Aim Faces Serious Challenges Amid Market Concerns

Aim, the lightly-regulated junior share market in Britain, has encountered significant difficulties over the past weeks, impacting its 700 listed companies. A looming budget decision next week by Rachel Reeves raises concerns that the inheritance tax exemption, which currently incentivizes Aim stock ownership, could be eliminated.

However, the challenges for Aim extend beyond potential tax changes. A recent report by the Tony Blair Institute for Global Change and Onward criticized Aim as “not fit for purpose,” suggesting that it fails to attract and support tech-driven small companies that could emerge as leaders in their respective fields.

The impact of these market conditions was evidenced when N Brown, a fashion retailer catering to larger women, accepted a £191 million bid from the Alliance family to take the company private, citing its detrimental experience on Aim as a significant factor in their decision.

N Brown reported low liquidity in its shares and noted that fund managers displayed little interest in smaller consumer stocks listed on Aim. They highlighted that being on the Aim market did not justify the associated costs.

This event is part of a broader trend, as over 80 companies have delisted from Aim in the past 15 months. MusicMagpie, a retailer of second-hand records, also announced its departure this month after agreeing to be acquired by AO World.

According to New Financial, a City think tank and lobbying organization, the ecosystem for smaller listed companies is increasingly precarious. The number of listed companies has declined significantly, initial public offerings (IPOs) are now uncommon, and institutional investors are stepping back, all while analysts reduce coverage of Aim stocks. Additionally, UK smaller company funds have seen outflows for 36 consecutive months, and the number of council pension schemes allocating to UK smaller companies has dropped from 18 to just one in the last decade.

New Financial emphasized the risky cycle at play: lower demand leads to declining valuations and performance, subsequently resulting in stricter governance and regulatory requirements and escalating costs.

To revitalize the sector, the report suggested implementing new incentives and tax breaks to combat the prevailing trend of “safety-ism” within the market. It argued that the decline is not inevitable, citing junior markets in countries like Sweden and Australia, where small companies have been successfully nurtured.

Investors also pointed to disappointing investment returns from Aim as a significant issue. While structural challenges have contributed to diminished valuations, the overall poor performance of many Aim companies is believed to be the primary culprit.

Tim Bush, a representative from Pirc, an advisory service for institutional investors, commented on the unsatisfactory investment performance. He questioned why Aim has not addressed growth aspirations as intended.

In contrast, smaller companies on the principal London market have performed significantly better. Research by Deutsche Numis revealed that over 25 years, returns for smaller firms on the main market reached 869 percent, outdoing the S&P 500, which returned 602 percent. Aim’s stocks, in comparison, managed a mere 177 percent.

The recent performance metrics are equally troubling. In the past five years, smaller firms on the main market delivered an average return of 2.8 percent annually, while Aim stocks posted a negative return of -0.5 percent per year.

A glance at the share prices of various Aim companies illustrates the downturn. Boohoo, once a £4 billion favorite and a standout on Aim five years ago, now has a market valuation of £371 million and is contemplating a breakup.

Marcus Stuttard, who oversees Aim, refutes claims that the performance issues are due to the quality of the companies. He points out that collapses like Quindell and Purplebricks are historical, not indicative of the current market.

Despite his concerns regarding tax threats and other challenges, Stuttard remains optimistic, stating that 53 percent of all capital raised across Europe’s growth markets has come from Aim over the last five years. Aim companies contribute £68 billion to the UK economy and sustain approximately 778,000 jobs.

Furthermore, Stuttard highlighted that three out of the six companies that commenced on Aim in the past year were American, countering the narrative of a one-way IPO traffic flow.

Despite this, some brokers recognize that Aim’s track record of poor average returns has not been beneficial. Charles Hall from Peel Hunt noted that some companies clearly should not have been listed initially. He expressed a desire for a more selective approach while acknowledging the inherent risks in small companies.

Proponents of Aim argue that picking the right stocks is essential, suggesting that there are opportunities to outperform through careful analysis. The Octopus AIM Inheritance Tax Service fund, for example, has seen a rise of 177 percent since its inception in June 2005, while the overall Aim has only delivered a total return of 6 percent over the same period.

Hall argues that the potential for significant returns justifies the risk, especially considering that successful companies such as AstraZeneca and Shell began as small enterprises. He believes in the necessity of taking risks and embracing potential failures.

However, Aim’s short-term outlook could worsen if the Chancellor eliminates the inheritance tax exemption scheduled for discussion on October 30. Aim stocks have underperformed blue-chip companies by 10 percent since June, and further declines could occur if the tax provision is revoked. Stuttard remarked, “It’s absolutely not fully priced in.”

Aim’s Highlights and Challenges

Success Stories:

Jet2: This airline and holiday group has long been associated with junior share markets, initially listing on the Unlisted Securities Market before transferring to Aim in 2005. It is now the UK’s largest package holiday provider, serving 7 million customers with a valuation of £3.1 billion.

Gamma Communications: Headquartered in Berkshire, this telecom provider has expanded internationally since listing on Aim in 2014, yielding eight times the initial investment for shareholders. The company is valued at £1.6 billion, despite announcing plans to consider a full listing.

Fevertree Drinks: Though experiencing recent struggles, this mixer brand previously outpaced competitors like Schweppes and is still valued at £897 million.

Warpaint London: Known for brands such as W7 and Technic, this cosmetics company has seen substantial growth since its 2016 listing, currently valued at £431 million, driven by collaborations with influencers.

James Halstead: This established flooring company has consistently increased its dividends since 1974 and transitioned to Aim in 2002, although recent concerns over supply chain issues have affected its shares.

Challenges:

Quindell: Once a booming insurance services group, it collapsed following a Serious Fraud Office investigation into its operations, leading to significant losses for investors.

Purplebricks: The estate agency that sought to disrupt the industry reached a peak valuation of over £1.3 billion but was sold for a nominal fee of £1 last year after a failed international expansion strategy.

UK Oil & Gas: Initially riding high on the potential of the “Gatwick gusher,” the company has seen its value plummet by 99.996 percent since 2005 due to more realistic market expectations.

Conviviality: This retailer imploded in 2018 following a spreadsheet error and missed tax obligation, leading to a £500 million loss for investors.

WANdisco: Once valued at nearly £1 billion, the software firm was marred by an accounting scandal and is now valued at only £32 million.