London’s Alternative Investment Market (AIM) enables global start-ups to float shares regardless of their size or age. Yet while the market is high-risk playing field, it offers a range of mutual benefits to cash-strapped companies and investors alike
Adequate funding can be incredibly tricky for fledgling start-ups to acquire. Rising borrowing costs, trapped working capital and flaky investor confidence levels pose major barriers to small companies hoping to generate capital and chalk up sustainable growth – and while a solution for some start-ups could be to pursue a traditional public listing, the vast majority of small businesses simply aren’t ready for all of the regulatory and financial pressures that come hand-in-hand with public offerings. Likewise, scrappy start-ups aren’t always the most attractive investment because they’re saddled with risk. That’s where AIM comes in.
Formerly known as the Alternative Investment Market, AIM was launched by the London Stock Exchange in 1995 as a junior growth market designed to connect smaller companies with external funding from capital markets. AIM was brought in to replace the Unlisted Securities Market, and started with just ten UK companies and a collective market capitalisation of £82.2m. Fast forward just over two decades, and AIM has helped more than 3,700 companies raise £100bn in capital.
The market is designed to be a proverbial win-win for investors and start-ups alike.
With AIM, market participants benefit from less onerous entry criteria, regulatory requirements and entry fees in order to float. Companies are required to have a market value of at least £700,000 and have enough working capital for at least a year’s worth of trading before they’re even considered eligible to float on the London Stock Exchange’s Main Market. AIM doesn’t carry these requirements, which means more agile but less established firms are able to gain listings.
Meanwhile, investors enjoy key tax benefits in exchange for taking on high-risk stocks in these relatively untested companies.
The result? AIM tends to outperform other UK benchmark indexes pretty dramatically, and is without doubt one of the most lucrative markets in the City. The market has three investment indices, and returns across all three average around 40%. Returns on the AIM 100 are even higher, averaging 55% since 2016.
Meanwhile, companies typically stand to raise up to £100m by floating, and dozens of start-ups have successfully used the junior market as a springboard in order to reach the Main Market.
Companies able to tap into the power of the alternative investment market stand to reap quite a few benefits. In addition to capital access, a public listing on the junior market enables start-ups to capitalise on plenty of additional exposure. Household names like ASOS and Fevertree made their start on the AIM, and market participants also gain in-built support from experienced advisers and are able to offer existing investors a viable strategic exit route by listing.
That being said, it’s worth pointing out one general entry requirement for companies under two-years-old is that existing shareholders have got to agree not to sell their own shares for at least 12 months after floating.
Another added bonus of joining AIM is that companies are free to choose how much equity they’d like to give up. There’s no minimum share percentage start-ups are required to make available as part of their listing – although the fewer shares a company floats, the more volatile their price share will ordinarily be.
For those start-ups keen on joining the market, the first step is to appoint a nominated adviser, or Nomad.
The vast majority of Nomads come in the form of accountancy firms or investment banks, and they act as internal regulators. Responsibilities include guiding start-ups through the listing process, which includes overseeing preparation of the AIM admission document and due diligence. Nomads are also responsible for periodically ensuring their respective companies maintain standards after joining the market.
After appointing a Nomad, firms must then appoint a nominated broker who will be responsible for assessing investor interest, advising on trading and handling shareholder relations. A reporting accountant will also be required in order to conduct an independent financial review and forecasts as an added second opinion to back up the financials included as part of a company’s own AIM admission document.
Flotation on the junior market takes a minimum of 14 weeks to complete, and the cost varies dramatically depending upon the size and the ambition of each firm. The admission fee is based on a firm’s expected market capitalisation at the point of entry, and advisers typically warn clients to expect a cost of around 7% of the proceeds raised.
Above all else, it’s worth reiterating that AIM investments are inherently riskier than shares in Main Market companies. Because entry requirements are far less stringent for the junior market, it’s generally composed of less experienced business teams with untested business models. That’s why the delisting rate on the junior market far outpaces listings on the Main Market.
Yet AIM is also the textbook definition of a high-risk, high-reward market – and at present around a quarter of all the trading done by private shareholders in the UK is facilitated by AIM. More important still, the tax incentives that come hand-in-hand with these riskier investments are often considered worth the gamble.
Shares in many AIM companies are exempt from inheritance tax after an individual has held the shares for two years, and AIM shares can also be held in an ISA. This means investors pay absolutely no Capital Gains Tax at the point of disposal and no Income Tax on company dividends received. AIM stocks are also exempt from Stamp Duty.
Some companies listing on the junior market also qualify for the UK Government’s Enterprise Investment Scheme, which offers investors the added benefits of an Income Tax relief of 30% on investments, a Capital Gains exemption on profits from shares held for at least three years and loss relief if the company fails.
Private investors make up a fairly large proportion of the AIM market, and there are a number of brokers able to facilitate pursuing these sort of investments. That being said, an increasingly popular AIM alternative is to join a Venture Capital Trust that trades on the Main Market but invests money raised into early-stage AIM listings. In order to be approved as a trust, at least 70% of company investments over a span of three years must have been made in unquoted companies.
In turn, investors will gain Income Tax and Capital Gains relief with the added bonus of a professionally managed AIM portfolio. On the flipside, it’s worth noting AIM investments facilitated by a Venture Capital Trust won’t be eligible for some other perks like Inheritance Tax relief.
AIM-listed companies are certainly a gamble. After all, the vast majority of these businesses are in their early stages, they have low liquidity levels and due diligence can be pretty tricky to carry out. Yet bearing in mind the average returns rate of the junior market – as well as the associated tax benefits – investment could be an option worth exploring.
At the end of the day, the alternative investment market isn’t right for everyone. AIM-listed companies are typically in their early stages, which means they’ve got no liquidity and inexperienced leadership. Conducting due diligence on a company under two-years-old can be incredibly difficult, too.
Yet by and large, AIM is a high-risk, high-reward market with a record of delivering great returns and undeniably helpful tax benefits for investors. Meanwhile, the market is a crucial platform young start-ups can utilise in order to unlock capital, raise their profiles and achieve sustainable growth.