Accredited by:
alternative investment market
Industry Update
QUARTER 1 2020
coping with coronavirus WHAT THE MANAGERS say FEES AND CHARGES recent performance budget update better reporting
FIND INSIDE
INTRODUCTION
1
MARKET UPDATE
2
industry analysis
3
considerations for investment
4
MANAGERS IN FOCUS
5
WHAT'S ON THE HORIZON
6
FURTHER LEARNING
7
The latest news, updates and statistics on everything AIM
enterprise investment scheme
1. Introduction
Foreword Opening statement Update overview Key findings
Foreword Opening Statement Update Overview Key Findings
1. INTRODUCTION
Coping with Coronavirus Beyond the Coronavirus Recent Performance 2019 Performance An International Market? Budget Update What the Managers Say
2. market update
AIM Acquisitions Better Reporting
3. INdustry analysis
Market Composition Fees and Charges Sector Diversity
4. considerations for investment
Close Brothers Sarasin & Partners TIME Investments AIM Solutions Comparison
5. managers in focus
Coronavirus Impacts The non Covid-19 Future What the Managers Say
6. what's on the horizon
Learning Objectives CPD and Feedback About Intelligent Partnership
7. further learning
2. MARKET UPDATE
4. CONSIDERATIONS FOR INVESTMENT
3. INDUSTRY ANALYSIS
5. MANAGERS IN FOCUS
6. WHAT'S ON THE HORIZON
7. FURTHER LEARNING
guy tolhurst
foreword
MENU
Foreword
INTRODUCTION / FOREWORD
I
t gives me great pleasure to welcome you to our first quarterly AIM Update. This is a new format for us, after several successful years publishing Annual Reports. We feel the new format will allow us to continue to provide you with in-depth analysis, insight and data, but now we will be able to do so in a more timely manner. The importance of being able to react to changes rapidly has been ably demonstrated by the AIM market over recent months. Already this year the global equity market has struggled with panic around the Coronavirus Covid-19 pandemic, seeing historic daily falls on more than one occasion. Ironically this pace of change makes the AIM market a good option to consider for longer term investments. Tax advantaged investments like Business Relief (BR), Venture Capital Trusts (VCTs), and even the occasional Enterprise Investment Scheme (EIS), all offer IFAs and their clients effective ways to grow their wealth in the long term. Although the number of companies on the AIM market has shrunk over recent years, there is still plenty of diversity in the market, with an increasing number of larger, well established businesses complementing the younger, more risky (but higher growth potential) options for managers. Indeed, for a savvy manager there are great opportunities in the AIM market and, for an investor, this can be complemented with the generous tax reliefs on offer. As we look ahead, Covid-19 is quite rightly dominating short term forecasts, but other factors will also impact the market. Seamless trade with the EU will continue until at least the end of the year. Britain is looking to strike trade deals with other countries at the same time - most notably the US, which may itself be complicated by the 2020 US presidential elections. I hope this Update, and the Updates to come, will help provide you with the insight and information you need to make informed decisions about advising clients about the AIM market.
managing director, intelligent partnership
welcome
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Marcus stuttard
opening statement
AIM’s role in growth and recovery
INTRODUCTION / OPENING STATEMENT
A
s we look to AIM’s 25th anniversary later this year, no one could have predicted the unprecedented circumstances as a result of COVID-19. More than ever, capital markets including AIM have a major role to play in supporting companies that will be needed to provide high quality jobs, find innovative solutions and drive growth to support the economy. Despite market volatility, public companies have continued to be able to access capital to strengthen their balance sheets and liquidity positions. In the first quarter of 2020, London’s public companies across a wide range of sectors, from technology to leisure, raised almost £5 billion in IPO and further capital. If we look back to the 2008 financial crisis as an example, companies were able to access markets efficiently, with new and existing investors willing to take a long-term view and continue to deploy capital. Our expectation is that investors will continue to do that through this crisis
- MARCUS STUTTARD
More than ever, capital markets including AIM have a major role to play in supporting companies.
However, it will be important for companies to maintain good communication with investors. Firms that build trust through regular and transparent communication with investors are the ones that are better able to go back to their investors and raise further capital if they need to. Since launch in 1995, AIM has supported nearly four-thousand growth companies in raising over £115bn, 60% of which has been through follow-on fundraisings.
Last year, AIM accounted for 60% of all European growth market IPO and follow-on equity capital raised. While IPOs often get greater attention, it’s worth noting that in 2019 AIM companies raised £3.4bn in 351 follow-on issuances. This underlines the essential function of public markets to enable companies to return to market to raise additional capital, as needed, to continue to grow, innovate, create jobs and support economic development. London Stock Exchange also launched two innovations in 2019, which will support AIM companies and the investor community. In November, we announced a collaboration with Primary Bid to broaden retail investors’ access to IPOs and follow-on equity raisings. Through the collaboration, retail investors will be able to access capital raisings on the same terms as institutional investors. And in October, London Stock Exchange launched the Green Economy Mark, shining a spotlight on listed companies and funds on the Main Market and AIM that derive 50% or more of their revenues from products and services contributing to the global green economy. There are currently 78 companies that have received the Mark, 38 of which are admitted to AIM. In the short-term global stock markets are likely to remain volatile as countries around the world navigate their responses to the pandemic. However, there is much to celebrate about AIM and the dynamic companies it supports. As the world’s leading growth market, AIM plays a key role in supporting UK and international companies, providing access to growth and opportunities for investors and connecting issuers with the capital they need to drive innovation, economic growth and job creation.
head of aim & uk primary markets, london stock exchange
update overview
INTRODUCTION / UPDATE OVERVIEW
This Update wouldn’t be possible without the help and support of a number of third parties who have contributed to the writing of this update. Contributions include helping develop the initial scope, providing data and information, providing insights on the market, providing copy and reviewing content. So, a big thanks to: Sam Barton, Stephen Daniels, Marcus Stuttard and Hugo Wood. We have relied upon MICAP for most of the data in that we have based the Update upon. MICAP is part of the same group of companies as Intelligent Partnership. We also carried out our own extensive desk research and interviews to verify their data. This update is made possible by our sponsors, who have also contributed copy to the Update and supported us by helping to meet production costs. So thank you to: Close Brothers, Sarasin and TIME.
Business relief qualifying shares and share sales Business Relief allows investors who hold Business Relief qualifying shares to sell those shares. As long as they purchase replacement Business Relief qualifying shares within three years of the sale, the two year BR qualification clock is not reset. As the examples of Earthport, WYG and PTSG show, there are examples where it may be worth investors considering earning an immediate windfall, which can then be reinvested in other options a manager considers better long term value. However, investors should be aware of the risk that, should they pass away in between an investment being sold and any replacement shares being acquired within the three year window, they would not be able to claim Business Relief
acknowledgements and thanks
Find out more at MANAGERS IN FOCUS
Readers can claim up to 2 hours’ structured CPD (excluding breaks). By the end of the update readers will be able to: • Identify the main tax advantaged products available in the AIM market • Pinpoint the key developments and news in the AIM market over the past quarterUnderstand the effects of M&A in the AIM markets • Determine how the AIM market has performed, and some of the factors that contributed to this performance • Benchmark current products and providers against each other on key investment criteriaRecognise various factors that will affect the AIM market in the months to come. • Understand the effects of M&A in the AIM markets • Recognise various factors that will affect the AIM market in the months to come
learning objectives for cpd accreditation
Find out more about claiming your CPD
INTRODUCTION / update overview
INTRODUCTION / KEY FINDINGS
794
on 27 april 2020, Down over 180 points since 21 Feb, but up over 200 points since 19 March low of 589
AIM All Share Index
23
in the aim market in 2019
IPOs
11%
have a market cap of over £250 million
of AIM quoted companies
1.28%
Average annual management charge
100%
using QCA’s governance code report their business model and strategy
of companies
33
as of april 2020
tax-advantaged AIM offers
£3.4
raised in 351 follow-on issuances in 2019
billion
at the end of 2019
AIM quoted companies
865
key findings
2. Market update
coping with coronavirus beyond the coronavirus recent performance 2019 performance an international market? budget update what the managers say
coping with coronavirus
MARKET UPDATE / COPING WITH CORONAVIRUS
As a quoted market, the AIM market has not been immune to the global equity fall caused by the pandemic.
rom a post 2018 high of 972 at the end of Friday February 20, the FTSE AIM All-Share market fell over 10% by the end of the next week, and has continued to fall. The effects were compounded by an oil price war between Saudi Arabia and Russia which contributed to what has been dubbed Black Monday on 9 March 2020 - during which global markets suffered the greatest single-day fall since the 2008 recession. This was followed by the so-called Black Thursday 3 days later, when US president Trump banned travel from the Schengen Area to the US. This surpassed Black Monday, and was the worst day of trading since 1987 for some markets. Since then, markets have continued to struggle but there has been an encouraging upturn. By 27 April, AIM had recovered almost half of the 386 point drop it saw between 20 February and 19 March. It is important to note this was not limited to the AIM market, virtually every Index has suffered as a result of worries around the virus - including the FTSE All-share, European markets and US stock markets. From the initial stock market rout on February 20th, the AIM market fell over 30%. Although looking at that period paints a bleak picture, there were signs of light at the end of the tunnel. The market jumped 13% between March 23 and March 27. Although it will be too early to say for sure, historically many Business Relief AIM managed portfolios have outperformed the general AIM market in tough times. For example, when the market fell 19% in 2019, Business Relief AIM managed portfolios only fell 15%, on average, with many performing even better. This demonstrates the value of experienced stock pickers in tough times. With the global markets stuck in reverse as a result of the virus, it is impossible to not be affected by it. But by careful stock selection, and a shrewd appreciation of what options represent value, a good manager can shield their investors’ capital away from the worst of it.
F
There is already an indication of how AIM-quoted companies are reacting to the current situation with Finncap’s April 2020 COVID-19 Company Response Report finding that of the two thirds of companies that have issued Covid-19 updates so far, perhaps surprisingly, 38% of companies have not seen an impact on trading. The report states that, “this list is dominated by Tech (WFH, online payments, recurring revenues) and Life Science companies with a smattering of niche Financials and Industrials.” There is also a notable minority of 7% of companies that is directly benefitting, specifically tech (WFH, online payments, recurring revenues), Life Sciences (Disinfection, Covid-19 treatments) and some Food Producers (pulled forward demand from stockpiling). But around two thirds have downgraded their trading expectations or suspended forecasting.
how are aim companies responding to covid 19: impact on forecasts
Source: 2020 COVID-19 Company Response Report, Finncap, April 2020
Forecast upgrade
Forecast neutral
Forecast downgrade
Forecasts suspended
7%
38%
33%
30%
with careful stock selection and a shrewd appreciation of what options represent value, a good manager can shield their investors’ capital away from the worst of it.
sam barton
thought leadership
beyond the coronavirus
MARKET UPDATE / THOUGHT LEADERSHIP
n four short months, a previously unknown coronavirus has spread from a market in Wuhan, China, across the entire world. The pandemic has caused an unprecedented global lockdown. As the responses of governments, central banks and other authorities were at first considered insufficient, shares went into freefall and headed towards their quickest ever bear market. A rush for dollars (momentarily at least) caused many other assets to be liquidated. Hard panic had set in. While this has been unnerving for investors, it’s more important than ever to remain calm and place current events in their historical context. Coronavirus has ended a decade-long bull run for global equities, but at some point the bull will return. In the Close Inheritance Tax Service, we were already treading cautiously going into the bear market. By the end of 2019, some companies we owned in the service were acquired and when looking to reinvest the windfall, it was tricky to find what we considered good value for investors. Our response to the Coronavirus has been to work tirelessly to protect the value of every pound clients have entrusted to us. This includes engaging with the companies we own that may be challenged by the outbreak. Among others, we need to focus on companies with high net liabilities and those seeing their working capital unwind:
- SAM BARTON
Our strategy beyond this outbreak is unchanged – that is to pay attention to company balance sheets, look for value and build well-diversified portfolios for investors.
• Those which may have to stop or drastically cut their dividends • Those which may need to raise capital (which would dilute our equity) • Those which have high net debt/EBITDA ratios (are too leveraged) • Those at risk of being nationalised ‘by the back door’ via conditional government loans, which may later be converted to shareholder equity
In the face of some of the most extreme trading conditions we have ever seen, we have forensically analysed balance sheets, liquidity and debt profiles to develop a list of companies which we believe will emerge stronger from this downturn. These are ones with either net cash or manageable levels of debt and good, consistent revenue over time (often family/founder-led businesses). Because these types of companies are so popular, they usually trade at a high premium – something compounded by the prolonged bull market. With the recent sell-off, there will be opportunities to pick up companies that have been oversold, with the potential to generate good returns for investors. Our job now is to remain focused on what is ahead. With the adage ‘never catch a falling knife’ in our minds, we are continuing to take a cautious view when allocating capital, even if we are likely to increase the number of holdings to the top end of our usual 25-35 range. We will add to portfolios incrementally and in smaller position sizes until we reach a comfortable standard size. The current market offers an attractive entry point for long-term investors, however with high volatility companies can be mispriced in the short-term. We have always maintained a conservative investment approach and although this means we might not see the highest of the highs, historically it has meant that we have avoided prolonged lows when the market hits a difficult patch – as is happening now. For Business Relief this is important. Investors are in it for the long-haul and, generally, do not know exactly when their estate is going to need to claim the relief. That’s why we aim to smooth out the short-term pain and protect as much of their 40% head-start on Inheritance Tax relief as possible. The recent shocks have demonstrated the benefits of preparing for a downturn, even when times are good. A number of years ago, we invested in a pawnbroker and an insolvency practise which we believe will provide some growth for investors while other businesses struggle. Not being too greedy, we’ve always preferred to avoid the excesses of the bull market by never overpaying for companies. Finally, the key is not to panic. It’s difficult to know all the long-term consequences of the Coronavirus, but people are adaptable. Our strategy beyond this outbreak is unchanged – that is to pay attention to company balance sheets, look for value and build well-diversified portfolios for investors.
managing director, close brothers asset management
www.closebrothersam.com 01606 810325 ifaclient@closebrothers.com
contact
recent performance
MARKET UPDATE / RECENT PERFORMANCE
value of stock markets following drops (%)
In the first quarter of 2020, there were 26 cancellations on AIM, the vast majority of which (15) took place in January - before the Covid-19 impact ramped up in the UK.
here is clearly a risk of an escalation in these numbers as smaller AIM quoted firms struggle with funding during the lockdown period. Perhaps unsurprisingly, the average number of daily trades went up to 65,050 in March from 46,166 in January and 54,385 in February as panic sparked substantial share sales. The average for the whole of 2019 was 55,226. The total number of equity trades in the quarter was 3,534,337, of which 439,231 were in the healthcare sector alone. This already equates to almost 87% of the 2019 number with the March figure of 192,310 well over double the December figure of 78,169. Drilling down into the healthcare sector, Pharmaceuticals, Biotechnology and Marijuana Producers were involved in 164,923 trades in March, around three times the number seen in December 2019. These statistics show the positive impact of Covid-19 with investors keen to enter this market where there is incredible demand for services that can be of assistance to those fighting and those suffering from the virus. However, those in other sectors have fared less well. The FTSE AIM All Share 100’s Breedon Group plc, which is an independent construction materials company saw its share price drop to 65.5p on 3 April from 99.95p at the start of March. Trading activity in its sector - Construction and Materials - was at 24,892 trades for the whole of 2019. By the end of Q1 2020, it had already surpassed that at 34,831 and taking into account its share price and the hit taken by UK property, we can probably assume that most, if not all traders were looking to sell off their interest, rather than gain access to the sector. That said, it is in these types of sell offs that value can be found ready for a bounce back. And we know that bounce backs do happen. We’ve already had some mini bounce backs as markets react to improved news of Covid-19, like the one on 24 March that coincided with Boris Johnson finally imposing a near full lockdown of Britain to protect against the spread of coronavirus. In the longer term, we know that positivity does return.
T
1987
BLACK MONDAY
2000
DOTCOM BUST
2008
GREAT FINANCIAL CRISIS
2016
BREXIT REFERENDUM
Source: FTSE All Share Fact Sheet
1 month on
5 months on
3 years on
5 years on
-40
-20
0
20
40
Drilling down into the healthcare sector, Pharmaceuticals, Biotechnology and Marijuana Producers were involved in 164,923 trades in March, around three times the number seen in December 2019. These statistics show the positive impact of Covid-19 with investors keen to enter this market where there is incredible demand for services that can be of assistance to those fighting and those suffering from the virus. However, those in other sectors have fared less well. The FTSE AIM All Share 100’s Breedon Group plc, which is an independent construction materials company saw its share price drop to 65.5p on 3 April from 99.95p at the start of March. Trading activity in its sector - Construction and Materials - was at 24,892 trades for the whole of 2019. By the end of Q1 2020, it had already surpassed that at 34,831 and taking into account its share price and the hit taken by UK property, we can probably assume that most, if not all traders were looking to sell off their interest, rather than gain access to the sector. That said, it is in these types of sell offs that value can be found ready for a bounce back. And we know that bounce backs do happen. We’ve already had some mini bounce backs as markets react to improved news of Covid-19, like the one on 24 March that coincided with Boris Johnson finally imposing a near full lockdown of Britain to protect against the spread of coronavirus. In the longer term, we know that positivity does return.
2019 performance
MARKET UPDATE / 2019 PERFORMANCE
In order to look for longer term trends, it is worth looking at 2019 performance which, even with the macroeconomic worries around Brexit and international tensions, are comparatively normal next to Coronavirus.
he number of AIM quoted companies at the end of 2019 was 863 - down from 923 in 2018. Except for a small growth in 2014, the number of companies quoted on AIM has now fallen every year since a historical high of 1,694 in 2007 - almost double the amount at the end of 2019. Despite the falling number of companies on AIM, the value of the market at the end of December was up notably from the end of 2018 (£104 billion compared to £91 billion), and was the second highest in the market’s history. 2019 was only the second time the market ended the year with a value above £100 billion (the other year was 2017).
2019 was only the second time the market ended the year with a value above this
£100bn
Of course looking at only year ends masks the famous volatility of the AIM market, and during 2019 the market did not reach the highs it reached during 2018, when the AIM All-Share index broke 1,100, before it collapsed in Q4. After the disastrous Q4 in 2018, AIM recovered strongly during the first five months of 2019. However from the end of May, the index began a decline which lasted until mid October. This fall followed political events - from Theresa May announcing her decision to step down in March, to Boris Johnson’s ‘die in a ditch’ declaration around Brexit, and finally Jeremy Corbyn’s defeat at the hands of Johnson in the general election (which resulted in a strong upswing in performance). As the ‘AIM All-share vs FTSE All-share’ graph shows, the FTSE all-share shared a similar pattern to the AIM All-Share Index. However the FTSE All-share index was less volatile over the year.
aim all-share vs ftse all-share
In other words, the number of companies is shrinking, however the companies remaining on AIM are generally becoming larger. As the graph ‘Number of companies vs market value’ shows, this is a trend which began in 2013, but really began to accelerate in 2016. There are a number of reasons why the average company on AIM is getting bigger. Some companies are now choosing to remain on AIM rather than move into the FTSE, as has historically been the case. Also, larger companies are buying smaller ones at a younger stage in the search for higher growth - meaning there are fewer smaller companies.
number of companies vs market value
number and size of companies
Source: London Stock Exchange
an international market?
MARKET UPDATE / AN INTERNATIONAL MARKET?
Since 2013, the percentage of AIM made up of foreign companies has gradually but consistently fallen.
hereas in 2013 the 226 international companies made up 1 in 5 AIM quoted companies, in 2019, there were just 123, representing less than 15% of the market. As the fall in numbers began prior to 2016, Brexit cannot be seen as the only reason for this fall. This does not mean Brexit has not had an impact, and it is likely that some businesses have taken a ‘wait and see’ approach - choosing to wait for more certainty about Britain’s future relationship with the EU before taking any concrete action. In 2019, just three new international companies quoted on AIM, compared to 21 which left. Even if the majority of AIM quoted companies are UK-based, many of these will have an international outlook. Currently there are over 500 AIM companies with the majority of their operations outside the UK in over 100 countries. Anecdotally, managers speaking at the Intelligent Partnership VCT Showcase at the end of 2019 noted many of their companies are focussing on Asia and the US, as opposed to Europe for international expansion, which might provide an element of protection from any Brexit fallout.
W
% OF AIM COMPANIES: UK VS INTERNATIONAL
AIM COMPANIES with the majority of operations outside of the uk.
500+
examples of international aim companies
ASOS
The online fashion retailer reported that less than 40% of it’s retail sales came from the UK last year. The EU was its second biggest market (representing just over 30% of sales), with the rest of the world accounting for the remaining third. In the company’s most recent results, before the advent of Covid-19, ASOS Chairman Adam Crozier said: My priorities going forward are clear. We need to ensure we have world-class, lean, frictionless operations internationally.”
fever tree
New admissions Given the lower number of companies listing on AIM, it is unsurprising to see the number of new issues was down substantially compared to 2018 and 2017. In 2019, less than half of the new issues raised were the result of IPOs. The lack of IPOs points to uncertainty in the market - with the Brexit deadline looming for much of the year with no obvious way through Parliamentary deadlock, increased international trade tensions, as well as the spectre of a third election in less than five years. The election may have had a particularly strong effect on the attractiveness of the AIM market, as it had the potential to bring into power a Jeremy Corbyn-led Labour government that many feared would remove the tax benefits of many AIM stocks. Although the election results have answered at least one of these questions, and the Brexit agreement has helped ease some of the tensions in this regard, there are still a number of macro issues facing the economy in 2020. Significant questions around the Coronavirus impact loom large, and there are continued questions around President Trump’s international policy, as well continuing uncertainty around the Brexit trade deal.
NEW ADMISSIONS
money raised (£m)
LAUNCHED TO DATE
3,178
691
2015
2017
2018
2019
47
55
69
52
14
9
11
13
UK
International
Further
New
£5,456m
£6,378m
£4,765m
£5,505m
£3,837m
budget update
MARKET UPDATE / BUDGET UPDATE
In March, Rishi Sunak delivered his maiden Budget.
n the lead up, there had been speculation that Sunak might alter inheritance tax - from something as radical as replacing it with a lifetime gifting allowance through to reducing or removing some of the inheritance tax reliefs, including Business Relief. The removal of BR would have had a negative effect on the AIM market. Between 50% - 70% of AIM companies qualify for the relief, and it is generally accepted that it can fuel growth and help increase the value of those which can receive it. In the end, Sunak left inheritance tax and Business Relief, as well as VCTs and EIS, alone. Instead, with Coronavirus high on the agenda, he chose to use the Budget to combat its economic effect - for example cutting business rates for SMEs. Overall the budget should not have a major effect on the AIM market. It should be noted though, that some have speculated that Sunak pushed back planned tax rises and relief cuts until after the Coronavirus threat has subsided.
Having said that, the government re-iterated its support of mechanisms through which growth can be generated, stating: “The government places a high priority on expanding the supply of finance through the cycle to support long-term investment to increase the productive capacity of the economy, across all regions and nations of the UK. This includes, but is not limited to, areas such as infrastructure, SME finance, venture and growth capital” As one of the world’s leading growth markets, AIM looks set for continuing political backing.While the Budget announced strong measures to help the types of growth companies that list on AIM, given the Coronavirus predictions - there may well be opportunities for individual investors to do their bit and perhaps benefit later from a spot of value investing: Many companies without up to 20% of their workforce and interrupted access to supplies as well as reduced consumer spending, could now be looking for follow on funding rounds sooner and higher investment levels.
- Edward Campbell-Johnston, Sarasin & Partners
The range of ESG and stewardship risks we see across the AIM universe is wide. Whilst many smaller companies do not always have the means to address these risks, management and board appetite to engage with us on them is certainly improving.
what the managers say
MARKET UPDATE / WHAT THE MANAGERS SAY
So how are the managers feeling about the AIM market and overall investment market conditions? Here's what they have to say.
What are the big opportunities you’ve been seeing in the market in the past year?
SAM BARTON
Managing Director, Close Brothers Asset Management
01
The opportunities have been in well-managed, cash generative businesses where the inherent value of the enterprise has been mispriced by the market. We saw 3 of these taken over in 2019. Cyclical stocks performed well after the election result, but this excitement has rapidly evaporated at the start of 2020.
How do you feel about the political landscape and Brexit?
In many ways, the unexpectedly large majority should help offer some political hegemony as we enter the uncharted waters during and after the current crisis. To some extent, it is disappointing that a period where political change could be affected will ultimately be truncated.
02
What has been a big highlight for you over the past year?
While it was good to deliver strong investment performance as a large number of our holdings delivered excellent operational results and validate one’s long-term view, there is always a feeling of frustration when companies get taken over at a discount to what you think is a fair price.
03
hugo wood
Portfolio Manager / Analyst, Sarasin & Partners
While there have been many, three are worthy of particular mention: our returns ahead of the ARC AIP series over 1,3 and 5 years, the breadth and depth of our ESG engagement with AIM companies, and enhancements to our quarterly investment reports that – we believe – provide unrivalled clarity and detail.
Following almost four years of political deadlock, the UK’s departure from the EU in early 2020, combined with the largest majority won by a single party in a generation, provided much-needed stability. A Conservative government with a strong mandate provides arguably the most business-friendly backdrop from a fiscal perspective.
With each passing year the quality of companies listed on AIM improves. As important to us, however, are the improving thematic credentials of the market. We are seeing a growing number of opportunities to invest in companies that directly benefit from the themes that we study.
managers:
Close Brothers Asset Mngmt
HUGO WOOD
SARASIN & PARTNERS
stephen daniels
TIME INVESTMENTS
Our thematic work produces investment ideas across the market cap spectrum. AIM is no exception, and we have repeatedly found small AIM-listed businesses that benefit from exposure to global multi-decade themes.
Head of Investments and Partner, TIME Investments
Our AIM service went through its three-year anniversary last November and while it is continuing to seek to deliver attractive risk-adjusted returns to investors, the portfolio has not been immune to the Coronavirus related falls in the equity markets.
The Conservative Party majority has provided political clarity for the first time in a few years, which is helpful for the domestically focussed stocks on AIM. We welcomed the March 2020 budget, which had no changes to BR or AIM.
We continue to focus on the larger and higher quality companies listed on AIM and those with a history of attractive dividend yields. The recent market correction has represented a potentially opportune period to buy such companies at more attractive prices.
The AIM market is inherently volatile, as evidenced by the dramatic market movement in 2020, so it is essential that it is recommended for all the right reasons.
OUR STRATEGY BEYOND THE CORONAVIRUS OUTBREAK IS UNCHANGED – THAT IS TO PAY ATTENTION TO COMPANY BALANCE SHEETS, LOOK FOR VALUE AND BUILD WELL-DIVERSIFIED PORTFOLIOS FOR INVESTORS.
3. Industry analysis
aim acquisitions better reporting
aim acquisitions
INDUSTRY ANALYSIS / AIM ADQUISITIONS
Although qualification for the potential tax reliefs on offer entails minimum holding periods, currency issues could result in share transactions looking much better value to foreign acquirers, giving an immediate uplift in share prices.
uring the development of the Covid-19 outbreak in the UK, Europe and the USA there has been considerable volatility on currency markets as the various national governments have announced economic support packages. As virus statistics have increased and slowed at different rates and the impacts of the virus on measures such as unemployment rates and national debt are published, the relative strengths of GBP, the dollar and the euro have been significantly affected. This looks set to continue in the short term as the progress and hopeful control of the outbreak peaks and troughs in different locations. Nevertheless, in 2019, with the pound still relatively cheap following Brexit, many UK AIM companies - which often have high potential growth - represented interesting options for funds and foreign companies looking to grow through M&A. Despite being pushed to the background by the Covid-19 imperative, Brexit continues to be a major driver for the price of sterling and The Sunday Times has reported that the UK government is coming under pressure to consider an extension to the Brexit deadline at the end of this year.
D
AIM 2019 Acquisitions average share price uplift on previous day's close
52%
gbp price in euros
Whether or not Boris Johnson is forced to extend the transition period still has the potential to cause a reaction in the GBP vs USD exchange rates. What’s more, as the epidemic has become truly global, there has been evidence of investors moving back to the safe haven of the US dollar. The upshot is that currency fluctuations generating acquisitions interest could be favourable for AIM investors if 2019 is anything to go by: In 2019 there were 34 AIM companies that were acquired. On average, these sales earned investors 52% above the prior day’s close. This stat is slightly skewed by two sales earning investors huge windfalls, and the median amount was 28%. Of course, in the current context, such gains may serve to bring valuations back to the baseline before Covid-19 reared its ugly head. In 2019, the majority of the acqusitions were via trade sales (26 of the 34), while 8 AIM companies were bought by private equity funds.
bid premium / (discount)
As the chart shows, a number of companies earned a large premium on what shares were trading at. In some cases, this was over 100%. Only three companies were sold for less than they were trading at - however this may have actually saved investors longer term pain, if these companies would have struggled without the acquisition.
Companies acquired in 2019 with big uplifts for investors:
AIM companies continue to drive growth Again, in the current context, many small companies are likely to grab funding at any price, but there are still some companies that will be trading at a premium as, there is always opportunity in crisis: Biotech firms have particular earning potential right now, but they are not the only ones: AIM quoted Genedrive PLC (LON:GDR), which is close to finalising development of a freeze dried Coronavirus test with “significant logistical advantage for rapid shipment and global distribution” saw its share price rise around 233% to 30p during March 2020. Meanwhile, fellow AIM-listed biotech Novacyt SA (LON:NCYT) has surged 47.5% to 206.5p in the same period as it develops its own Coronavirus test. Mobile telecoms software specialist Boku (LON:BOKU) provides the technology to mobile networks and apps stores that allows people to buy products and services by adding the cost to their phone bill. It reported payment volumes in the first two months of the year rose by 30% year-on-year, which was a slightly larger increase than expected. “The recent growth we have seen in those countries that are most affected has been higher than in those where the virus has had a more limited impact so far,” said chief executive Jon Prideaux.
Source: BBC 6 April 2020
Source: LSE and Allenby Capital
earthport
Earthport offers cross-border payments services across 200 markets, and its clients include the likes of TransferWise and the Bank of America Merrill Lynch. At the end of December 2018, its shares were trading for between 7p and 8p, yet at the end of the year Visa made a bid for 30p per share.What followed was a short bidding war between Visa and Mastercard, which Visa eventually won with a bid of 37p per share in February - almost 400% above what it was trading for just three months earlier.
premier tech services group
Building facade access company Premier Tech Services Group (PTSG) only listed on AIM in 2015, at 52p. Four years later, it was acquired by a subsidiary of Australian investment group Macquarie for 210.1p. This was more than double what PTSG was trading for at the time, and more than it had traded for at any point in its history.
wyg
WYG provides engineering and consulting services to clients internationally. In May, its board unanimously accepted an offer of 55p per share by US listed consulting and engineering services company Tetra Tech, as it looked to expand its global presence. The company’s value had been struggling over the prior year and it had issued profit warnings. A bid worth 244% more than what WYG was trading for at the time offered investors a valuable exit option.
BUSINESS RELIEF QUALIFYING SHARES AND SHARE SALES Business Relief allows investors who hold Business Relief qualifying shares to sell those shares. As long as they purchase replacement Business Relief qualifying shares within three years of the sale, the two year BR qualification clock is not reset. As the examples of Earthport, WYG and PTSG show, there are examples where it may be worth investors considering earning an immediate windfall, which can then be reinvested in other options a manager considers better long term value. However, investors should be aware of the risk that, should they pass away in between an investment being sold and any replacement shares being acquired within the three year window, they would not be able to claim Business Relief
better reporting
INDUSTRY ANALYSIS / BETTER REPORTING
In September 2018, new rules came into force requiring AIM quoted companies to provide details of which recognised corporate governance code the company applies. This must also include how the AIM company complies with that code, where it does not and why.
ccording to the Quoted Companies Alliance (QCA) and accounting firm UHY Hacker Young, this has resulted in a substantial increase in the amount of information disclosed to the market. The majority of AIM quoted companies use the QCA Corporate Governance Code, which includes 10 principles. Using a sample of 50 AIM quoted companies, the QCA and UHY analysed how many companies were complying with its various principles. This research found rapid and dramatic improvements to the amount of companies applying the principles monitored in the research. This resulted in the vast majority of those monitored complying with the principles.
More transparent corporate reporting gives investors more information about the company, and should result in a healthier investment environment. There is still room for improvement in certain areas, however. Less than half (48%) of those surveyed explained their approach to succession planning (though this was still more than double the 20% in 2018). In addition: • Just 66% explained how they obtained feedback from stakeholders and the actions that were generated as a result • About half (52%) explained how each director kept their skillset up-to-date • The QCA noted that a high percentage of the companies reviewed mirrored the disclosures of Majestic Wine PLC, which was among the first to publish its accounts after the rule change What is more, UHY noted: “The narrative on culture has been generic and somewhat separated from the rest of the annual report. Furthermore, when companies have described their culture, they have used terms such as “open” or “inclusive”, without linking these to values or behaviours.” With that said, given the relatively short time frame since the rule change was implemented, the improvements are impressive, and should help with the perception and integrity of the AIM market.
CORPORATE GOVERNANCE IMPROVEMENTS
quote here.
4. Considerations for Investment
market composition fees and charges sector diversity
market composition
CONSIDERATIONS FOR INVESTMENT / MARKET COMPOSITION
pen AIM tax-advantaged fund makeup tends to have an element of seasonality about it. In BR funds, investors capital is invested and diversified across underlying companies which the manager considers good value at the time. These funds are usually evergreen, meaning they do not have a point where they need to close. In contrast, when investing in a VCT, an investor subscribes for shares in the VCT, not the underlying companies. This might be a brand new VCT issuing shares for the first time, or an existing VCT issuing new shares. These new shares will either take the form of a new share class with a distinct portfolio or a top up of an existing share class. For the pros and cons of investing in new or existing VCTs, take a look at our VCT Advisers Guide. Regardless of whether it is new or existing, VCTs have a closed ended structure. They open and close as the manager sees fit, and their fundraise can be relatively small and completed quickly. They don’t necessarily raise new money every year. In general, the peak of VCT fundraising is in Q1 in the run up to the end of the tax year.
O
How do we use MICAP?
In this section we’ll breakdown how the AIM tax-advantaged market breaks down, what the open offers look like, and how they compare to historical offers. For this data we use MICAP.
All data is correct as of 20 January 2020, and has been obtained from the MICAP platform, unless otherwise stated. That said, there are comments where appropriate on changes to those figures at the date of a further review on 4 April 2020.MICAP offers IFAs and other financial professionals a platform to conduct due diligence on tax advantaged funds, of which there were 33 at the time of writing. The vast majority of these were business relief related. Due to the time of year, there were still a couple of open VCT offers, as well as a single EIS fund.
The data pulled from mid-January shows higher number of VCT funds than the April stats. To help demonstrate how the calendar affects open offers and consequently average fees in the tax-advantaged AIM market, we will be comparing the open offers from January 2020 (and where appropriate, the April 2020 offers) with the open offers from June 2019. As VCT funds close and BR funds don’t, this also has a knock on effect on historical offers - which have a higher proportion of VCTs than BR. Put simply, a BR fund opened in the last tax year will still probably be open, while this likely won’t be the case for a VCT fund. While EIS also has an element of seasonality to it, historically there have only been two managers which offer EIS, and one of them recently stopped taking new investments. This seasonality is borne out by the change in breakdown of the offers in April 2020 by which time four of the six VCT AIM offers had closed, just before the end of the tax year, while the one new BR offer had opened in addition to the 29 open in January.
historical offers
only a small number of EIS managers offer AIM investments
open offers
EIS
18%
71%
BR
VCT
fees and charges
CONSIDERATIONS FOR INVESTMENT / FEES AND CHARGES
he charts show the average fees charged for open AIM offers on MICAP in January and April 2020. This demonstrates how some product types can impact the average fees and how the timing of analysis is affected, even in a relatively short time period. The increase in Business Relief offers by one and the drop in VCT offers has resulted in a drop in average AMC as AMC is generally slightly lower for Business Relief offers than for VCT offers. Also hidden within the averages are some substantial differences between product types. For example, exit performance hurdles are generally a feature of VCT and EIS, but not BR. Therefore the average is much higher for historical averages (which contain a higher proportion of VCT offers) than open offers. In a January guidance statement, the Financial Conduct Authority (FCA) warned against excessive fees or charges for financial products and services. Although its warning was primarily aimed at financial advisers, it did note that excessive fees and charges will be an area of increased focus over the next two years. This may impact the costs of all forms of investment, including in the AIM market.
Data provided by MICAP
Read our EIS and VCT updates and BR Report for an analysis of typical fees (including non-AIM funds) of each individual product:
more on typical fees
EIS Q1 2020
VCT Q1 2020
deep dive into fees and charges
initial charge
average amc to investors
Annual Management Charge The Annual management charge has remained quite stable across all of the periods we have looked at and is currently lower than the historical average of 1.42%. The minimum AMC is 0.75% and the maximum charge is 3.00%. While this is not a huge spread, it is important to remember that this is charged every year, regardless of performance. Therefore it is important to consider AMCs when considering investments, as they have the potential to eat into returns if they are too high.
Initial Charge Of the 33 open offers in April 2020 14 or 42% charged an initial charge.This compared to 47% in January’s open offers, 39% of open offers with such a Charge in June 2019, and 48% in 2017. Since there has been little change in the initial fees for VCT in recent years and only a slight decrease in initial fees in BR over the past year, the fluctuations in average initial charge are very much due to the make up of AIM offers at the time of analysis. Despite this, the investor remains the one who expects to pay most of the initial fees. While this might result in higher upfront costs for the investor, it does mean that investee companies are able to use the investment for growth, as opposed to paying fees. But it also means that a lower proportion of the investor’s original investment amount is eligible for tax relief.
Investment Strategy The vast majority of funds investment strategies are either growth or growth and income, with a slight weighting towards growth. An important caveat here is that what ‘growth’ means will vary by product type. An EIS offer will be targeting far higher growth than a BR offer, for example, due to the risk to capital condition for EIS and VCT investments.
market composition: open offers
Refresher:
What is the risk to capital condition?
Unsurprisingly all VCT’s are investing for growth and income, which makes sense, considering the tax free dividends they are able to pay out and the nature of VCT qualification criteria. Due to this, when looking at historical (i.e. those that are closed) funds, a much higher percentage of funds pursued a growth and income strategy - 75%, compared to 25%.
With the closure of four of the six VCT offers by the start of April, the growth and income portion of the market dropped to 36.4%, although a new BR growth and income fund did open after the January figures were collated. Whether growth or growth and income, one thing is clear - the AIM market is not generally used for capital preservation. Just one BR open offer uses it for capital preservation and growth, no others historically have, and none use it solely for capital preservation. Given recent market conditions, this would seem sensible. However, the AIM based tax advantaged solutions that we are focusing on in this update require a medium to long term investment period (with a minimum three year holding period for EIS and five years for VCT. BR qualification only requires shares to be held for a minimum of two years, but they must be held at the time of the investors death to be eligible for IHT exemption, so the reality is that they are generally held for much longer). This gives the opportunity to ride out short term volatility, while continuing to build growth and reducing tax liabilities.
Investment Type All AIM funds on MICAP are either Alternative Investment Funds (AIF) or Discretionary Portfolio Services (DPS), with the majority of open offers at the start of 2020 being DPS. In reality, the difference between a DPS and an AIF tends to be more of a legal issue than a practical one. AIFs came into existence as a result of the European regulation, the Alternative Investment Funds Managers Directive (AIFMD), in 2013. AIFs are a collective investment undertaking raising capital from a number of investors with a view to investing in accordance with a defined investment policy. VCTs fall under this remit, and all VCTs on the AIM market are AIFs, while BR funds - whereby investors own the actual shares the manager selects, generally do not and are DPS. Again, as two thirds of the VCTs that were open in January had closed by the start of April, the overall proportion of AIF offers dropped in April to 9% with all other offers DPS. As the FCA says: “An AIF is an investment undertaking which pools together capital raised from investors to invest it on a collective basis. The management of a portfolio of investments or other property on an individual client-by-client basis is covered by MiFID rather than AIFMD.” Because VCTs use the AIF structure and BR funds are DPS, when looking at historical funds, the majority are AIFs, as opposed to DPS, due to the higher proportion of VCTs. In January, the FCA wrote to those it regulates highlighting that it intends to investigate whether firms are doing enough to ensure alternative investments are making sure their products are suitable for the investors. See Section 6, What’s on the Horizon for a full breakdown of the FCA’s intentions.
aif
how micap describes aif and dps
A collective investment undertaking which raises capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors, but does not require authorisation pursuant to the Undertakings for Collective Investment in Transferable Securities Directive. Whoever is responsible for arranging the investment must complete an appropriateness test on the investor.
DPS
Investors contract with an investment manager who will invest their funds on their behalf. The FCA Authorised Manager must complete a suitability test on each holding and have permission to manage investments
Slow squeeze in the middle With almost 900 companies listed on the AIM market, with market caps ranging from over £3 billion down to under £1 million, fund managers have plenty to choose from when it comes to scale. The largest category of company is valued between £10-25 million, and over 60% of companies fall between £10-250 million. Over the past four years, there has been a slight increase in the proportion of companies at either extreme in size. 2019 saw a slight but notable increase in the proportion of companies valued at over £250 million, as these companies constituted 11% of the market (compared to just under 10% in 2018 and 2017, and 8% in 2016). At the same time, 18.9% of companies were worth £5 million or below, higher than at any time over the past four years. The growth in large companies in AIM suggests that it is maturing, while the growth in smaller companies suggests it remains attractive for entrepreneurs. From an investment point of view, a growth on the fringes gives managers more options, as there are increasing opportunities for smaller more risky but higher potential companies as well as larger more mature ones.
distribution of companies by equity market value
continued
The Autumn Budget 2017 introduced a new ‘principles based approach’ to identify lower risk activities that should not benefit from the tax reliefs. This crystallised in the risk to capital condition, which has applied since March 2018 and is intended to exclude tax motivated investments, where the tax relief provides most of the return for an investor or where there is a limited risk to the original investment (i.e. a ‘wealth preservation approach). The condition depends on HMRC taking a ’reasonable view’ as to whether an investment has been structured to provide a low risk return for investors. There are two parts to the condition: 01. Whether the company has objectives to grow and develop over the long term (which broadly mirrors an existing test with the schemes); and 02. Whether there is a significant risk that there could be a loss of capital to the investor of an amount greater than the net return.The condition requires all relevant factors about the investment to be considered in the round. These rules apply to all VCTs, as well as investments through the Enterprise Investment Scheme and Seed Enterprise Investment Scheme.
the risk to capital condition
sector diversity
CONSIDERATIONS FOR INVESTMEMT/ SECTOR DIVERSITY
s the chart below shows, only one sector made up 10% of the market. Any sector which constituted less than 1% has been classed as ‘other’, and therefore there are actually more sectors present in the AIM market than is shown in the chart. Some of these sectors are dominated by a few big companies. Beverage companies make up 2.93% of the AIM market yet there are only four beverage companies in AIM. One of them happens to be Fevertree. At the same time, there are 46 industrial metals and mining companies in AIM, yet these constituted just 2.04%. Of course, not all companies listed on AIM are compatible with tax advantaged funds. For more information about what companies qualify for them, read our EIS, VCT and BR Guides. Whether looking at size or sector diversity, AIM provides managers with a wide range of options. Different managers will have focus on different sectors, giving investors and their advisers a wide choice in where to invest capital.
The AIM market is home to a highly diverse range of companies.
of aim market value belongs to Software & computer services
10%
percentage by market cap vs sector
- Nigel Ashfield, Managing Director, TIME Investments
The AIM market was launched to provide capital to growth businesses and will be vital for supporting UK businesses devastated by the effects of COVID-19
5. Managers in Focus
close brothers asset management sarasin & partners time investments aim solutions comparison table
Sarasin & Partners provides discretionary investment services to a wide range of clients, including charities, institutions and private individuals, as well as offering access to its investment strategies through third-party platforms. Our core focus is on identifying thematic investment opportunities that benefit from multi-decade trends, while incorporating a rigorous stewardship and ESG process. This is key to providing us with a more holistic understanding of the risks embedded in every company in our portfolio. We believe a responsible approach to investment leads to a superior outcome, both for society and in terms of investment performance. Our established investment process underpins the construction of our Global Thematic, Responsible, and Sustainable Equity funds, the charity-focussed Endowments and Climate Active strategies, and our range of Multi-Asset products that serve diverse client needs. We invest across equities, credit and derivatives, and across the market cap spectrum.
About the manager
managers FOCUS / SARASIN & PARTNERS
During 2019 we built a position in James Cropper. Based in Cumbria and stewarded by the Cropper family for many generations, this materials and paper products business has attractive long-term thematic growth credentials and sustainability at its core. The traditional paper business continues to thrive. Decades of focussed R&D has led to an unrivalled ability to work across the colour spectrum, making them a vital partner to brand-conscious retailers across the globe. Proprietary technology allows them to upcycle pulp extracted from used coffee cups into their products, improving the brand strength of their customers and diverting waste away from landfill. The strongest growth is in Technical Fibre Products (TFP), which produces niche non-woven technical materials, often with unique physical and chemical properties, that enable innovation in fuel cells, cryo-insulation and offshore wind. Colourform is a paper-based recyclable packaging. The product is in its infancy, but represents a viable replacement to the plastic alternative and has phenomenal potential.
Sarasin’s AIM service was established in 2007 to provide access to a diversified portfolio of smaller UK companies that are capable of growth ahead of the wider market, as well as qualifying for Business Relief. The investment objective is to outperform the market over the medium term. Our thematic approach helps to identify long-term structural trends and the companies that benefit accordingly, while a focus on ESG serves to both mitigate financial risk and address societal concerns more broadly. The outcome is a portfolio of 20 to 30 AIM-listed companies with strong growth and ESG credentials. Our investment process puts balance sheet strength and cash generation at the fore, and we rarely make investments in companies that are not yet profitable.
sarasinandpartners.com 020 7038 7037 sales@sarasin.co.uk
our offer
investment case study
Time is an award-winning investment manager specialising in tax-efficient investment solutions. Our group manages over £3.5 billion assets under management with over £650 million in Business Relief (BR). Our original BR service holds a 24-year track record and was one of the first to utilise BR to offer IHT mitigation for investors. Over 7,500 investors have invested in our IHT services and we hold a 100% BR track record.Our nationwide Business Development team of 30 is dedicated to supporting the adviser community and professional connections. Recent award wins: • Investment Week Tax Efficiency Awards 2019/20: - Tax-efficient Group of the Year - Best IHT Portfolio Service - Best AIM Portfolio Service – Tax Efficient and Estate Planning Specialist • Growth Investor Awards: - Best BR Investment Manager Listed 2019 - Best BR Investment Manager Non-AIM 2018
managerS IN FOCUS / TIME INVESTMENTS
TIME’s investment team conducts a regular, quantitative screening process on the constituents of AIM. Our process excludes companies which are either unprofitable or trade on overly high valuation multiples. To reduce the volatility usually associated with the AIM market, our screening process also excludes companies which operate in traditionally high-risk sectors, such as mining. All companies in the portfolio are regularly monitored to ensure that in our opinion, BR continues to be available. If we believe that a company ceases to qualify for BR or intends to de-list from AIM, we will arrange for the shares to be sold as soon as is practicable and reinvested in BR qualifying shares of a different AIM company. Unlike most AIM IHT portfolios, TIME:AIM uses verifiable financial and commercial information published by AIM companies to determine the portfolio of shares for an investor, rather than relying on an individual stock picker’s opinions regarding the future commercial success of companies and the quality of their management teams.
TIME:AIM is a simple and effective estate planning solution that uses BR to potentially offer a 100% exemption from IHT after two years, whilst allowing investors to retain access to their investment. TIME:AIM is a discretionary managed service that provides investors with exposure to the AIM market through a diversified portfolio of BR qualifying companies. In addition to achieving Business Relief, the TIME:AIM service seeks to deliver higher risk-adjusted returns than the market and to outperform in falling markets. In order to help achieve these aims, TIME:AIM utilises its proprietary investment process to filter the investment universe and build equally weighted portfolios of around 30 companies. We believe our service creates a more robust portfolio that will allow investors the opportunity for growth and to mitigate their IHT liability after only two years. TIME:AIM is available through an ISA, either for new or existing investments, as well as offering the option for non-ISA investment.
time-investments.com 020 7391 4747 questions@time-investments.com
managers IN FOCUS / AIM SOLUTIONS COMPARISON TABLE
go to website
6. What's on the Horizon?
coronavirus impacts The non Covid-19 Future what the managers say
coronavirus Impacts
WHAT'S ON THE HORIZON / CORONAVIRUS IMPACTS
In its Business Plan 2020/21, published at the beginning of April, the FCA made it clear that Covid-19 has been a game changer.
he FCA stated that, “Coronavirus (Covid-19) is profoundly affecting the financial lives of consumers and the workings of markets. Organisations, including us, are facing a huge challenge as we support our employees while also ensuring that the interests of customers, stakeholders and the wider public are protected. We have delayed other activity we had planned, where we judge that it was not urgent and may have distracted firms from the immediate priority... But we recognise that it may be weeks or months before we are in a more stable position and can turn ourselves fully to the activities in this plan.” As yet, no specific relaxations to the AIM regulatory framework have been introduced by the FCA to assist with an orderly market. While companies listed on the main markets have been allowed an additional two months to complete and publish their audited financial statements (after the end of the financial year to which they relate) this does not apply to AIM quoted companies which already have a six month window.
Experienced AIM managers have talked of the need to remain level headed and avoid knee-jerk reactions. Panic selling and lack of information about the reality of the situation make taking properly considered decisions incredibly difficult, if not impossible. This makes waiting for at least some of the dust to clear, especially when longer term investment horizons are involved, as is the case with AIM-focused VCT, BR and EIS offers, a sensible option. The next few weeks and months are very likely to find AIM managers working very hard to ensure their AIM investee companies are adequately funded, and defensive in their activities. But it is also clear that there is a feeling that overreaction creating a sell off across a broad range of sectors has already created some great bargains for those who know where to look. That said, those familiar with EIS will know that ‘second-hand’ shares aren’t generally eligible for the EIS tax reliefs and so care must be taken to purchase only newly-issued shares if the goal is to qualify for the EIS reliefs.
For Business Relief AIM managers, another important consideration could be the potential for investors to want to withdraw their investment or for withdrawal of funds to be required due to successful deaths. Either could put the manager in the position of needing to sell at a time when they would probably rather not. Of course, the cash position of the manager’s overall BR portfolio will be telling here. The big question is when recovery will really kick in. In terms of the near future, some have looked to China - the first country to experience the full impact of Covid-19 - to give an indication of when markets might find their feet again. The FTSE All-Share total return from 1 January to 1 April was -25.13%, whereas China’s MSCI was down just -6.20% in the same period - having seen what it judged to be the peak of the outbreak during that period and moving into a period of greater control of the virus. While these markets don’t necessarily present a like for like comparison, the uptick in China’s economic performance since the perceived passing of the peak have been taken as positive indicators elsewhere.
A successful path through the Covid-19 crisis will very much depend on:
WHAT WILL A SUCCESSFUL PATH THROUGH THE CRISIS LOOK LIKE?
The net cash positions of investee companies and the ability of managers to assist with fundraising at this very difficult time. It is worth remembering here that EIS, BR and VCT managers may only make up a small portion of the shareholders of many of the AIM-quoted companies they invest in, so the help they can offer with fundraising may be limited.
The diversification levels of current portfolios with stocks in sectors such as pawnbrokers, insolvency practitioners, health care and pharmaceuticals where current and potential demand is likely to push up prices to offset other losses.
Making the best buys now so that portfolios can be positioned to make the most of the recovery when it comes.
- Christopher Woolard, Interim Chief Executive, FCA
The UK’s capital markets will play a vital role providing finance to businesses to help aid the recovery from this crisis.
Aside from the direct impacts on share prices from panic selling, the Covid-19 pandemic has had other effects on the AIM market. One example is the reported closure of Cantor Fitzgerald’s UK corporate finance and advisory arm. The reports suggest that the US stockbroking firm, which provides nominated adviser services (NOMADs) to dozens of AIM-quoted companies, has proceeded with its planned cuts to these activities. As well as assisting a company through the admission process, once it has been admitted to AIM, the NOMAD will continue to provide advice and guidance on all aspects of the AIM Rules. They will ensure that the directors are aware of their continuing responsibilities and obligations and provide advice on business strategies and general market conditions. In other words, a NOMAD is intended to safeguard the integrity of the market and to play a role in guiding and supporting companies to achieve their growth potential. All AIM-quoted companies must retain a NOMAD while quoted on AIM with rules requiring companies that lose their NOMAD to appoint a replacement within a month or be ejected from AIM. In the current conditions, the willingness and ability of other NOMADs to take on new clients may be limited, leaving some companies in a particularly difficult regulatory position at a time when they may need the advice of a nominated adviser more than they ever have.
NOMAD ISSUES
The non Covid-19 Future
WHAT'S ON THE HORIZON / The non Covid-19 Future
In January the Financial Conduct Authority (FCA) outlined a series of concerns it had over the governance and appropriateness of alternative investments - which would include investments into the AIM market:
"We believe that progress is needed for the sector to deliver this purpose effectively. Overall standards of governance, particularly at the level of the regulated entity, generally fall below our expectations. Far too often, the appropriateness of investment products for investors is not adequately considered."
Macroeconomic trends As with any market, the near term future is likely to be heavily impacted by the Coronavirus. So far, this has had a damaging effect on AIM values, and it is not clear how long its effects will last, and whether markets have further to fall (and if so, by how much). Once the worries have passed, there will likely be a recovery, which will present a potential opportunity for savvy stock pickers, and fund managers will be looking for signs of when to buy. Looking beyond Coronavirus, the question of Brexit still isn’t entirely settled. Although Johnson managed to take the UK officially out of the EU, in many ways, the hard parts starts now. It is clear there are large differences between the UK and the EU on trade positions, with no guarantee the talks will end in easy access into each other’s markets. The Johnson Government has set out an ambitious timetable for the talks, and had made quite clear it is willing to countenance much looser trade ties if talks are not satisfactorily concluded by the end of the year. Whether it intends to stick to that in light of current events is hard to know at this time. Continued uncertainty around Brexit trade talks will continue to dampen market expectations. The UK Government is conducting simultaneous trade talks with other countries at the same time. Arguably the most important of these is the US, which will also be holding an election in 2020. As the AIM market has grown up, it has become an international market, including a number of large multinational companies. These trade talks will likely impact AIM for the year to come, potentially providing some sectors with welcomed opportunities, and slowing down others. A shrewd fund manager operating in AIM will be able to take advantage of this in balancing their portfolio, and could help them potentially outperform the overall market.
Increased regulatory scrutiny for alternative investments
aproppriateness & suitability
The AIM market is more volatile than the FTSE, and there are higher risks associated with it. The FCA said firms offering products and managing investments with exposure to alternatives should assess how suitable these investments are to their target investors. This should include: “Adequately assessing the appropriateness or suitability of alternative investments for retail investors. Appropriateness would apply to non-advised access while suitability would apply to advised or discretionary services.“ Where an investor has been classed as a professional investor, firms must be able to demonstrate how the firm assessed the client’s knowledge or experience of the relevant market. The FCA said it planned to review retail investor exposure to alternative investment products. In particular it will be testing firms on how aware of who their customers are, and that they are placing a clear focus on acting in the best interests of their clients and funds. This will include proving they have taken reasonable steps to ensure that investors understand the risks they are exposed to. For example, before an investor can place funds in a VCT, are they being made aware by their advisor or the manager about the liquidity risks involved, or the fact they will be investing in smaller companies with less capital?
Governance & market abuse
As part of its review, the FCA will test whether firms that have permission to hold client money and safeguard custody assets are exercising those permissions under robust control frameworks to support the oversight of the Client Assets Sourcebook (CASS), maintain adequate books and records and operate in a CASS-compliant manner. Due to the high risk nature of these investments (including market risk and, where appropriate on the AIM market, credit risk and liquidity risk), the FCA said it expects firms to operate robust risk management controls to avoid excessive risk-taking and to ensure that the potential for harm or disruption to financial markets is appropriately mitigated. Finally, it expects firms to ensure their market abuse controls are robust enough for them to fulfill their Market Abuse Regulations (MAR) obligations.
- FCA
WHAT'S ON THE HORIZON / WHAT THE MANAGERS SAY
What are you hoping to see in the coming months?
Firstly, for people to stay safe and healthy; secondly, for a slowing rate of COVID-19 cases; and finally for the Government to remain supportive of employers who are doing the right things for their stakeholders. This will pass – it is how people react after the event that will be remembered.
What did you think of the Budget?
Our first reaction was one of relief that smaller companies would still be supported by BR; there is now very limited threat of a change to legislation in the medium term. The increased fiscal spending should be a positive for some investee companies once conditions improve.
Where could the AIM market develop or improve?
With more regular, open engagement with all of the market’s participants. AIM should have a renewed focus on providing a level playing field for all investors. The market has a poor reputation for taking action against the tiny minority of companies, advisers and investors who cause AIM reputational damage.
AIM has improved in a number of ways in recent years. However, further steps that would help to support investor confidence include enhanced independence of non-executive directors, a requirement to review auditing arrangements periodically, and the introduction of a corporate governance code.
While Chancellor Sunak’s inaugural Budget heralded the largest fiscal loosening for 30 years, the sums were dwarfed by the COVID-19-related emergency measures announced less than a fortnight later. This huge-scale Keynesian approach should, ultimately, be supportive for small business over the longer term.
The COVID-19 pandemic and its societal and economic shock will give rise to myriad outcomes, and we believe that accelerated change is amongst the surest. How this will manifest itself remains to be seen, but we hope to see our exposure to health and wellbeing, online content, and renewable energy benefit accordingly.
This huge-scale Keynesian approach should, ultimately, be supportive for small business over the longer term.
Better and improved levels of governance on AIM, with increased audit and reporting requirements, particularly on companies with higher market capitalisations. We would always welcome new names to the AIM market to stimulate investor interest, improve general liquidity, and increase the opportunities to diversify away from resources and information technology stocks.
The budget was neutral for the AIM market and there were no changes to BR. The real focus of the Budget was responding to the Coronavirus outbreak, although the reversal of the expected plan to cut corporation tax from 19% to 17% will hurt earnings.
A reduction in the extreme volatility we are seeing in all financial markets as a result of the Coronavirus and a recovery of value.
This will pass – it is how people react after the event that will be remembered.
learning objectives cpd and feedback about intelligent partnership
7. Further learning
learning objectives cpd and feedback
learning objectives
further learning / learning objectives
HOW DID YOU DO?
Covered in Section 4 Market Composition using data from the MICAP platform.
Pinpoint the key developments and news in the AIM market over the past quarter
Covered in Section 2 Market Update. Coping with coronavirus, Recent performance, 2019 performance, Still an international market?, Budget update.
Determine how the AIM market has performed, and some of the factors that contributed to this performance
Benchmark current products and providers against each other on key investment criteria
Covered in Section 5 Managers in focus using data and expertise provided by our partners.
Recognise various factors that will affect the AIM market in the months to come
Covered in Section 6 What’s on the horizon. Coronavirus impacts, The non Covid-19 Future
Understand the effects of M&A in the AIM markets
Covered in Section 3 Industry Anaysis. AIM Acquisitions.
Identify the main tax advantaged products available in the AIM market
CPD and feedback
further learning / cpd and feedback
Intelligent Partnership has achieved accredited status from the CISI, CII and PFS. Members of these professional organisations represent the majority of the insurance, investment and financial services industry.
R
eaders of the AIM Quarterly Update can claim up to two structured CPD hours towards their CISI, CII or PFS member CPD scheme for the time spent reading this Update (excluding breaks). The review process included an assessment of the technical accuracy and quality of the material against CPD Accreditation standards. Achieving the recognised industry standard afforded by these organisations for this Update, and our training, demonstrates our commitment to delivering only balanced, informative and high quality content to the financial services and investment community. In order to obtain CPD and meet accreditation standards, readers must complete a short questionnaire and provide feedback on the report. This includes 10 multiple choice questions to demonstrate learning and a feedback form to assist in the compilation and improvement of future reports. To claim your CPD please visit: intelligent-partnership.com/cpd
Intelligent Partnership actively welcomes feedback, thoughts and comments to help shape the development of these Quarterly Industry Updates Greater participation, transparency and fuller disclosure from industry participants should help foster best practice and drive out poor practice. To give your feedback please email: publications@intelligent-partnership.com
about intelligent partnership
Intelligent Partnership is the UK’s leading provider of insights and education in the tax advantaged and alternative investments space.
e provide a wide variety of ways in which we keep advisers and industry professionals up to date with the latest developments. Alongside our E-learning courses, we provide a range of engaging, accessible and CPD accredited resources as well as industry leading events. These include:
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