments a useful tool in an investor’s kit?
Badge of quality
Every AIM listed company has to appoint a Nominated Advisor (Nomad), who is responsible for guiding the business through all regulatory requirements. The Nomad will attend board meetings to keep a close eye on business performance and ensure ongoing compliance with exchange rules.
Nomads act as a kind of regulatory police for AIM and have a deep insight into their companies. If they feel a company is breaking the rules they can resign their role, effectively delisting the offending company, unless it can find another Nomad to take over the role. This provides a strong incentive for companies to play by the rules.
Tax incentives
While AIM represents an opportunity for investors to diversify their portfolios and find interesting companies with genuine growth potential, the shares also enjoy multiple tax benefits.
From 2013, it has been possible to include AIM shares in an ISA, this means that – as with any ISA investments – there is no capital gains tax to pay on profits, and investors will not pay any income tax on dividends. AIM shares are also exempt from stamp duty.
Second, because AIM is not a recognised exchange, many companies on AIM may qualify for Business Relief, therefore making them free of Inheritance Tax after just two years of share ownership. Many Business Relief services have been created to take full advantage of this feature.
Many businesses that are still largely in family ownership choose to list on AIM and occasionally main market companies will move to AIM specifically to take advantage of this tax relief.
A more matured marketplace
In 2002, the total value of AIM was about £10 billion, equivalent to one decent sized main-market industrial company, like British Aerospace. In other words, it was a particularly small market.
By 2007, AIM had experienced exponential growth in total market value due to the weight of new companies listing, but the average market caps barely exceeded £50 million. Further, following the Global Financial Crisis it was back to an average cap of a just £25 million per company. For many, these companies were just too small to invest in.
Since the turn of the decade, despite the huge attrition rate of companies on AIM, the average market value has increased dramatically, by a factor of 7x between 2008 and 2021. Even after the major correction in 2022, it is still a factor of 4.5x to an average value of £115 million per company.
The maturation of AIM from a ‘Wild West’ pre-GFC into a much larger market of fewer, but higher valued businesses is sometimes misunderstood and largely unrecognised. Similarly, trading volumes today are far higher than they were in the late noughties, despite fewer companies, implying much better liquidity in general. These are all good signs of a much more mature marketplace.
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Current state of play
While the market capitalisation of AIM has increased substantially since the GFC, there is still a very wide distribution of the size of companies on AIM. While it is impressive that 15 companies are capitalised over £1 billion, 211 – or one-quarter of companies on AIM – are capitalised at less than £10 million. This is a level where a company should consider whether it is worth the effort and cost of even being publicly quoted.
Further, 60% of AIM companies are capitalised at less than £50 million, which is below the threshold at which most institutions invest, predominantly because of poor liquidity.
In our mind, this dispersion effectively creates two distinct buckets of companies. Bucket one is ‘investment grade’, where the company is large enough to be of interest to institutional investors – giving it proper access to capital. It would also have a high quality Nomad in place, demonstratable growth track record, strong market position and consistent profitability. The second is a ‘speculative’ bucket, which consists of everything else, and is likely to be sub-institution in size, with a patchy growth track record and may not yet be profitable.
In our view, the investment grade/speculative cut-off is around £100 million market value although there are some interesting businesses up and coming in the £50 million – £100 million bracket.
Ultimately, if you are looking to invest, rather than speculate, the opportunity set on AIM is probably around 200 companies, or less than 30% of all companies in the index.
This opportunity set, while not without risk, presents significant potential for those looking for tax-efficient investments in some of the most exciting businesses around.
AIM explained
- The Alternative Investment Market (AIM) was launched in 1995 replacing the Unlisted Securities Market (USM).
- Since 1995 more than 4,000 companies have joined AIM and more than £130 billion has been raised in primary and secondary capital from a very wide range of investors making AIM the world’s most successful small company stock market.
- There are no specific minimum eligibility requirements for admittance to AIM. However, securities traded on AIM must be freely transferable and must be capable of electronic transfer and the company must appoint and retain a nominated advisor and broker.
- Investing in AIM shares via an ISA offers tax breaks.
- AIM is not a recognised exchange which means that a large subset of companies qualify for Business Relief, possibly making them free of Inheritance Tax.
