Taking Aim: Why the London Stock Exchange's junior market is attracting high-growth companies

 
Marcus Stuttard
The Square Mile - London's Financial District
So far this year the Aim all-share index has out-performed the LSE's FTSE 100 and 250 (Source: Getty)

Capital markets have long been synonymous with blue-chip companies.

For 300 years London Stock Exchange has been at the vanguard of financing the great generational industrial shifts of the day – from construction of the American railways in the 19th century, oil and mineral exploration in the 20th, to financing a low carbon global economy today.

Twenty two years ago we did something important. We launched a capital market specifically for smaller companies with high growth potential.

Amid scepticism, given how many global exchanges had tried and failed to establish such a growth market, the Alternative Investment Market (Aim) was born. Ten companies were listed, worth £82m. Today Aim is worth £95bn, and has supported 3,700 companies in 90 countries across 40 sectors.

So far this year the Aim all-share index has out-performed the FTSE 100 and 250 and UK Aim companies alone contribute £15bn to UK GDP while creating 430,000 UK jobs. Aim is a uniquely British success story, a growth market with global reach that has been copied but not as successfully.

Read more: Should you put your money in the Alternative Investment Market?

Aim’s track record

Like all innovations it continues to evolve and develop. In the last decade, the average value of new entrants grew from £17m to £88m, while average

capital raised increased from £5m to £30m. A total of 60 per cent of all capital raised has been through further issues. This shows Aim provides long-term institutional capital and commands long-term corporate and investor confidence.

Despite Aim’s pre-eminent track record over two decades there has been criticism from commentators and competitors, usually celebrating the occasional but inevitable company failure, claiming that Aim is “insufficiently” or “self” regulated, and that alternative platforms are better suited to deliver growth finance.

Aim is supported by a regulatory framework similar to the main market.

The London Stock Exchange, Financial Conduct Authority, Financial Reporting Council and other regulatory bodies – all play a role. We vigorously investigate rule breaches and where necessary sanction.

Read more: London Stock Exchange wants to halt "volatile trading" on Aim

Playing by the rules

On average there are nearly 200 alleged rule breaches each year and over half have resulted in action being taken.

In the cases where action was not taken by the Exchange, either the allegation was reviewed and not substantiated, or fell under the jurisdiction of other UK regulatory bodies and was referred.

And while Aim companies do occasionally fail, so do companies in private ownership and on other stock exchanges.

When investing equity risk capital, there is by definition an evaluation of risk versus reward – but this is a basic tenet of all investment and markets, not just Aim.

Any investment in high growth businesses should be evaluated with an appropriate understanding of the risks and returns.

As the regulatory landscape continues to evolve, so does Aim.

During its 22-year history, we have periodically reviewed and updated our rules and today we are publishing our latest discussion paper seeking participant views around various themes, including admission criteria and corporate governance requirements.

Crucially, and as always, this regulatory consultation is with the market participants themselves – the companies, investors and advisers.

In business it is fundamental to listen to the customer, not the commentator.

When evaluating the role of high growth companies in society and their markets, we should also remember their outsized contribution to our economy.

Big established firms are not creating net new jobs, but a one per cent increase in high growth companies could add 238,000 new jobs to the economy.

As we build a post-Brexit economy which can realise the potential of these dynamic companies, it is vital the rules of our growth market meet the requirements of companies and investors.

Read more: London Stock Exchange buys Citigroup bond divisions for $685m

Fulfilling customer needs

Aim’s record of raising billions for high growth companies and delivering for investors speaks for itself but we believe different customers have a range of growth finance needs.

So as far as other competitor platforms and markets go: we wholeheartedly welcome them.

Patient or long-term capital providers are increasingly supporting each other throughout the finance “escalator” from angel finance to venture capital and crowdfunding through to public markets like Aim.

But the UK equity finance eco-system must develop further.

Eighty per cent of SME financing still comes in the form of debt. Debt is a perfectly suitable (and tax deductible) tool for big established companies to manage their obligations but ill-suited for high growth businesses which need to invest their capital in innovating and growing, rather than servicing a loan every month.

They need long-term patient capital like equity (which is currently taxed several times).

The patient capital eco-system needs to continue working together to win the policy arguments to recalibrate this debt bias and increase the percentage of growth finance coming from equity. It is entirely possible to do so.

When we successfully campaigned to make shares on Aim eligible for ISA inclusion, £4bn flowed into these companies.

Rather than competing against each other for a small share of the market, we owe it to the risk takers to grow the pie. Capital should flow bottom up from investor to entrepreneur, in addition to the efficient bank lending engine already supporting larger companies.

And as for those who believe that SMEs should be satisfied with traditional forms of lending that may help them to grow at two per cent a year and that the City should remain closed to the backbone of our economy, we say: you belong in the past.

Read more: Industrials firms are expected to make a comeback on Aim – here's why

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