Continuing on our blog theme of public markets, this month we are discussing the robust health of the AIM market, and its continued staying power and appeal. AIM has thrived since inception offering a sector-agnostic, regulatory-light and cheap infrastructure for companies to gain a public listing, whilst maintaining the many tax incentives of remaining private. AIM is now deemed the leading market for growth companies, accounting for 59% (£5.5bn) of all capital raised in 2018 on European growth markets. In H1 2019 this dominance continued with AIM accounting for 65% of all IPO and follow-on capital raised in Europe, raising 3.1x more than the next European growth market. At times in Q2 and Q3 2018, the AIM market’s total capitalisation was at an all time high of c. £115bn, with the value of secondary (trading) share volumes at its highest since the global financial crisis. Across all sectors, AIM has an unparalleled follow-on environment: of all newly IPO’d companies in the period 2013-2018, approximately half returned in the same period to raise follow-on capital (37% doing so more than once).
Notwithstanding its successes, AIM has had its critics, arguing the market’s success is unsustainable, highlighting mounting regulation, the impact of Brexit, and the appeal of technology and life science-focused Nasdaq and other growing alternative markets (such as Nasdaq First North and NEX). Below I argue that companies should be cautious of these other approaches and instead see AIM as a natural part of a company’s growth trajectory and as key stepping stone for a full UK or to another subsequent listing.
Within my own sector of healthcare and life sciences, UK companies (e.g. Bicycle Therapeutics) are increasingly favouring a Nasdaq listing, seeking easier access to bigger pools of capital and staggering valuations amid strong US investor demand for risky drug development compared to European counterparts. Last year on AIM there were 4 new healthcare and life science company issues raising £85m (mean £21m) and over 198 further raises totalling £398m (mean £2.0m ). Whilst very respectable, this appears miniscule compared to Nasdaq’s 72 Healthcare IPOs last year raising approximately $8.4bn (mean £117m), but it is the ability to stand out that maintains AIM as a viable market for healthcare companies. The US is a very competitive market, and unless a company is on a billion dollar market cap, it is difficult and expensive for companies with a market cap below £400m to stand out to investors and to maintain their broker support. As such, companies are at risk of being left orphaned as research coverage is gradually dropped and with no retained adviser to steer them. Comparatively, AIM allows companies at a range of market caps below this threshold to gain access to capital, institutional investor support and enhanced corporate profile.
This brings me on to AIM’s requirement of companies to appoint a nominated adviser (“Nomad”). Nomads are financial service firms that play a fundamental role supporting a company in its journey to the market, offering ongoing advisory support throughout its lifespan as well as helping to marshal investor support and frame investor expectations through complementary broking and research. Through credible research coverage and an effective sales trading presence, broker- nomads can generate a decent secondary market and a platform for liquidity, not just to match buyers and sellers, but also to enable a company to access further capital for growth. For a new and growing company with a limited public market history, an experienced nomad and broker with real market presence and respected research is crucial to its success and maintaining a following for its shares. This support system is not readily available on other markets, and therefore, AIM should be seen as a stepping stone for companies to grow and gain market experience necessary before potentially “graduating” to the main markets. The rise of true cross-over funds means that it is becoming easier for companies to use AIM to reach critical mass and the relevant trading history, before smoothly switching to a main market listing in London or sometimes even a further listing in the US.
London is already the most international stock market in the world in terms of international listed companies, with international shareholders representing c.half the ownership of UK quoted stocks (including North American shareholders representing c.30% of UK ownership). The UK market is receptive to deals of varying sizes and sees less share price volatility than other markets, reflecting the longer term orientation of London investors, as well as better appetite for secondary selldown at IPO than its US peer markets. With a significantly lower regulatory and legal ‘carrying cost’ in London (lower fundraising commissions, six-monthly not quarterly reporting, cheaper insurance and no ‘SarbOx’), lower price volatility and a strong sector performance vs. whole market benchmarks, AIM has become a natural home for healthcare and life science companies.
International companies are therefore seeing AIM as an attractive alternative source of capital and a place to find a supportive investor base without the need to give away too much hard-won equity to venture funders. A clear example of this has been RenalytixAI*, an AI-enabled diagnostic company with US operations which has had a transformative year since its AIM IPO in Nov. 2018, as a spin-out from EKF Diagnostic Holdings. With its KidneyIntelX™ product running a good year ahead of schedule in terms of regulatory progress, and having recently completed an oversubscribed £14m raise with new and existing investors, Renalytix is now well positioned to accelerate its commercial plans.
As the AIM ecosystem has matured and the quality of companies has improved, it is now perfectly possible to build a £1bn company on what used to be referred to as the ‘Junior Market’, and arguably AIM can now more than ever be seen as a destination venue in its own right. Companies like Asos, Abcam, Clinigen, Hutchinson China Meditech and Burford Capital have all demonstrated this. With good returns from the sector being generated in London (e.g. the takeover of Shire returned an estimate of more than $21bn to UK investors alone), there should be appetite for some reinvestment into a persistent and very successful market for growth companies, AIM.
* Singer Capital Markets has provided and continues to provide corporate services to RenalytixAI.
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