alternative investment market
Industry Update - DECEMBER 2022
1. INTRODUCTION
The latest news, updates and statistics on everything AIM
2. Market Update
3. Considerations for Investment
4. Industry Analysis
5. Managers in Focus
6. What's on the Horizon
7. Further Learning
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Industry Update - dECEMBER 2022
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AIM: coping in the perfect storm
Photography by Interview by
Covid changed context for BR
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he year 2022 is slated to go down in the history books as an ‘annus horribilis’ for financial markets, with equities posting negative returns. The Alternative Investment Market (AIM) has been one of the most impacted by the turbulent times. The first half of the year was called the worst for markets in 50 years. The main culprit: inflation, which still continues its unrelenting ascent. As we near the end of 2022, government data shows consumer prices returned to a 40-year high in October, indicating that rate hikes may not yet be finished. The Bank of England raised the base rate of interest by 0.75 percentage points to 3% in November — the single biggest increase in more than three decades. The bank warned that the UK is now headed for its longest recession since records began a century ago. Afterwards, Bank of England chief economist Huw Pill warned that the central bank was preparing to further raise interest rates over concerns that inflation could become embedded in the British economy. Against this backdrop of severe economic disruption, heightened by the war in Ukraine and a stunning episode of political instability that saw Britain elect its third prime ministers in three months, stock markets have been clobbered mercilessly. The world's leading growth market was the laggard While market declines have been widespread, the period has been especially painful for small-cap stocks, many of which had outperformed during the pandemic. Indeed, AIM has been one of the worst performing major markets in the world this year. At the time of writing on 09 December, AIM had fallen by almost 30% year to date, while the AIM 100 index had shed 33% of its value. Less stymied, The FTSE 100 is down just 7.2% this year, thanks to its outsize weighting to oil and gas stocks that have benefited from elevated commodities prices. That in turn has helped limit the FTSE All-Share’s decline to just 10.8%. On a total return basis, the FTSE 100 is down just 2.5%. TThe FTSE AIM 100 index has fallen further than AIM as a whole because of sharp falls in some of its largest constituents. The picture that emerges from the above data, is of a market that is much cheaper today than when the year began. The price/earnings ratio for the AIM 100 has dropped from 61 times at the start of the year to 27 times as of mid-October. Small caps bounce back As we have seen since late last year, small-cap stocks, which tend to be more volatile and economically sensitive than large caps, typically sell off more in anticipation of an economic downturn. What may come as a surprise is that they also tend to recover before recessions end and lead the market coming out of a recession. Many AIM share prices had got ahead of themselves by the end of 2020. That was particularly true of biotech and technology companies. But with prices now so low, it is a good time to try to identify attractive potential long-term investments. AIM can't be treated as a homogenous market. It hosts companies from a wide range of countries, sectors and subsectors. Therefore, blanket price falls across the market are not evidence that every AIM company is substandard or performing badly. The trick for investors is to actively identify dynamic high-growth businesses with specific traits. Companies with high margins, strong free cash flow, and quality business models may be better positioned to weather an economic downturn and a higher rate environment. On the other hand, attempts to predict short-term market movements, during times of wild instability are likely to hype up risk. So, instead of listening to and trading on the short-term market noise, investors are better off ignoring it and focusing on the long-term, mustering the discipline, and ideally, expertise, to stay true to their plans, to reach their long-term goals. In many cases, the current valuations on the AIM market already reflect a dire economic outlook. For high-quality small-cap companies — with the potential for significant growth as the economy recovers — that may not be something to fear.
name surname
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- Marcus stuttard
Very quickly, companies on AIM were able to access equity capital rapidly and at scale
Introduction
Market Update
Considerations for Investment
Industry Analysis
Managers in Focus
What's on the Horizon
Further Learning
Dividends: AIM Stocks to pay out £1bn in a difficult year Who owns AIM shares More investors grab AIM shares for IHT relief What the managers say
2. market update
What’s next for AIM? What the managers say
6. what's on the horizon
Guy tolhurst
Founder and Managing Director Intelligent partnership
While market declines have been widespread, the period has been especially painful for small-cap stocks, many of which had outperformed during the pandemic.
Learning Objectives CPD and Feedback About Intelligent Partnership Disclamer
7. further learning
Opening Statement Acknowledgements and Thanks Key Findings
Close Brothers TIME Investments Comparison Table
5. managers in focus
3. Considerations For Investment
Today’s fundraising: scaling up when the market is down AIM: Depressed market offers bargains for long-term investors Business Relief is the preferred IHT solution for advisers and wealth managers
MICAP data analysis MICAP market snapshot
Some positive signs despite the headwinds
Guy tOLHURST
Founder Intelligent Partnership
2. MARKET UPDATE
3. CONSIDERATIONS FOR INVESTMENT
4. INDUSTRY ANALYSIS
5. MANAGERS IN FOCUS
6. WHAT'S ON THE HORIZON
7. FURTHER LEARNING
This report and the research behind it would not have been possible without the help and support of a number of third parties who enthusiastically shared their time and expertise. These busy professionals went to great lengths to provide us with data, their insights on the market, and useful comments and suggestions while peer reviewing initial drafts. We’d like to show our gratitude to Sam Barton of Close Brothers, Stephen Daniels, Simon Housden and Henny Dovland of TIME Investments. The expertise of one and all have improved this study in innumerable ways and their support as sponsors has made this update possible. Any errors and omissions are our own. We have relied upon MICAP for most of the data 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. The update is made possible by our sponsors, who have contributed copy to the update and supported us by helping to meet production costs. So, a big thanks to Close Brothers and TIME.
Acknowledgements and Thanks
learning objectives for cpd accreditation
Identify the main developments and news in the AIM market Analyse relevant issues in the high inflation, high interest rate, and high tax era Benchmark products and providers in the market against one another Evaluate the key fees and charges applied by AIM managers Define some of the key events likely to impact AIM in the near future
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cpd
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Find out more at Managers in focus
Readers can claim up to two hours’ structured CPD. By the end of the update readers will be able to:
increase in new issue funding 2021 ytd vs 2020 ytd
5x
The AIM All-share’s highest daily close of the year to date and since March 2001
1314
Victorian Plumbing Group’s 2021 AIM listing was the market’s biggest ever
£850 million market cap
raised by AIM companies to 30 September 2021
£5.7 billion
£
average gap between funding rounds for early-stage equity-backed companies in 2020, down from 19.7 months in 2019
18.5 months
in the tax-advantaged space with a focus on AIM companies
39 open offers
After you have reviewed this publication and before we fulfill your CPD certification request, we will be requesting your feedback on it. Your collaboration will assist us to enhance the learning activity, and will inform improvements to future publications.
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EDITORIAL Mohamed Dabo CREATIVE Gillian Livingstone SUB-EDITING Lisa Best & Mohamed Dabo RESEARCH Mohamed Dabo
MARKETING Chloe Fry Carlo Nassetti DISTRIBUTION Michelle Powell SALES Chris White
Acknowledgements and thanks
Readers can claim up to 2 hours’ structured CPD. By the end of the update readers will be able to:
MARKETING Carlo Nassetti DISTRIBUTION Michelle Powell SALES Chris White
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of AIM's companies are now headquartered or have the majority of their operations outside the UK
1/3rd
average amount of money raised from new admissions during the past five years to 2021
£20.8 million
The number of AIM-quoted companies with a market cap of over £1 bn
19
amount raised by 3,988 companies since 1995 [as of 2021]
£130 bn
raised in new issues and further issues to end November 2022
£2.27bn
Key findings
combined market cap of AIM’s 852 companies in 2021
£135 bn
This update has thrown up some interesting, sometimes alarming, sometimes revealing facts and figures. So we've selected a few to give you a flavour of the current context, some food for thought and some indicators of the fundamentals you should be aware of.
more than half of the companies that have IPO’d have done follow-on fundraising
54%
key findings
increase in new issue funding ytd vs 2020 ytd
Dividends: AIM Stocks to pay out £1bn in a difficult year
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AIM dividends rose by 7.4% in the first half of 2022 to £574 million, according to the annual AIM Dividend Monitor from Link Group. Despite likely moderation in that growth rate in the second half, underlying pay-outs for the full year should still run out more than 13% higher than 2021’s. The strong underlying rate of growth in the first half of 2022 follows a rapid rebound in 2021 from the pandemic. In 2021, payouts jumped 39.3% on an underlying basis to £962 million, recovering to a level last seen in the 12 months to the end of March 2018. The headline total, which includes 2021’s very large special dividends, rose 60.0% to £1.19 billion in 2021.
Volatility: FTSE All share vs FTSE AIM All share vs FTSE Smallcap 30 September 2021
Source:FTSE Russell Factsheets, FTSE AIM Index Series and FTSE Index Series, 30 September 2021
ONE YEAR 10.8% 13.5% 10.7%
THREE YEARS 25% 20.1% 22.4%
FIVE YEARS 19.4% 13.9% 16.2%
FTSE AIM All share FTSE All share FTSE Smallcap
Outside the EU, we now have greater freedoms and flexibility than we’ve had in forty years. And we’re going to use those freedoms to ensure our regulatory systems in technology, life sciences, financial services and beyond support innovation.
In a challenging year that saw the combined market capitalisation of AIM-quoted companies drop, London's junior market surprised by increasing dividend payouts.
- Rishi Sunak, Chancellor of the Exchequer.
The current depressed position of the AIM index potentially provides an attractive entry point for investors, especially for those whose primary objective is to gain BR qualification. The opportunity to hold AIM listed companies within an ISA offers the opportunity to capitalise on any growth tax free.
Simon Housden - Sales and Marketing Director TIME Investments
The largest contribution to growth in H1 came from the building materials sector which has enjoyed the post-pandemic construction boom. The food, drink and tobacco sector also delivered strong growth. In the first half of 2022 the general financials sector (comprising asset managers, corporate finance advisory firms, and stockbrokers among others) saw payouts return to pre-pandemic levels, rising by a fifth on an underlying basis, slightly faster than the overall AIM total.
Post-pandemic dividend surge in financials, building materials and food & drink
“The second half of 2022 will see a slowdown in the pace of recovery in AIM dividends, as the year-on-year comparisons become less favourable,” notes Link Group researchers in their report. The consulting firm expects 8.4% growth on an underlying basis in H2, meaning 13.3% growth for the full year or a total of £1.09bn, excluding special dividends. Special dividends are likely to drop this year from the record 2021 levels, meaning headline growth (which adds specials to underlying) of 2.5% for the full year, equivalent to a total payout of £1.22 billion. Ian Stokes, Link Group’s managing director, Corporate Markets UK and Europe, said: He added that corporate margins are currently under pressure and that a potential recession is on the cards, which will affect both the ability and willingness of AIM companies to return cash to shareholders. He believes, however, that an underlying dividend growth in the 2-5% range is achievable if the economic squeeze is not too steep, but headline payouts are likely to fall as special dividends are susceptible in downturns.
Looking forward
“AIM companies have really impressed with their ability to bounce back from the pandemic. This is reflected in the strength of the recovery in their dividend payments, which was better than we expected. The easy work is done, meaning that growth will now slow. We have less visibility on AIM payouts than we do on the more predictable main market but as we move into 2023, we expect growth to slow further.”
While the AIM market has secured a well-deserved reputation as the place for investors seeking high-yielding stocks, it has yet to be seen as a hunting ground for income-stock investors. The reality is that AIM has room for discriminating investors seeking income. A recent study found that nearly 200 companies listed on the London junior market now regularly pay a dividend to shareholders. Well-known tonic water maker Fevertree Drinks is one of the 195 AIM-listed companies that hands cash back to investors through dividends, but there are also some less-known names that do so. Language translation specialist RWS, kettle safety control firm Strix and insolvency company Begbies Traynor are just some of them. Others include Cambridge-based life science company Abcam, software firm Ideagen, and Robinson, a manufacturer of sustainable plastic and paper packaging that counts Reckitt Benckiser and Unilever among its customers. The relative lack of dividends among AIM companies used to mean they weren’t a great choice for older investors who want income to play a bigger role in their portfolios. Now, with so many AIM shares coming with a good yield attached, that is less and less the case.
An image in need of enhancement
History shows that owning stocks has helped protect investors against inflation because stock prices have often gone up along with consumer prices. But so far this year, inflation is up and the overall stock market is down. That doesn’t mean that stocks no longer work as hedges against inflation, but it does suggest that not all stocks may perform equally well when consumer prices are rising. One way to get the inflation-fighting benefits of stocks may be to look for types of stocks that have historically outperformed when inflation has been high. One key characteristic to look for is whether or not they pay dividends. It's true that AIM companies are much less likely to pay dividends than their larger, more mature counterparts on the main market. However, Sharepad data confirms that around one-quarter of the companies on the junior market currently do pay dividends. Dividends can help investors at times when many stocks’ prices are down from their highs as they’ve been for much of this year. With much of the financial media focusing only on falling, or rising, stock prices when they assess the health of the market, it's easy to forget that dividends are also an important source of stock returns. Unlike many bonds and other investments that pay a previously determined rate of interest to investors who own them, stocks’ dividends can—and often do—rise when inflation does. Investors hoping to draw an income from their holdings might be surprised by the number of AIM companies rewarding shareholders with a dividend.
Dividends in the age of rising inflation
AIM dividends rebound strongly from pandemic underlying payouts jumped by a fifth in H1 2022, following strong 2021
H1 22 headline dividends of £574m, up 7.4% on a headline basis, or 19.8% once volatile special dividends are excluded 2021 saw headline growth of 60.0%; underlying 39.3% Payouts from financials have recovered to pre-pandemic levels, but largest contribution to H1 growth came from building materials Link Group expects 29% of AIM companies to pay a dividend this year, one tenth lower than pre-pandemic levels Link Group expects 13.3% underlying growth for the full year, meaning a total of £1.09bn; headline dividends are expected to rise 2.5% for the full year, equivalent to a total payout of £1.22bn
Source: The Link Group
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Who owns AIM shares
Active on the stock market are a wide range of institutional investors, a vibrant cohort of retail investors and, thanks to London’s unique status, an unparalleled pool of international capital. Together, they make up a diverse and highly knowledgeable investor base keen to provide capital to support growing companies. Larger international investment firms can be found on the shareholder registers of the larger AIM companies while specialist investors, such as Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS), invest in many of the smaller AIM companies. All this translates into a range of opportunities for companies to finance their growth and for investors to buy into it and to exit and realise profits. A large segment of institutional investors, being beholden to their own investors, tend to be more risk averse, and many steer clear of AIM. On the other hand, the junior market tends to attract a larger number of retail investors who are more willing to take on the risks. Retail investors hold approximately 13.5% of shares listed on the LSE’s Main Market. For AIM, the figure is 25%. According to a study conducted by TD Direct Investing, the majority of AIM investors are relatively young investors in the 30- to 44-year-old age bracket. Both investors and companies have access to a network of advisers and liquidity providers who understand the needs of growing companies and are able to support them throughout their journey. Both also benefit from a regulatory environment that is attuned to the needs of growing companies and their multitude of investors.
Source:London Stock Exchange
The companies and sectors AIM investors seek
Given the broad spectrum of sizes of the companies on the Alternative Investment Market (AIM), London's junior market appeals to a wide range of investors.
Investors on AIM are faced with a plethora of investment opportunities in an impressive array of companies, distinguishable by various factors such as market cap, future growth prospects, dividends, and latest performance results. Some of the companies are managed by their founders, so their interests are well aligned with investors'. There are some real jewels which are proven to offer better quality and growth than fully-listed companies. Many of the businesses are mispriced simply because there are fewer investors chasing AIM shares, as some funds won't touch them. In other words, some AIM companies that are established, profitable businesses with good opportunities to grow sales and earnings, do trade at a discount to their larger cap peers. Investors can choose from among new venture-capital-backed companies and well established, mature organisations looking to expand into a wider market. They are able to invest in the software sector, in real estate, support services, or provide funding to companies from newer sectors such as renewable energy. Some market observers have reported that the general quality of AIM shares has improved because nominated advisers have become more responsible in terms of which companies they launch on the market, while a number of less attractive companies have delisted or gone bust. Available for investment on AIM are businesses from 28 countries that range across 37 market sectors and 90 sub-sectors. They provide all types of investors with a vast range of choice in seeking out businesses to fit their investment profile. Among the companies are many non-UK businesses. AIM companies are not required to be incorporated in the UK or in any other specified jurisdiction. Non-UK businesses joining AIM are subject to identical eligibility requirements within the AIM rules as those companies incorporated in the UK. Since its launch in 1995 AIM has attracted over 500 companies incorporated outside the UK. Most investors come to AIM for the opportunity to share in the results of rapid growth. AIM companies are often focused on a disruptive niche and can generate growth even if the overall business environment is not great. The investors also tend to be impressed by companies working in sectors where barriers to competitor entry are high. The quality of companies listed on AIM varies widely, in part because this market has lighter regulation than the main market. As a result, the performance gap between AIM winners and losers can be very wide. In this context, smart investors hold on to their winners for as long as possible to compound returns. As for the losers, they dump them as quickly as possible.
Funds that know the market
Some investors target funds and investment trusts that have substantial exposure to AIM shares. Investment trusts can be a good way to access assets that are set to rise, as investors can sometimes benefit from both a rise in the price of the underlying assets and the investment trust's share price. Because they do not have inflows and outflows like open-ended funds, they can take a long-term time horizon which is necessary with smaller companies, and assets that are hard to buy and sell. There are no mainstream funds exclusively invested in AIM stocks, but many smaller company funds have holdings in the junior market. Some specialist funds, such as AIM EIS funds, aimed at EIS investors, invest solely in the junior market. However, there tends to be many more VCT and Business Relief investment managers with this focus. Some of these fund managers are hugely experienced smaller companies' investors and, crucially, have a deep knowledge of many of the management teams that run AIM listed businesses. They are well-placed to consider the commercial success and innovation to date and what this says about the capability of the company’s leadership. Core UK equity funds are generally focused on larger companies, but many of these managers deem it wise to supplement them with a smaller companies fund. The higher-risk nature of these companies makes them quite suitable for investors with large portfolios and a long-term time horizon. Generally speaking, AIM investors want to back companies with growth potential operating in a clearly defined market. They are typically attracted by a simple and strong proposition as well as a clear business plan.
Research to evaluate an AIM-quoted company and decide whether it's worth adding to an investor’s portfolio is crucial. This is another area where an expert investment manager, with a focus on AIM is likely to have more resources and experience than most private investors, particularly as, traditionally, there is less research available on smaller, less costly stocks. That said, research provided by the company’s broker is one of the most important areas of communication with the market following flotation. The Brokers research analyst will publish notes in reaction to company news. Investors and potential investors will want to track the company’s progress. The flow of regular news enables the analyst to adjust their forecasts and recommendations accordingly, which allows investors to assess the company and its existing and future performance. The broker’s sales team circulates the house research notes and ensures continued dialogue with existing investors. It will also have meetings with the company’s management team on a regular basis to ensure it keeps up to date with corporate developments. Message boards and blogs have become important sources of information for AIM investors and therefore regular clear communication has become even more important. Under Rule 26 of The AIM Stock Market rules, an AIM company must maintain an up to date website and include key information on the company. Companies on AIM benefit from a high public profile and strong interest from a growing and increasingly sophisticated investor base. Today, investors ranging from private individuals to global institutions regard AIM as an excellent place to find investment opportunities in young, entrepreneurial and growth-oriented businesses from all over the world.
AIM investors do the research
What are AIM investment managers looking for in AIM-quoted companies?
To a large extent, a company’s attractiveness to potential AIM company investors will depend on:
The perceived strength of the senior management team Whether the company has the potential to become a significant player in its business sector The overall scalability of the business To what extent the company is subject to market forces that are beyond its control Any over dependence on a limited number of customers or suppliers The barriers to entry which exist in the company’s business sector
Source: Holland Bendelow floatation consultancy
AIM investors, as share owners, are more likely to be focused on the long-term growth of the company, as opposed to the share price alone.
The opportunity to invest in AIM portfolios via a wrap platform makes it even easier for advisers to offer their clients effective estate planning.
Henny Dovland - Business Development Director, TIME Investments
More investors grab AIM shares for IHT relief
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Investing in AIM shares is one way of mitigating IHT, as many stocks on London’s junior market qualify for BR, which reduces the amount of IHT payable on certain business assets. While AIM can experience heightened volatility and certainly, 2022 has been a very difficult year for the index, the nature of BR investment means that seeking BR-qualifying shares on AIM is a sensible option. Generally speaking, BR requires a long term hold as investors are required to own the BR-qualifying shares at death to be eligible for the inheritance tax reliefs on offer. Consequently, anecdotal evidence suggests that the average holding period is around seven or eight years. Given that, in years such as the current one, market sentiment can play a substantial role in dropping AIM share prices across the board when the underlying assets and strategy of many remain sound, there is a reasonable expectation of a bounceback in the medium to long term. This offers the potential for the acquisition of underpriced shares, although this type of stock-picking takes expertise to mitigate risk. For those investing in AIM for BR purposes, it’s also comforting to know that investment managers in this space have a range of large cap companies to choose from with the stability that can come from greater maturity and capital reserves. Of course, while the tax tail should never wave the investment dog, the 100% IHT saving on the value of the BR-qualifying shares at death, is also very appealing. The attraction for AIM stocks is heightened by more families being charged IHT in the past few years; the latest HMRC statistics show the number of UK deaths that resulted in an IHT charge increased by 4%. During the financial year 2021 to 2022, IHT receipts received by HMRC were £6.1 billion. This was an increase of 14% (£729 million) on the financial year 2020 to 2021. It is also the largest single-year rise in IHT receipts since the 2015 to 2016 financial year, when receipts rose by 22% (£848 million). Among the reasons behind the record high IHT proceeds are the soaring house prices seen recently and frozen nil rate bands which were extended for a further two years to 2028 in November's Autumn budget. Property is the most valuable asset in most people’s estates and the value assigned to it can have a great impact on their estate calculation. At the same time, average UK house prices hit a record £296,000 in August 2022, £36,000 higher than the same month a year earlier, according to figures from the Office for National Statistics (ONS). The ONS said house prices grew by 13.6% over the year to August, down from a peak of 16% a month earlier. While the housing price boom is now under threat from high inflation pushing up bank and mortgage rates, the shortage of homes to buy in the UK continues. A recent report commissioned by the National Housing Federation found that 340,000 new homes need to be supplied in England each year to meet demand in England. In 2020/21 only 216,000 were built. Such a supply and demand imbalance remains an underlying driver for long term price rises. The nil rate band, below which no inheritance tax is paid, has been £325,000 since 2009, and isn’t due to be reviewed until 2028, with the freeze extended for two further years from 2026 in November's Autumn budget. This double whammy of growing home values and fixed personal allowance is pushing more and more investors to turn to AIM shares as a way to cut their IHT tax.
With the government’s inheritance tax (IHT) receipts hitting record highs, more and more investors are turning to shares on the Alternative Investment Market (AIM) that qualify for Business Relief (BR) as a way of reducing or eliminating their IHT liability.
Not all AIM shares qualify for inheritance tax relief, though most do. To qualify for BR, the company must be involved in ongoing trading activities, which excludes, for example, businesses that deal in securities or are involved in investment activities. BR operates by reducing the value of ‘business assets’ for IHT. For some assets, the reduction is 100%, so the asset is effectively exempt from IHT. These might include a sole trader or family’s business, an interest in a business, such as a partnership, or shares in an ‘unquoted’ company. Note that, for inheritance tax purposes, a company’s stocks and shares are said to be ‘unquoted’ when the company is listed on AIM, which is not considered a ‘recognised’ stock exchange by HMRC regulation. (“Recognition under section 1005 Income Tax Act (ITA) 2007 is for tax purposes only and confers no other status on the exchange concerned,” cautions HMRC.) For other assets, the reduction under BR is only 50%. These include land, buildings, machinery and plants used by a business run by a partnership of which the owner is a partner, or by a company in which he owns a controlling interest.
Inheritance tax relief on AIM
AIM dividends rebound strongly from pandemic Underlying payouts jumped by a fifth in H1 2022, following strong 2021
The AIM tax advantage: the benefits of being ‘unrecognised’
Although shares and securities traded on AIM are colloquially referred to as 'listed on AIM', they are in fact not listed, but rather admitted to trading on AIM. More to the point, shares and securities are not listed for UK tax purposes just because they have been admitted to trading on AIM. Consequently, many of the tax incentives for investing in unquoted companies apply to investments in AIM companies. If a company has shares or securities admitted to trading on AIM and it has no other shares or securities that are listed on a recognised stock exchange, the company is an unquoted company. So, far from being a detriment, AIM’s status as an ‘unrecognised’ stock exchange for tax purposes allows London’s junior market to provide considerable tax benefits to its investors. The policy behind the tax reliefs available to investors in unlisted shares and securities is to encourage investment in smaller, higher-risk trading companies. This explains why the junior market is the hunting ground for tax reliefs, such as the Enterprise Investment Scheme (EIS) relief, the Seed Enterprise Investment Scheme (SEIS) relief and the Venture capital trust (VCT) relief, whose investors provide venture capital for Britain’s early-stage companies in expectation of superior returns. The same applies to Business Relief, with AIM quoted companies qualifying for the IHT exemption relief.
The attraction for AIM stocks is heightened by more families being charged IHT in the past few years. During the financial year 2021 to 2022, IHT receipts received by HMRC were £6.1billion.
What the managers say
09
The value of the AIM market was down 30% in the first half of 2022. What opportunities does this represent for long-term investors?
Looking behind the falls, much of this has been driven by higher rates and companies downgrading forecasts. That said, the market isn’t perfect and we have seen a number of quality businesses with steady (and growing) earnings come back into buying territory using our consistent valuation framework. We are hopeful that these will generate some decent returns over the medium-term.
M&A activity on AIM remains buoyant. Why would this offer long-term benefits to investors, as some have argued?
Although M&A does give the chance for us to refresh portfolios and normally provides a boost to returns, the long-term benefit would rely on two factors. Firstly, the acquisition price – and we have been in situations where other shareholders were willing to accept much lower valuations than what we considered to be fair value – and secondly, the availability of a comparable replacement.
Sam Barton
Managing Director Close Brothers
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So how are the managers feeling about the AIM market and overall investment market conditions? Here's what they have to say.
With fears of recession rising, market participants have begun to reposition. What changes, if any, are you making?
We have been topslicing some of our largest holdings as we are observing increased stock specific risks on AIM. This has allowed us to take advantage of some of the broader opportunity set given recent market weakness and increase our exposure to sectors where we had previously been holding off due to what we saw as stretched valuations.
Whilst the recent market weakness has caused the value of investor portfolios to fall, the current depressed position of AIM could provide an attractive entry point for investors. Many AIM companies distribute their products and services globally and will therefore benefit from the weakness of GBP against the USD and Euro.
Companies are usually acquired for a substantial premium to their average pre-offer share price, providing investors with a gain on their investment. The cash realised by investors following a takeover is typically re-invested into the shares of other AIM companies to maintain Business Relief, thereby providing support to the shares of companies which were not involved in the takeover. In the long-run buoyant M&A activity will encourage more companies to float on AIM, thereby increasing the range of sectors and businesses available for investment.
As investors must hold shares for two years and at the time of death to achieve Business Relief, there is no opportunity for AIM services to sell shares and hold cash or lower risk investments. TIME:AIM is a quant driven investment service, which targets the larger, less volatile AIM companies. As such, we would expect our portfolio to outperform more growth orientated companies during periods of economic uncertainty.
Stephen Daniels
Partner and Head of Investments, TIME Investments
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3. Considerations for investment
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Range of attractions for Investors
Market Composition
For this section, we rely on MICAP data to help give you a snapshot of the size of the market, as well as the fees and charges you can expect to see from AIM tax-advantaged offers. All data is accurate as of 06 December 2022.
Stock markets all over the world had a tough time in 2022, and the Alternative Investment Market (AIM) was no exception. The global financial instability throughout the year was a holdover from the Covid-19 pandemic, as investors attempted to determine the long-term effects of the pandemic on the global economy. Global indices began to decline after January 2022. However, the Russian invasion of Ukraine escalated the decline as fears of energy disruption became apparent, and then a reality, playing a leading role in driving up inflation. On top of that, global markets were also impacted by fears of economic recession. In the UK, a period of political turmoil also took its toll on stock prices. The dust has now settled in the wake of that spell of mounting market confusion, and investors have given a tentative seal of approval to chancellor Jeremy Hunt’s plans to repair the UK’s public finances. At the same time, the numerous tax changes in the Autumn Statement do afford investors an opportunity to consider putting a greater emphasis on the role of tax-efficient investments in their portfolio. This trend bodes well for AIM, the most appealing market from a tax mitigation perspective.
AIM is still the ideal place for tax mitigation
March 2022 October 2021 May 2021
VCT Open Offers 1 2 2
BR Open Offers 35 34 34
Total Open Offers 39 39 37
EIS Open Offers 3 3 1
Median 27.5 27.5
Capital Growth Growth & Income
DIVERSIFICATION OF OPEN OFFERS BY INVESTMENT STRATEGY
Mode 30 30
Min 8 20
Average 26.4 26.5
Max 40 35
12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00%
Average Modee Min Median Max
7.00%
10.00%
9.00%
Target Return to open offers
200,000 150,000 100,000 50,000 0
£56,429
50,000
200,000
Average Mode Min Median Max
Minimum subscription of open offers
5,000
% 10 0.75 0.50 0.25 0
9.33%
Target no. of investee companies by open offers
There are now 43 open offers in the tax-advantaged space with a focus on companies quoted on the AIM market. This number marks a steady progression from 39 in March and 40 in June, at the time of our last market analysis. This increase in the number of open offers is interesting at a time of market anxiety and the spectre of further interest rate rises. But perhaps there are opportunities to be had while others are fearful. Indeed, a common investor wisdom is that it’s a good time to buy when stock markets are low. The idea is that you get more for your money and the value of your investments will rise when markets pick up again. Timing the market, however, is not for the faint-hearted or those lacking knowledge and expertise. Predictably, the great majority of the open offers (39) are focused on Business Relief (BR). Two of the remaining three offers focus on the Enterprise Investment Scheme (EIS) and the remaining one has a VCT focus. The figures represent a slight increase in the number of offers in BR, which was 38 in March. The number of EIS-focused offers has not changed since that time, but we now have one VCT-focused offer where there was none at the time. Contrary to both EIS and VCT, which are subject to seasonal variations in sales, leading to the closure of funds that have reached their targets, BR offers tend to be evergreen, always open. The growing number of BR-focused offers comes as no surprise; more and more financial planners have been using AIM portfolios as a mainstream planning tool for inheritance tax (IHT) planning in recent years. Not unrelated to growing efforts to mitigate the ‘death tax’ is the fact that the amount of money being raised by the tax has increased dramatically in recent years, reaching record highs in the first months of 2022. In May, HMRC raked in around £1.1 billion through IHT, an increase of more than £100 million on the same month last year.
Open offers
Guiding the selection of their investment portfolios, the open offers adopt two main strategies: Growth and Income, by the majority of the offers (71.4%) and Growth by the rest (by 28.6%). In an economy battered by both inflation and a recession, both strategies can help to stay ahead of inflation and build wealth by potentially generating outsized returns. AIM-listed companies can often achieve considerably higher levels of investment growth compared to more mature firms quoted on mainstream stock markets. This is primarily due to the early stage at which investors can support businesses with high growth potential, which can be enhanced further due to some AIM-quoted companies being eligible for valuable tax reliefs. This, however, applies more to EIS and VCT offers. For AIM BR offers, managers tend to focus on the larger, more mature, more stable companies.
Investment strategy
Taxes reduce investment returns but tax-efficient investing, for which London’s junior market is well known, can minimise your tax burden and maximise your bottom line. The current open offers target on average 9.33%, with the most common target 10.00%. Investors also benefit from the favourable tax treatment on AIM, which has proved to be a good tax planning tool over the years. The tax advantages are those which relate to investments in qualifying unquoted companies. This is because companies traded on AIM and a number of other markets are regarded by HM Revenue and Customs (HMRC) as unquoted for this purpose. The tax reliefs available to individual investors include the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS), the Venture Capital Trust (VCT), as well as Business Relief (BR).
Target returns
While a range of institutional investors operate on AIM, the market also benefits from a vibrant cohort of retail investors, a sign of its accessibility. Minimum subscription, the amount of investment which has to be subscribed for, has largely declined over the years for the above tax-advantaged schemes, increasingly bringing them into the reach of retail investors. For the current open offers, the minimum subscription is £5,000. The average minimum subscription, which stands at £56,429 represents a decline from the £58,077 we noted in June. In May 2021, it was £62,778. What bodes well for the future of AIM is the fact that the exchange has particular appeal for younger investors, with a survey conducted by TD Direct Investing revealing that AIM has three times more investors aged 30-44 than those in the 45-75 age group.
Minimum subscription
Diversification targets
Diversification is a key consideration for investors seeking to manage the current inflation and recession risks. As the economy and markets continue to respond to headwinds, the open offers on AIM invest in stocks from several different industries, countries, maturities and risk profiles. The wide dissimilarity among the investee companies works to reduce investors’ risk of a permanent loss of capital and their portfolios’ overall volatility. The open offers invest in an average of 27.44 companies, with 30 being the most common number of companies invested in. Ranging from a minimum of 8.00 companies to an outlier of 80.00 companies, diversification is clearly the norm among the open offers. Though AIM-listed companies can display the potential to generate considerable investment growth due to their early-stage, with this comes equally considerable risk considerations. However, the market provides investors with significant scope for portfolio diversification. Attracting companies that are aiming to raise finance, usually between £1 million and £50 million, AIM currently enables firms from 26 countries operating across 37 different sectors to source capital for expansion.
80 60 40 20 0
27.44
30
8
25
80
diversification: Number of investee companies targeted
8.00%
market composition of open offers by investment strategy
Growth Growth & income
28.6%
71.4%
12
Leveraging its market overview position, MICAP is able to offer IFAs exclusive insight into the wider VCT market. As a sister company of MICAP, we are able to offer the following snapshot of data, which is updated in real time, and pulled from the MICAP website.
MICAP Market Snapshot
Market Snapshot
14
Today’s fundraising: scaling up when the market is down
Moreover, UK and Irish based businesses take the lion's share when it comes to overall funding accounting for 40% of Europe's total VC investment. The UK's investment is more than double the investment in Germany and triple investment in France. In the first half of 2022, venture capital deal activity in the UK and Ireland has remained robust as both countries weather a cost-of-living crisis and the prospect of a long recession, according to data from PitchBook. Capital raised by VC-backed companies in the UK and Ireland matched the pace set last year with £15.4 billion (around $15.3 billion) invested in H1—just over half of 2021's £28.2 billion total. The region has seen a slowdown in deal volume with the number of rounds falling short of 2021's halfway mark—1,879 in H1 2022 compared with 3,857 for the whole of last year. This deceleration in deal count is expected to continue, as the effects of rising inflation, which hit a 40-year high in October, and the worsening condition of the overall economy become clearer for the asset class. So, following a surprisingly strong H1, market headwinds in the UK have since grown stronger. The Office for Budget Responsibility says the UK economy is in recession and predicts it will contract by 1.4% in 2023 after 4.2% growth this year. The combination of higher interest rates and higher inflation spells slower growth, which combined with geopolitical tensions results in volatile public markets and valuations.
These are companies formed specifically to raise money from investors which is then used to acquire an operating business. A record 248 SPAC vehicles listed in the US in 2020, raising approximately $102 billion. In the first three months of 2021 alone 313 further SPAC vehicles listed, raising approximately $102 billion. Changes to SPACs in the UK are currently under consideration, but recent SPAC activity of only seven SPAC listings on the main market or AIM in the UK in 2020, raising approximately $46 million; and just three in the first three months of 2021, raising approximately $343 million, pales in comparison.
While some have argued that the post-Covid bounce-back has come to an end, the UK’s fundraising landscape is still largely an attractive place.
Eligibility criteria Admission documents Rulebooks Corporate governance Regulation Adviser Periodic reporting Disclosure requirements Corporate transaction
Key eligibility requirements
Continuing obligations (As per AIM rules)
- Appointment of Nominated Advisor (Nomad) - No minimum track record requirement (e.g. revenue) or free float criteria, but company must demonstrate appropriateness to join a public market. - Pre-admission announcement at least 10 business days prior to admission - AIM Admission Document - Nomad declaration of suitability - AIM Rules for Companies and Nominated Advisors - Adoption of corparate governance measures as appropriate for the business - UK Corporate Governance Code/QCA Corporate Governace Code best practice but not mandatory - EU Directives - Home legislation (company law) as applicable - Nomiated Adviser to be retained at all times. Failure to do so may result in suspension of the company's shares - Audited Annual Report - Half-yearly financial report (unaudited) - Price sensitive information to be made public without delay - Significant shareholder notifications - Directors dealings notifications - Company websitewith up-to-date regulatory information, including disclosure of corporate governance arrangements - Class tests apply to certain transactions - Notification of substantial transactions and related party transactions - Shareholder approval for reverse takeovers, fundamental disposals and cancellation
Early-stage deals increase slice of the pie
Late-stage deals accounted for the largest share of deal value in the first six months of the year despite clocking in slightly less than last year's total. The percentage of capital raised in early-stage rounds rose from 22.3% in 2021 to 23.4% of the region's overall total in H1.
Fintech a major driver for UK and Ireland VC activity
With financial services contributing £164.2 billion to the UK economy, fintech continues to drive VC activity. Deal activity in the sector has remained stable in H1 with £5.2 billion raised across 276 deals, with most of the activity in the UK. Some of the region's biggest VC deals this year were in fintech. The largest round was for Checkout.com's $1 billion Series D in January, while payment company SumUp raised €590 million (about $584.3 million) in June.
The startup market in the last decade and before has shown that while economic crises do impact VC investing, they do not stop investing totally. The market is changing, but money is still there. Although it does not mean that raising capital might be easier than before - even if money is there, investors' risk awareness is growing, so they will make their investment decisions more carefully. History shows that the average Seed round size dropped during the 2008 economic crisis, but the total amount of money available for early-stage startups increased. If a specialist AIM investment manager decides, after careful research and consideration, to invest in a young company looking for funding nowadays, if the amount of money the company is seeking is unrealistic, the investment manager may well be put off. Difficult conditions may make the best investment opportunities more difficult to uncover, but the best managers require all the right indicators before proceeding. Some sectors are more likely to experience a downturn than others. For example, in 2008, the technology sector was hit particularly hard by the recession. As a result, fundraising for early stage tech companies slowed down significantly, and many companies were forced to lay off employees or shut down entirely. In contrast, the healthcare sector fared relatively well during the last recession. Fundraising for healthcare startups increased during the downturn as investors saw potential in the industry. So, what can we expect for fundraising in the 2022/3 recession? It's hard to say, but fundraising will likely slow down across all sectors. As a result, younger, less developed firms will need to be more careful with their spending, and investors will be more cautious with their money. But smart investors will always remember that some of today’s most successful companies were founded and flourished outside of optimal economic conditions due to the valuable services and benefits they provide.
History lessons about a potential recession
Due diligence in challenging times
In a time of inflation, investment managers will have to make several adjustments to due diligence:
Plan for scenarios, not certainties While it’s impossible to say with any confidence how the current downturn will unfold, that doesn’t mean investors are flying blind. Fund managers should already be developing a deep understanding of the most likely scenarios for their industries and pressure-testing both portfolio and target company prospects against them. Avoid the straight-line mistake In calmer markets, funds could get away with assuming that past performance at a company was predictive of future trajectory. But that could be a trap in the current environment. Was rapid growth over the past three years a sign of real strength or the anomalous impact of inflation or unusual market conditions? Making the right call means doing the work to find out. Disaggregate price and volume The best due diligence has always done this, but again, some funds have gotten away without it in the past. Now, understanding volumetric trends is essential because price volatility can easily distort the picture. Look for inflation winners Which companies can pass on rising costs to customers without skipping a beat? Those businesses will benefit disproportionately in the current environment. For some companies, this is a function of market leadership (which you’ll pay for), but for others, it may be less obvious. One industrial company in a recent due diligence seemingly had broad exposure to increases in labour, fuel, and materials costs. But with a little digging, it became clear that its contracts were indexed to inflation, giving it the ability to pass on costs to customers. There would be a 12-month lag, since the index was backward looking, but the company had strategies in place to bridge the gap, enhancing its attractiveness as a target. If a company simply can’t protect margins, walk away from the deal. Challenge intuition about market growth Inflation changes everything when it comes to growth. A consumer-packaged goods company growing at 3% would have been quite healthy in 2019. That’s no longer the case. Likewise, a tech company with 10% revenue growth is not clearly a standout in an inflationary environment.
Source: Bain & Company, global management consultancy
100% 905 80% 70%^ 60% 50% 40% 30% 20% 10% 0%
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 H1 2021
Angel/Seed
Early VC
Later VC
Source: PitchBook data
£108 £98 £88 £78 £68 £58 £48 £38 £28 £18 0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 H1 2022
600 540 480 420 360 300 240 180 120 60 0
Deal value
Deal count
Dwal value H1 '22
Deal count H1 '22
fINTECH A MAJOR DRIVER FOR UK & IRELAND VC ACTIVITY
15
A
The greater availability of liquidity on AIM than is generally the case for private companies, may also be helpful for EIS investors to avoid the possibility of zombie companies.
It has been a difficult year for investors. As recently as March the Federal Reserve funds rate was 0%. Since then we have had six successive hikes to a range of 3.75%-4%. Most major central banks in developed markets (with the exception of Japan) have followed suit in short order. As the dominant reserve currency, the US dollar has strengthened against the pound, euro and yen. The value of a whole constellation of assets has shifted wildly to reflect the new reality of a higher-rate world. From a global investor’s perspective, October’s ‘mini-budget’ added uncertainty to markets already in flux, giving them further reasons to avoid the UK. While Chancellor Hunt’s actions to restore confidence in Sterling have proved successful, the outlook for higher taxes and slower growth is likely to dampen interest in UK assets in spite of their attractive valuations. Smaller companies have been hit harder than their larger peers in this risk-off environment. The lower liquidity in their shares means that, as investor confidence wanes, daily trading volumes can fall – with a dearth of buyers, the “voting machine” sends stocks lower. For some companies (regardless of their size or index) the falls are entirely justified. In the broadest sense, higher interest rates decrease the relative attractiveness of all risk assets when compared to the “risk-free” rate of government bonds. This has proved particularly painful for long duration and high-growth assets. These have suffered due to compounding - as yields rise, one would logically expect that their present value would experience a proportionately higher fall as more of their implied value sits further out in time. The weighting towards highly-rated, fast-growing companies on AIM, particularly those with direct consumer exposure, has seen the market underperform wider smaller companies indices, but underlying this, there are reasons to remain calm.
The tax reliefs, are useful buffers against total loss.
AIM: Depressed market offers bargains for long-term investors
The sell-off in recent weeks is bringing a raft of quality AIM companies back onto our radar. This is allowing us to strengthen portfolios for the future.
IM: Depressed market offers bargains for long-term investors
From a typical investee company’s perspective in the Close Inheritance Tax Service (CITS), the volatile credit and currency markets are unhelpful but not life-threatening. Balance sheets either have remained strong or were bolstered by capital raising during the pandemic, giving them a number of advantages over their privately held peers. For our investee companies, management teams’ guidance has been cautious since the early days of COVID-19 in 2020. This has broadly stood them in good stead, limiting the number of downgrades as they face markets in flux. Underlying this, trading for many is holding up well, with input-cost inflation being passed on more easily than anticipated. Companies are finding ways to cope with tight labour markets and the supply chain disruptions that blighted the start of the year, often by using their financial strength to build inventories, protecting revenues and margins.
Remember the pandemic?
Away from the starkly negative news of late, AIM companies have been raising capital to execute their strategies. In portfolios, we have seen H&T Group, Strix Group and Wynnstay Group raise a collective £40 million to further their growth ambitions in the third quarter alone. Markets have not dried up. On the other side of the coin, M&A activity remains elevated. Weak Sterling may see this trend accelerate as foreign investors cast a slide rule over quality companies worth perhaps 20% less in Dollar terms than a year ago.
Markets remain open for business
In the 21 years since CITS was launched, we have learnt that discipline is key to building optimal portfolios. For example, the lower interest rates since the global financial crisis tempted many analysts to reduce key variables in their forecasting models, such that it became increasingly justifiable to pay more today for future earnings. In some cases, this was exacerbated by using estimates that were overoptimistic. By using a consistently high cost of capital and our own conservative forecasts, we eschewed the most highly-rated, long-duration stocks which have since fallen so dramatically, although looked so tempting at the time. We focused on strong management teams steering quality companies with robust balance sheets and dominant market positons. We have held positions in counter-cyclical companies such as insolvency practitioners and secured lenders through the cycle. Where possible, we have sought to diversify the geographic sources of revenue from portfolio companies to reduce reliance on the UK economy.
It pays never to overreach
The sell-off in recent weeks is bringing a raft of quality AIM companies back onto our radar. This is allowing us to strengthen portfolios for the future; by reducing weightings in the Service’s largest constituents, we can fund quality additions while diversifying risk for our clients. For new client money, we are making full use of our 6-month investment window, adding to positions cautiously by working with our experienced dealing team to purchase names at sensible levels.
In the downdraught, an opportunity to reduce risk
Lost in the volley of criticism of the ‘mini-budget’ was some good news in the growth investor arena. Rolling back the 1.25% increase in NI for employers is helpful for all UK businesses. EIS and VCT reliefs are being extended beyond 2025 removing uncertainty for investors and entrepreneurs alike. (Since 2011 these reliefs have been considered state-aid by the EU and therefore anti-competitive within the bloc, but under a ‘sunset clause’ the UK has used secondary legislation to prolong them). And a range of SEIS measures and limits were improved. This is all positive news for early-stage companies, “filling the hopper” with businesses that may eventually graduate into CITS holdings.
Government support for growth companies continues
Given recent market falls driven by the unhelpful macroeconomic and geopolitical backdrop, it is understandable struggling to feel optimistic about prospects for smaller companies. But looking beyond the short-term picture, we believe the current market reset offers several reasons for the patient investor to take heart. The inflationary pressures on the economy look set to recede going into next year. Our portfolio companies are well positioned and, perhaps more importantly, well capitalised. And last, but certainly not least, we are seeing compelling valuations return to AIM after a multi-year hiatus.
All to play for!
contact
closebrothersam.com +44 (0) 207 426 6261 sam.barton@closebrothers.com
thought leadership
B
usiness Relief is an under-utilised Inheritance Tax exemption according to analysis of government data. New research with wealth managers and financial advisers by TIME Investments, the leading estate planning solutions provider, shows that Business Relief (BR) is now being used by the majority (83%) as an Inheritance Tax (IHT) planning tool for their clients. Many advisers like to incorporate BR into estate planning because it offers a faster route to IHT relief, requiring only two years to gain IHT exemption instead of seven years with gifting or trusts. The research shows that 12% of advisers are now recommending BR at least once a month as their preferred IHT solution for clients, with a further 34% recommending it every three months. This means that almost half of advisers surveyed are recommending BR at least once a quarter. The majority (76%) are using it up to twice a year. When recommending BR, 27% of advisers said they either use AIM BR services exclusively or more than unquoted services, which was something of a surprise given the relative volatility of the AIM index. However, the majority of AIM for BR purposes is held within an ISA, as this is the most straightforward way to ensure an ISA investment is free of IHT after two years, whilst maintaining the tax benefits of the ISA wrapper. A third said that they use quoted and unquoted in equal measure. The new findings come as IHT receipts hit a record £6.1 billion for the most recent tax year 2021/22, an increase of 14% on the previous year and the largest single-year increase in five years. With the Office for Budget Responsibility (OBR) predicting that this trend will continue, Inheritance Tax is a major concern for many families already under pressure from the rising cost of living crisis. However, despite its effectiveness as an estate planning tool, analysis of government data shows that the use of BR as an IHT exemption has reduced. Only £1.9 billion of BR exemption was claimed by 2,820 estates in the 2019/20 tax year, down from £2.5 billion claimed by 3,240 estates in the previous year. This means many investors may be missing out on this valuable tax exemption. Henny Dovland, TIME Investments’ IHT technical specialist, said: “The popularity of Business Relief as an estate planning tool is growing because it offers investors a faster route to IHT relief than gifting or trusts. However, although many advisers are writing BR business, it is still an under-utilised opportunity, despite offering tangible value to client outcomes.”
16
Henny Dovland
Business Development Director, TIME Investments
Business Relief is the preferred IHT solution for advisers and wealth managers
www.time-investments.com 020 7391 4747 questions@time-investments.com
- Name Surname
The research shows that 12% of advisers are now recommending BR at least once a month as their preferred IHT solution for clients
Important information The information contained in this article does not constitute and should not be construed as constituting investment or tax advice by TIME Investments. Any views or opinions expressed are solely those of the author and do not necessarily represent those of TIME Investments. There is no guarantee that the target return objectives of TIME:AIM will be achieved and investors should recognise that their capital is at risk and they may get back less than they invest. The levels and bases of, and reliefs from, taxation may change in the future. Any favourable tax treatment, such as Business Relief, is subject to government legislation and as such may change.
17
AIM’s VCT-qualifying companies can escape dividend tax rise
Manager Name Year founded AUM (In total)/AUM (on AIM) Description of Offer Launch Date Tax wrapper or relief No. of holdings Target Fundraiser Investment Objective Target Annual Return (where stated) Liquidity (days to exit) Income (Y/N) Minimum Investment Minimum Increment Initial Fee AMC Other fees
TIME Investments 2011 £4.5 billion (TIME group), £75 million (AIM) TIME:AIM provides investors with exposure to the AIM market through a diversified portfolio of BR qualifying companies. TIME:AIM follows a disciplined, data-driven process to select high quality companies that have the potential to deliver attractive long-term returns. TIME:AIM can be held within an ISA or non-ISA wrapper. November 2016 ISA and BR 30 N/A Long term growth N/A Withdrawals processed monthly; sales proceeds sent to investors within 14 days of selling shares. No £25,000 standard application £15,000 ISA applications £15,000 0% 0.8% + VAT 1% Dealing Fee 0.32% Custodian Fee
Close Brothers Asset Management 1878 £15.3bn at 31/7/2022 / £302m 30/09/2022 The Close Inheritance Tax Service (CITS) is a specialist, discretionary investment management service designed to provide accelerated relief from IHT by investing in Business Property Relief (BPR) qualifying shares quoted on the Alternative Investment Market (AIM) and the Aquis Stock Exchange (AQSE). January 2001 Eligible for ISA investment 25-35 N/A - evergreen "1. To achieve a beneficial tax status by capitalising on Business Property Relief (BPR)* 2. To preserve capital** and achieve growth over the long-term within the context of BPR 3. To diversify risk *A company that qualifies for BPR at the time of investment may cease to qualify for reasons outside our control at a later date, which means any tax benefits will be lost until the capital is reinvested in BPR qualifying company. **This is not a capital protection service and your client’s capital is at risk." N/A Target under 10 days for withdrawals of £25,000 and below No £50,000 £50,000 £250 + VAT 1.25% + VAT of portfolio value 1% dealing fee on the value of each transaction
20
18
What’s next for AIM?
In order to qualify for EIS or VCT, a company must generally: - Be unquoted although trading on AIM is allowed - Have gross assets valued at no more than £15 million before and £16 million immediately after fundraising (although it can continue to grow afterwards) - Be no more than seven years old (ten years for a knowledge-intensive company) - Have fewer than 250 full time equivalent employees (500 for a knowledge-intensive company) - Not be operating in excluded trades including dealing in land, investment activities, banking, insurance, hire purchase, money lending, legal and accounting services, property development, farming and market gardening, forestry, operating or managing hotels or residential care homes, coal production, steel production and shipbuilding, and all energy generation activities.
These are companies that undertake a significant amount of R&D and because of the longer term potential of their activities are allowed to be older (up to ten years), larger (with up to 499 employees) and receive more venture capital schemes (EIS, SEIS, VCT and SITR) funding (up to £5 million annually and £20 million in their lifetime) than other companies that otherwise qualify for venture capital schemes funding. The annual investment limit for individuals is also increased to £2 million for KICs, allowing up to £600,000 of income tax relief in a tax year
Russia’s invasion of Ukraine is arguably the most important geopolitical event since the fall of the Berlin Wall.
The removal of much of the froth from the market suggests the availability of great opportunities on which the shrewd investor can now capitalise. According to FactSet, the price/earnings ratio for the AIM 100 had dropped from 61 times at the start of the year to 27 times as of mid-October. The small caps sell-off in a period of risk-aversion is consistent with other crises. Experience also tells us that, at some stage in the not-too-distant future, we’re likely to see the market recover. And when it does, the share prices of beaten-up AIM stocks could come roaring back to reward patient investors. AIM has traditionally been used by smaller companies that are at an early stage of their development, though other businesses do join the exchange because the listing requirements allow for more flexibility when listing shares. The resiliency of these small businesses will play a key role in determining the path of the UK’s economic recovery.
Coming off a period of considerable outperformance, the Alternative Investment Market (AIM) had fallen almost 30% at the time of writing, creating extraordinary buying opportunities for long-term investors.
AIM companies remain bullish amid the challenges
How many Brits have an investment and if current UK investors would consider ethical investing
CEO/MD
CHANGE IN AVERAGE REMUNERATION BY ROLE
FD/CFO CURRENT
OTHER EXECS
Latest
1 year prior
2 years prior
4%
74%
22%
apply the stricter FRC governance framework
apply the QCA code
are either eligible and have opted to apply for the Association of Investment Companies (AIC) code, or follow an international standard.
The junior market is not just a favoured hunting ground for private retail investors in search of decent returns and inheritance tax (IHT) breaks. It’s also popular among wealth managers who offer dedicated AIM IHT portfolios to clients. Seeking strength in numbers, these institutional buyers gravitate towards the biggest stocks. While that can worsen the selling when a company falls from favour, it can also create a powerful share price driver on the way up—which explains why many AIM companies remain bullish. With all eyes on the outlook, guidance for the second half was also largely positive: more companies upgraded full-year expectations than downgraded them, according to Investors’ Chronicle analysis of FTSE 100, FTSE 250 and AIM 100 company results. By the first week of December, the FTSE 100 index had recovered modestly as hopes of central banks’ pivot increased. It rallied to a high of £7,633, which was the highest level since June. This recovery turned the FTSE positive for the year, meaning it has outperformed American counterparts like the Dow Jones and Nasdaq 100 indices. The FTSE 100 recovery also coincided with the rebound of the British pound. After crashing to the lowest level since the 1980s, sterling rebounded by more than 18.8% from its lowest point this year in early December. It’s notable, however, that the AIM 100 – composed of the largest companies on the junior market – has slightly underperformed even the AIM All-Share this year. That’s partly due to some high-profile blow-ups among the biggest stocks. Overall, the AIM market now seems to present a rather positive outlook. While there were high-profile share price collapses on the junior market during the summer, analysis indicates AIM 100 companies as a whole remain roughly as optimistic as their large-cap peers, according to data from Factset. Two-thirds of AIM 100 companies giving guidance over the past months said full-year figures would be in line, with just 15% warning on the outlook and the remainder saying guidance would be ahead or at the top end of expectations. Those proportions almost exactly mirror FTSE 100 companies’ own outlooks. In the middle of the road, the resilience of the domestic-focused FTSE 250 has been particularly eye-catching, on the surface, at least. Cuts to guidance performance projections have been particularly few and far between among mid-cap companies. On the whole, companies of all shapes and sizes are sounding positive in the face of coming headwinds, though there are still warning signs as we head to the end of this tumultuous year.
The FTSE AIM 100 Index is reviewed quarterly by the London Stock Exchange, which owns and maintains it. The constituent companies may change based on market capitalisation data as at the end of February, May, August and November. The multiple challenges of 2022 have brought some notable changes to the index. For example, the typical company is somewhat smaller than it used to be. At the start of this year, the average market capitalisation of a top 100 company was £660 million. By the end of the third quarter, that figure had fallen to £405 million. The drop in value–which is the result of the downturn–has been even more pronounced for the AIM UK 50 Index, where the average company value has slumped from £785 million to £471 million. The drop has had a positive effect on dividends, pushing the dividend yield on the AIM 100 from a negligible 0.9% to a more respectable 1.8%. Dividends, which are still recovering strongly from 2020’s wipe-out payouts, are set to rise by over 13% this year. According to financial-services administrator Link Group in its annual AIM Dividend Monitor, regular dividends, excluding special payouts, rose almost 20% in the first half of 2022. Despite likely moderation in that growth rate in the second half, underlying payouts for the full year should still run out more than 13% higher than 2021’s. Contrasting fortunes this year have produced some notable changes in position in the top 100. Basic resources and energy businesses now have a weighting of almost 14%, up from 10.5% at the turn of the year. The technology sector has been pretty resilient in relative terms, seeing its AIM 100 index representation rise from 10.3 to 12.5%. The sector’s persistence is arguably an indication that a wide range of businesses are waiting in the wings of the AIM All-Share, ready to attract investor attention just as old favourites flag. To be sure, tech has generally had a rather tough year with big drops in valuation. However, CEOs of tech companies still see AIM as an attractive place to list and have continued to do so on the basis of a medium-term recovery. The junior market seems to put them in the right place to take advantage of it.
New trends that shape the market
The possibility of a flotation on AIM provides many types of early-stage investors – family and friends, angel investors, crowdfunders, university spin-out offices, seed capital and venture capital firms – with the confidence to support businesses in their earlier stages. And while AIM can help crystallise value for founder investors, it also provides an opportunity to introduce fresh investors who are keen to invest in the future growth of a business. One of the big benefits of investing in shares on AIM is the tax advantage it offers. For example, AIM shares can provide 100% relief from inheritance tax, through the Business Relief (BR) scheme. Companies on the alternative market can also benefit from the bounty of the venture capital schemes, which offer tax relief to individuals to encourage them to invest in companies and social enterprises that are not listed on any ‘recognised’ stock exchange. These government-backed tax-advantaged schemes include the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS), the Venture Capital Scheme (VCT), and Social Investment Tax Relief (SITR). AIM quoted companies are often seen as attractive because they offer these and other tax advantages, particularly the inheritance tax reliefs, while not suffering as high a risk and lack of liquidity as other unlisted companies. Even so, shares on the alternative market will still be higher risk than mainstream investments. Therefore, it is always sensible to get expert advice from a qualified financial adviser and/or specialist AIM investment manager, on selecting investments. Growth remains the watchword for AIM companies. Companies on the junior market continue to create jobs, drive productivity, and foster innovation and exports.
Growth remains the watchword
Source: Refinitiv
Source: Link Group, AIM Dividend Monitor
Source: ONS
The outperformance by the FTSE 100 is partly catching up with the previous gains by AIM since the pandemic lows.
Millions £1400 £1200 £1000 £800 £600 £400 £200 £0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022e 2023e
Regular Dividends
Special Dividends
Monthly closing of the FTSE AIM All-Share Index (capital return)
1.400 1,300 1,200 1,100 1,000 900 800 700 600
Jan 2015
Apr 2015
Jul 2015
Oct 2015
Jan 2016
Apr 2016
Jul 2016
Oct 2016
Jan 2017
Apr 2017
Jul 2017
Oct 2017
Jan 2018
Apr 2018
Jul 2018
Oct 2018
Jan 2019
Apr 2019
Jul 2019
Oct 2019
Jan 2020
Apr 2020
Jul 2020
Oct 2020
Jan 2021
Apr 2021
Jul 2021
Oct 2021
Jan 2022
Apr 2022
Jul 2022
Source: statista
AIM dividends 2022 - 2023
How AIM outperformed in 2021
130 120 110 100 90 80 70 60
2020
2021
FTSE 100
FTSE AIM 100
100 80 60 0
2019 Q4 2020 Q1 2020 Q2 2020 Q3 2020 Q4 2021 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2
Growth in business investment increased in the latest quarter
One of the big benefits of investing in shares on AIM is the tax advantage it offers. For example, AIM shares can provide 100% relief from inheritance tax, through the Business Relief (BR) scheme.
How do you foresee Q4 2022 for the AIM market overall?
As a BR service, there tends not to be a huge level of seasonality in fundraising. That said, the volatile markets have seen numbers come off a little compared to last year. My casual observation would be that there is a negative correlation between low inflows and strong client returns!
The final quarter, or fundraising season, is underway, how is it looking so far? What do you expect?
The macroeconomic backdrop is clearly not supportive for equities, but the same is true for all risk assets as borrowing costs increase. Our investee companies have, in the main, delivered a good operational performance in 2022 and expectations look conservatively set. It has also been encouraging to see companies continue to raise capital, implying that investor confidence has not evaporated.
Britain has a new prime minister. What will this mean for financial markets in the long run?
The arrival of Rishi Sunak at Number 10 has calmed the waters following October’s ill-judged ‘mini budget’ and provided a boost for domestic-focused UK equities. The long-term price of this stability, however, is yet to be fully understood, with higher taxes and less emphasis on growth acting as headwinds for the UK economy.
UK SMEs are often considered the engine room of economic growth, so we expect the government to continue its support for AIM listed companies. The proposed rise in UK corporation tax from 19% to 25% will negatively affect AIM companies, so it will be interesting to see if the government provides any support to mitigate the impact with rising costs already depressing profits for many firms.
We anticipate that Q4 will continue to be a volatile period for the AIM index as the political environment in the UK hopefully starts to find some stability. Companies have seen significant share price movements on very limited news flow as there has been a flight to safety during this uncertain period and we anticipate this will continue over the next couple of months. For investors with appetite for growth, the current depressed position of AIM could provide an attractive entry point for investors.
The last few weeks have seen an exceptional amount of market turmoil and as at today most of the announcements that came in the mini-budget have been scrapped or reversed as we have seen the BoE having to step in to stabilise markets and a change of prime minister and chancellor to try and steady the ship. We expect there to be a challenging period ahead as the government seeks to re-establish confidence both domestically and globally.
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7. Further Reading
Learning objectives CPD and Feedback About Intelligent Partnership Disclaimer
learning objectives
HOW DID YOU DO?
Covered in Section 2: Market Update
Benchmark products and providers in the market against one another
Identify the main events and developments in the AIM market
Covered in Section 5: Managers in Focus
Analyse relevant issues in the high inflation, high interest rate, and high tax era
Define some of the key events likely to impact AIM in the near future
Covered in Section 5: Managers in Focus; and Section 6: What’s on the Horizon
Evaluate the key fees and charges applied by AIM managers
Covered in Section 3: Considerations for Investment
Learning objectives
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CPD and feedback
Intelligent Partnership has achieved accredited status from the CII and PFS. Members of these professional organisations represent the majority of the insurance, investment and financial services industry.
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eaders of the AIM Quarterly Update can claim up to two structured CPD hours towards their 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
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About
Intelligent Partnership is the UK’s leading provider of insights and education in the tax advantaged and alternative investments space.
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e provide a wide variety of ways to keep advisers and industry professionals up to date with the latest developments. Our content includes a range of engaging, accessible and CPD accredited resources as well as industry leading events:
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This publication is not included in the CLA Licence so you must not copy any portion of it without the permission of the publisher. All rights reserved. No parts of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means including electronic, mechanical, photocopy, recording or otherwise, without written permission of the publisher. This publication contains general information only and the contributors are not, by means of this publication, rendering accounting, business, financial, investment, legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. Neither the contributors, their firms, affiliates nor related entities shall be responsible for any loss sustained by any person who relies on this publication. The views and opinions expressed are solely those of the authors and need not reflect those of their employing institutions. Although every reasonable effort has been made to ensure the accuracy of this publication, the publisher accepts no responsibility for any errors or omissions within this publication or for any expense or other loss alleged to have arisen in any way in connection with a reader’s use of this publication. This publication is based on the authors’ understanding of the structure of the arrangements detailed, the current tax legislation and HM Revenue & Customs practice as at December 2022 which could change in the future. It is not an offer to sell, or a solicitation of an offer to buy, the instruments described in this document. This material is not intended to constitute legal or tax advice and we recommend that prospective investors consult their own suitably qualified professional advisers concerning the possible tax consequences of purchasing, holding, selling or otherwise disposing of AIM quoted shares. Intelligent Partnership is not authorised and regulated by the Financial Conduct Authority and does not give advice, information or promote itself to individual retail investors. It is the responsibility of readers to satisfy themselves as to whether any arrangement contemplated is suitable for recommendation to their clients. Tax treatment depends on an investor’s individual circumstances and may be subject to change. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.
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AIM 100 companies: executive pay, governance, diversity, and ESG Climate-related disclosure rules and tax-advantaged investments What the Managers say
This publication is not included in the CLA Licence so you must not copy any portion of it without the permission of the publisher. All rights reserved. No parts of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means including electronic, mechanical, photocopy, recording or otherwise, without written permission of the publisher. This publication contains general information only and the contributors are not, by means of this publication, rendering accounting, business, financial, investment, legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. Neither the contributors, their firms, affiliates nor related entities shall be responsible for any loss sustained by any person who relies on this publication. The views and opinions expressed are solely those of the authors and need not reflect those of their employing institutions. Although every reasonable effort has been made to ensure the accuracy of this publication, the publisher accepts no responsibility for any errors or omissions within this publication or for any expense or other loss alleged to have arisen in any way in connection with a reader’s use of this publication. This publication is based on the authors’ understanding of the structure of the arrangements detailed, the current tax legislation and HM Revenue & Customs practice as at June 2022 which could change in the future. It is not an offer to sell, or a solicitation of an offer to buy, the instruments described in this document. This material is not intended to constitute legal or tax advice and we recommend that prospective investors consult their own suitably qualified professional advisers concerning the possible tax consequences of purchasing, holding, selling or otherwise disposing of AIM quoted shares. Intelligent Partnership is not authorised and regulated by the Financial Conduct Authority and does not give advice, information or promote itself to individual retail investors. It is the responsibility of readers to satisfy themselves as to whether any arrangement contemplated is suitable for recommendation to their clients. Tax treatment depends on an investor’s individual circumstances and may be subject to change. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.
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