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A good year for AIM - a bad year for small caps
Sophie Douglas, manager of Sharemark, looks back over 2010 and examines how AIM’s recovery has impacted UK small cap companies and their investors
AIM had a rough ride during 2009, suffering from a wave of de-listings and a significant fall in new money raised. To the end of October 2010, however, the number of companies de-listing from AIM had fallen by 28 per cent, compared with the same period last year, while new money raised is up from £579.7m to £863.18m.
But how has AIM’s recovery impacted other markets and how well is London’s junior market serving small cap companies and their investors?
Not surprisingly, given the drop in the number of de-listings, secondary markets have seen fewer companies join from AIM, with private firms now making up the majority of new admissions.
As for the main market, a new government, spending reviews and bank bail-outs have all contributed to a turbulent year. Amid the ups and downs, the steady recovery of AIM has been welcomed, with seven companies moving up to the main market from AIM so far this year.
However, the story isn’t so rosy for the majority of UK fully-listed small cap companies, for whom liquidity and market visibility remain a real concern. With market-makers widening spreads in the wake of the credit crunch and mainstream media attention focused on larger companies, 2010 has seen many small caps struggle to communicate with their investors and improve market exposure, while their shares remain inaccessible and illiquid.
Furthermore, many institutional investors are unable to invest in small caps due to size and liquidity restrictions, while the regulatory and information environment makes it difficult for private investors to invest.
Sophie Douglas
As manager of Sharemark, Sophie Douglas is a well-respected commentator on the financial markets and is regularly asked to contribute to publications such as the Financial Times, Shares magazine, Investment Week, Growing Business, Growth Company Investor and Business XL. |
Small Cap Network
One organisation committed to helping small caps escape the liquidity trap is the Small Cap Network, a newly-formed industry working group. Small Cap Network member and co-founder of Stockopedia, David Brickell, says: “Although small caps have outperformed large caps, this wasn’t the case in recent years and, as a result, a lot of institutional money has been lost from the sector.
“This has left retail investors to provide the balance of liquidity but the market structure isn’t well set up for this. Retail investors often lack access to fundamental analysis and broker research, which has unfortunately led to the rise of speculation and short-term trading strategies”.
The attitude of policy makers has arguably compounded the problem. Amid understandable concerns about miss-selling, it seems to have been forgotten that the equity markets were originally designed to enable companies to raise finance effectively, in an environment that allowed investors to find those companies and vice versa.
lack access to fundamental
analysis and broker research
Regulatory Environment
A number of commentators believe we now exist in a state of overprotection of retail investors and overregulation of smaller companies, which is crippling many small caps and driving others away from the markets. There are approximately 100,000 SMEs in this country and less than 2000 of those are listed. That’s a relatively poor share for the public markets.
While some may argue that illiquidity is inevitable for small caps, they would do well to look at the Australian and Toronto exchanges, where listed SMEs thrive thanks to a more buccaneering spirit.
The Canadian regulatory environment doesn’t prevent private client brokers from promoting stocks to the retail audience, in the way that is increasingly the case here. Nor is the tax environment for AIM companies as supportive as it could be.
Investors respond to incentives and the fact investors are unable to hold AIM shares in ISAs doesn’t help towards providing the increased retail investor liquidity that is badly needed by smallcaps.
Despite the doom and gloom, there is some hope for the UK’s smaller companies. Many believe the forlorn state of the small cap market is due to the credit bubble favouring large caps, so institutional interest may return.
Furthermore, the government has emphasised the importance of SMEs in its recovery plans with its recent Green Paper, Financing a Private Sector Recovery, suggesting that the equity markets are a key route to resolving the funding gap for SMEs.
Finally, an increasing number of UK small caps are also looking to dual-trade their shares on an order-driven market like Sharemark alongside a quote driven system – to help further raise liquidity and provide them with an additional route to settlement.
Let’s hope such measures ensure that many UK small caps and their investors enjoy as much of a revival in fortune in 2011 as AIM did in 2010.
Written by Sophie Douglas
Sharemark
Copyright © Aimzine Ltd 2010
About Sharemark Sharemark is a simple, flexible and low cost stock market for the shares of smaller companies and mutual organisations. It provides investors and shareholders with a secure environment in which shares, loan stock and bonds can be traded. In 2010, Sharemark celebrated 10 years as one of the UK’s leading alternative share-trading platforms. Over the past decade, Sharemark has been helping small businesses raise liquidity by providing a stock market specifically designed to meet their needs. Sharemark provides companies with a simple way for their investors to deal shares using a fair and transparent pricing mechanism. Instead of relying on bid-offer spreads, shares are traded at a single price – bought and sold at auctions which take place at a time that suits shareholders. Sharemark also offers unbeatable flexibility in allowing companies to trade in a closed market or dual trade. By dual trading on Sharemark, companies can raise their profile further, they can increase liquidity, and they can broaden their shareholder base. Sharemark represents great value for money too. Low admission fees and inexpensive ongoing costs means companies can save up to £145,000 by choosing Sharemark over markets like AIM or PLUS. |
institutional interest
may return
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