alternative investment market
Industry Update - JUNE 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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Some positive signs despite the headwinds
Photography by Interview by
Covid changed context for BR
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ollowing a strong year for the UK capital markets in 2021, the first quarter of 2022 was rather turbulent. Fundraising across AIM was impacted by the geopolitical events in Ukraine. Despite this, however, there were still some positive signs for the UK markets. A significant number of first-quarter fundraises were driven by funds looking to invest in companies across the technology, renewables, real estate and natural resources sectors, suggesting that investors were still willing to back certain sectors. Furthermore, it appears that the investor community still has capital to deploy and, while the market for fund raises and new IPOs are expected to remain quiet in the immediate short term, there remains a queue of private businesses positioning themselves to IPO once the markets settle. In the second quarter, the FTSE fell less overall than other major international markets and both the AIM and FTSE All-Share recovered somewhat into April 2022, albeit this was not sustained into May. AIM companies to be included in PIE (Public Interest Entity) definition On 31 May 2022, the government published its long-awaited response to the consultation on strengthening the corporate governance, corporate reporting and audit regine. 136 responses were received on whether AIM companies should be included in thePublic Interest Entify (PIE) definition, and whether the threshold should be based on those with market capitalisations above €200m. The vast majority of responses from across all sectors – though there was significant representation from AIM companies – were in favour of including a smaller number of AIM companies than the proposed threshold would bring into the definition, with just over half saying the market capitalisation figure should be higher or that the size threshold should be aligned with the large private company threshold. These responses argued that entities traded on AIM or other Multilateral Trading Facilities (MTFs) are deliberately subject to a lighter regulatory regime than for listed companies, as their objective was to act as an incubator to innovative companies. This, they maintain, is recognised by those investing in them who were prepared to accept a higher level of risk. Arguments from individuals (often academics) and listed companies against raising the threshold – and in a few cases lowering the threshold further – pointed to the higher risk of AIM and other MTFs due to their lower regulation and called for greater transparency. A few of these responses suggested that some large AIM companies were using AIM to avoid the main listed market regime, and should be encouraged to move onto the senior market by aligning the reporting requirements. Having considered the views of consultation respondents, the government intends to treat large private companies with both 750+ employees and an annual turnover of £750m+ as PIEs. Companies traded on AIM or other multilateral trading facilities will be PIEs if they meet this 750:750 test, but smaller companies on those markets will not become PIEs. The Government is also considering whether to make the transition to listed status easier by making compliance with some or all of the proposed new PIE requirements optional for a period of time after flotation, subject to gross revenues remaining below a specified threshold. Restoring trust in audit and corporate governance The rules around PIEs are being changed to expand the scope of regulation to large private companies and to recognise the changing nature of the UK economy. Updating the rules also underscores the need for higher standards of corporate governance in the most significant UK companies, given their importance for employees, shareholders, and the country as a whole. For those companies that will now be considered to be PIEs, including those quoted on AIM, the regulatory changes mean a lot more tangible liabilities for directors and more direct supervision and examination by the new regulator. To illustrate, the new rules will require PIE directors to report on a company’s internal controls and fraud-prevention measures, with auditors providing assurance on the latter, report on actions they have taken to prevent and detect fraud, disclose their distributable reserves and explain the board’s long-term approach to the amount and timing of shareholder returns. The Government also intends to require directors of such companies to make an explicit statement confirming the legality of proposed dividends and any dividends paid in-year. The Government believes this approach will ensure that the companies of greatest public interest are properly scrutinised by the regulator, while minimising additional burdens from regulation as far as possible. The hope is that the regulatory change will help to restore trust in audit and corporate governance.
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
LSE to help unlisted companies raise funds Markets in turmoil: finding the bright spots in the dark What the managers say
2. market update
MICAP data analysis Fees & charges MICAP market snapshot
3. Considerations For Investment
Blackfinch TIME Investments Comparison Table
5. managers in focus
AIM 100 companies: executive pay, governance, diversity, and ESG Climate-related disclosure rules and tax-advantaged investments What the Managers say
6. what's on the horizon
Learning Objectives CPD and Feedback About Intelligent Partnership Disclamer
7. further learning
Engaging with your Nominated Adviser: an important step ESG on AIM: using your money to drive positive change FCA: Spotlight on the UK listing regime
Guy tolhurst
Founder and Managing Director Intelligent partnership
Opening Statement Acknowledgements and Thanks Key Findings
The first-quarter fundraises suggest that investors are still willing to back certain sectors.
AIM: holding an indispensable place in the funding continuum
Marcus stuttard
head of aim & uk primary markets, london stock exchange
2. MARKET UPDATE
3. CONSIDERATIONS FOR INVESTMENT
4. INDUSTRY ANALYSIS
5. MANAGERS IN FOCUS
6. WHAT'S ON THE HORIZON
7. FURTHER LEARNING
The government intends to treat large private companies with both 750+ employees and an annual turnover of £750m+ as public interest entities (PIEs).
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 Lawrence Campin, Van Hoang, and Martin Perrett of Blackfinch Investments; Matt Currie, Victoria Edwards, and Peter Steele of Seneca Partners; Chris Cox, Stephen Daniels and Simon Housden 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 Blackfinch, Seneca and TIME.
Acknowledgements and Thanks
learning objectives for cpd accreditation
Identify the main events and developments in the AIM market Benchmark products and providers in the market against one another Evaluate the key fees and charges applied by AIM managers Describe governance issues and the performance of selected sectors on AIM Define some of the key events likely to impact AIM in the near future
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Find out more at Managers in focus
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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
MICAP data analysis MICAP market snapshot
LSE to help unlisted companies raise funds Markets in turmoil: finding the bright spots in the dark Whath the managers say
Contact us: lisa@intelligent-partnership.com Sponsorship Opportunities: chris@intelligent-partnership.com
EDITORIAL Mohamed Dabo CREATIVE Gillian Livingstone SUB-EDITING Lisa Best & Mohamed Dabo RESEARCH Mohamed Dabo
MARKETING Carlo Nassetti DISTRIBUTION Michelle Powell SALES Chris White
Acknowledgements and thanks
04
number of new issues on AIM since launch
4,000
number of international companies on AIM
114
number of companies listed on AIM
840
money raised on AIM
£1,168.8 million
proportion of UK private businesses that are SMEs with less than 250 employees
99.9%
average turnover of businesses in the UK
£758,239
Key findings
total number of trades on AIM
1,353,578
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.
(May 2022)
total employment in SMEs
16.3 million
(01 Jan – 31 May 2022)
(01 Jan – May 2022)
(May 2022, UK companies: 726)
(out of 5.58 million private businesses)
(61% of the total)
key findings
increase in new issue funding ytd vs 2020 ytd
LSE to help unlisted companies raise funds Markets in turmoil: finding bright spots in the dark What the managers say
LSE to help unlisted companies raise funds
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"Our ambition is to be the first global exchange group that is genuinely indifferent as to whether a company is public or private," LSEG said. To do so, it plans “to support the widest range of companies through their funding lifecycle including helping them transition from private to public markets."
Seeking to bridge the UK’s persistent SME funding gap
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
The issue being addressed is of high relevance to the Alternative Investment Market (AIM), London’s junior stock exchange, designed to help smaller companies access capital from the public market. It is this challenge that led to the creation of AIM, in the first place, to allow these companies to raise capital on a public exchange with much greater regulatory flexibility compared to the main LSE stock market. In recent years, however, many small companies have turned their backs on a public listing, citing heavy costs and regulatory requirements, according to a finance ministry consultation paper last year. The search for a solution led the LSEG to recently announce a strategic investment and long-term partnership with Floww, a platform that connects investors with private companies. “The partnership enables us to support private companies with the capital they need to grow and positions us to drive innovation in trading and post trade activities,” the stock exchange said in a recent press release.
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.
Britain is reforming its capital market after leaving the European Union to ensure London still attracts global investors. As part of this initiative, the London Stock Exchange Group (LSEG) is striving to make it easier for private companies to access funds and attract more retail investors.
- Rishi Sunak, Chancellor of the Exchequer.
SMEs: failure to access sufficient capital could hamper productivity growth
Since the financial crisis, Britain’s high street banks have been less willing to lend to small businesses over fears they might default. Currently, more than half of small and medium-sized businesses (SMEs) in the UK are struggling to get the funding they need to help boost investment and productivity, new research has revealed. According to one study, only four out of ten SMEs have been able to secure funding from their chosen lender. Against this background, if Britain wants to lead the world in tackling climate change, solve the Grand Challenges facing our society and make the UK the best place to work and grow a business—the key is to enable the productivity of our businesses to flourish. And the productivity block can be unlocked with business funding.
AIM: will it continue to play a vital role in supporting business growth?
The stock exchange sees building a bridge between private and public companies as a way to build a pipeline of listings. The UK listings regime has already been eased in a bid to attract more technology firms to the UK. With LSEG making such a clear commitment to Floww, perhaps there is now a question mark over the future of AIM. Will its place in the development of growth companies be usurped by a platform that potentially renders public market funding unnecessary to them in their earlier stages? But, AIM remains a potent weapon in the funding arsenal. The junior market is the traditional home of the innovators, the disruptors, the scale-up businesses that will be fundamental to the UK’s economic recovery. For growth businesses which have reached a certain size and scale, AIM has always been, and remains, a vital source of funding. More than a quarter of a century on from its launch, it is still Europe’s top destination for fast-growing firms looking to go public. For businesses in need of funding, listing on AIM has clear positive benefits. Companies and investors have access to liquidity and transparent pricing to a greater or lesser degree and levels of disclosure and protection some of which are enshrined in law and others in the rules of the exchange. Moreover, given that AIM has such a diversified investment base, (the AIM Index is particularly well supported by retail investors, who hold more than a quarter of the total shares) companies are not exposed to the threat of a singular or limited number of VC’s pulling out of a deal. With the market index weighted towards the industries of the future – with technology, energy, and healthcare companies alone accounting for more than 40% of the companies currently listed—the outlook for the AIM market gives cause for optimism. Despite the dire economic times, much of what post-Brexit Britain is doing is exciting, including the Chancellor’s call for ‘new culture of enterprise’, a vision for lower taxes and business dynamism in a vibrant market economy. The signs are that the financial regulators will seize the opportunity to adapt the regulatory system so that it continues to enhance the attractiveness of UK capital markets.
UK SMEs are often considered the engine room of economic growth, AIM listed companies offer the opportunity to capitalise on this growth and if shares are held within an ISA this growth is tax free.
Simon Housden - Sales and Marketing Director TIME Investments
Floww is a company that provides a SaaS technology, built to connect the global financial ecosystem on one decentralised platform. It enables investors and institutions to perform primary and secondary market transactions and empowers them to communicate and share investment opportunities. The platform also allows users to focus on data analysis and scaling of the business. Floww allows investors to monitor and track their investments in private companies and already features 7,000 company profiles and 70 venture capital firms. The strategic partners aim to build a connected network “for all market players to share and manage their data, deals and opportunities and the ability to trade shares in companies at any stage," said Floww CEO Martijn De Wever, adding: “Trust and reliable data form the foundation for a liquid market. We are the only party in the market with accountant verified data and the ability for players to control who has access to what data. In private markets where information is sensitive, and trust is everything, controlling who can see your data is key.” For its part, LSEG says it continues to work with the government and regulators to support the development of the funding continuum, ensuring companies at all stages of their lifecycle, in the UK and globally, are able to access the capital they need.
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Markets in turmoil: finding bright spots in the dark
Cyclical stocks, or shares of companies in industries that are highly sensitive to the economic cycle, are often hardest hit during a recession. There are, however, some stock market sectors that are relatively immune to the ups and downs of the economic cycle. With heavy clouds of anxiety hanging over the market, only investors who can keep their cool will be able to spot the opportunities that are still available. This is by no means to minimise the formidable difficulties of the hour. As we go to press, soaring prices fuelled by Russia's invasion of Ukraine are threatening to plunge most developed economies into recession. While the UK economy has now recovered to its pre-pandemic level, the momentum seems to be ebbing away as historical indicators of recession begin to flash red. The latest figures from the Office for National Statistics shows that gross domestic product contracted 0.1% in March after growth for February was revised down to zero. It grew 0.8% on a quarterly basis, below expectations. The services sector was the biggest drag on the economy as consumer-facing services suffered a 1.8% slide in sales during the month, from a 0.5% growth in February as households cut spending. The sector is now 1.5% above its pre-pandemic level. In early May, the Bank of England warned that consumer prices could reach 10%, well above the Bank’s 2% target, later this year. Meanwhile, the central bank has hiked UK interest rates to a 13-year high of 1% to stem inflation. So far, the central bank has raised its key interest rate for the third time since December. Economists have warned that while growth is still expected this year, Britain's economy could face more challenges in 2023 as recession risks elevate.
Source:London Stock Exchange
How to weather the storm
There’s a bright spot in every dark cloud, as the saying goes. Though, in a year of seemingly endless bad news, it can be hard to imagine that the market still harbours some sweet spots. But the economy typically follows a somewhat predictable, if irregular, pattern—of expansion and contraction—known as the economic cycle.
While there’s no such thing as a ‘recession-proof’ investment, some types of investments and strategies could help a portfolio better weather the current crisis. Even during a recession, some sectors of the economy tend to outperform others as consumer needs shift. Traditionally, the healthcare and consumer staples sectors have been good examples. Available research shows that health-care hiring has remained stable in spite of economic downturns, one indication of how recession-resistant the healthcare market could be during the current Russia-Ukraine crisis. The consumer staples sector includes food and beverages, household and personal products, and even alcohol and tobacco. These sectors typically don’t see the rapid growth that others, such as consumer discretionary (household goods and services that are considered more wants than needs, such as apparel, restaurants, and luxury items) or information technology, might see in the rebound and recovery phase of a recession. These stocks, considered ‘defensive stocks’, may not be as attractive during boom periods like a bull market. But bear markets and recessions may be the time to reassess and consider the companies that sell items everyone buys, no matter the outside circumstances. Meanwhile, slower consumer spending and overall household consumption has been widely credited for the weakening domestic economy. Consumer spending is now forecast to rise 4.9% in 2022, down from the 5.1% and 5.6% expected in March and February. Growth of 1.5% is predicted in 2023, down from the March and February forecasts of 1.7% and 2.9%. Coming amid the cost-of-living crisis, a new YouGov survey reveals how many Britons have been forced to make spending reductions on 24 areas of household spending: If you’re interested in investing in the AIM market during a recession, you might look to options in the sectors outlined above. Of course, that’s not the only criteria: Low debt, profitability, strong balance sheets and positive cash flow may all help a company get through difficult economic times.
Source: London Stock Exchange
Cost of living: in what ways are Britons having to make cuts to household spending?
AIM-quoted companies are deemed to be unquoted companies by HM Revenue & Customs, because they are not quoted on a ‘recognised’ investment exchange, therefore making them potentially eligible for a range of tax benefits. In other words, investors on AIM may benefit from favourable tax treatment, independent of the state of the economy. Over the years, this has proved to be a good tax planning tool for many. Whether the economy is in a boom or bust, investors can search out these generous tax breaks as they build a well-diversified portfolio to home in on their investment objectives. Most notably, there are a number of favourable tax reliefs that the government has implemented to encourage investment in smaller growth companies through the London junior Market.
Tax reliefs: the perennial benefits
Here, investors subscribe for shares in a VCT (listed on LSE), which then onward invests in qualifying young trading companies (either private or AIM quoted), providing them with funds to help them develop and grow. The tax reliefs available to investors are:
Venture Capital Trust (VCT)
Income Tax Relief – individual shareholders aged 18 or over can claim Income Tax relief at the rate of 30% of up to £200,000 annual investment, provided their shares are held for at least five years. Dividends - no Income Tax is payable on dividends from ordinary shares in VCTs. Capital Gains Tax - no Capital Gains Tax is payable on disposals by individuals of ordinary shares in VCTs.
This scheme operates by offering tax reliefs to individual investors who buy new shares in a qualifying young company(either private or AIM quoted). It offers generous EIS tax reliefs:
Up to 30% relief on your income tax bill – up to £300,000 per year (or £600,000 when investing in knowledge-intensive companies) Maximum amount you can invest: up to £1 million (or £2 million if anything above £1 million is invested in knowledge-intensive companies) Tax-free growth Capital gains deferral from other investments – potentially indefinitely You can offset any future losses against your income tax or capital gains tax liabilities Pass on your investment free of IHT
Enterprise Investment Scheme (EIS)
Introduced by the government as a complement to EIS, following the success of the latter, SEIS was designed to allow a company to raise money at the very early or seed stage of its existence. It offers a mix of upfront and ongoing tax reliefs:
Up to 50% income tax relief Tax-free growth Up to 50% Capital Gains reinvestment relief Inheritance tax relief Loss relief on exit
Seed Enterprise Investment Scheme (SEIS)
Shares in many AIM-listed companies fall outside the scope of the inheritance tax (IHT) due to their qualifying for business relief (BR). That is because BR offers up to 100% IHT tax relief on trading business interests. This relief applies to business property either transferred during a person’s lifetime, or on their death, providing they have owned it for the two out of the five preceding years. In order to qualify as relevant business property for BR, the shares will need to be held in a trading company whose business does not consist wholly or mainly of dealing in stocks and shares, land and buildings, or making or holding of investments.
Business Relief (BR)
Including tax-advantaged investments in your investment portfolio can help to minimise what you owe on the returns you earn. The AIM market is the tax-aware investor’s heaven. Few, if any, stock markets in the world offer as many opportunities to make high returns while mitigating tax consequences. It stands to reason that the more tax-advantaged investments you have working on your behalf, the more of your investment returns you get to keep. Managing investment taxes becomes more important as your portfolio grows. If higher returns from an investment would put you in a higher tax bracket, for example, it’s important to understand what that means from a capital gains tax perspective.
AIM: the ultimate arena for tax-aware investment
A well-diversified portfolio can benefit clients by reducing the level of risk at a low cost, acting as a volatility buffer, especially when the market is not performing favourably.
Van Hoang - Senior Investment Manager Blackfinch Investments
clothes eating out takeaways non-essential food items petrol/diesel day trips beauty services (e.g. hair cuts, manicures) luxury items alcohol holidays cosmetics (e.g. face cream, perfume, mascara) pursuing a hobby staple essential food items household essentials (e.g. cleaning products, toilet roll) going to the cinema toiletries (e.g. toothpaste, shampoo) video streaming service subscription music streaming service subscription digital tv subscription (e.g. sky, virgin media, but not including tv license) monthly mobile contract car vehicle insurance home broadband subscription home/contents insurance gym membership
I have reduced the amount i spend on this by buying it/doing it less frequently
I have reduced the amount i spend on this by switching to a cheaper alternative/s
i have stopped buying/spending money on this altogether
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Throughout the supply chain disruptions we’ve seen those management teams that are quick to adapt and use strong supply chain relationships have navigated the challenges more effectively.
Lawrence Campin - Investment Manager Blackfinch Investments
clothes eating out takeaways non-essential food items petrol/diesel day trips beauty services (e.g. hair) luxury items alcohol holidays cosmetics (e.g. face cream) pursuing a hobby staple essential food items
Russia’s invasion of Ukraine has destabilised stock markets, which were already straining under inflationary and interest rate fears. Predictably in an uncertain environment, shares of smaller companies, such as those that dominate the Alternative Investment Market (AIM), are having a tougher time than the blue chips. Spooked investors are increasingly focusing on fundamentals, the strong suite of larger, more stable companies, rather than the promise of future growth, which traditionally brings investors to smaller, young companies. As a result, the performance of London’s junior market, already faltering before the war in Ukraine, has taken a big hit.
A troubled year for the market
Beginning in September 2021 and through the first quarter of 2022, the FTSE AIM All Share index has largely been on a downward trajectory. The broadest index that tracks London’s junior market has lost just over 25% since 31 Dec; in Q1 it lost just over 14%; and in Q2 to date it has lost just under 13% of its value. The worst performing sectors on AIM were retail and healthcare & pharma. Conversely, natural resources and mining companies performed strongly relative to other sectors due to the increase in oil and commodity prices. However, the improvement in these stocks was not sufficient to offset the decline in retail and healthcare. Amidst economic and geopolitical headwinds, the FTSE All-share index fared better than other international markets, ending just 2% down on its opening position for 2022. In the first half of 2022, the main market fell by just under 4%.
FTSE AIM All Share’s steady descent
Among the hardest hit AIM-quoted companies are those that joined the market in 2021, often with unwarranted valuations. These unjustified valuations were based on unusual market conditions related to the Covid-19 pandemic which, unfortunately, flattered their growth prospects. At the same time, the valuations of some excellent highly profitable companies, with attractive growth prospects, have also been pulled down to extremely attractive levels, offering compelling buying opportunities.
Muddled valuations
2022 is a difficult year for the AIM market, but investors are not without options. One of these is to do very little, assuming that your portfolio is already well diversified, and keep an eye out for bargains. Probably the worst thing to do is to get into a panic mode and indulge in manic trading—perhaps, hunting for supposed safe havens, which don’t exist at this time. AIM investment is a long-term play. The market is a place where investors keep their eyes on the ultimate prize as they ride out the volatility. Certainly, experienced investment managers are fully aware of the longer-term investment horizon and those focused on tax-advantaged AIM investments are not only tied in by statutory minimum holding periods, but the need for a patient capital outlook as growth trajectories of smaller firms take shape. That said, we know from the Covid-19 recovery that AIM is also capable of a strong and rapid bounceback.
Taking the long-term view
Jul '21
AUG '21
SEP '21
OCT '21
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DEC '21
JAN '22
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APR '22
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1,300.00
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1,100.00
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800.00
900.94
FTSE AIM ALL-SHARE INDEX
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What the managers say
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Unprecedented government stimulus to restart the economy, supply-side bottlenecks and labour shortages are placing upward pressure on prices and inflation. What are the implications for AIM investors?
In an inflationary environment, investors should consider the strength of the products and services that a company offers. Those capable of successfully adapting pricing in the face of inflationary headwinds, as well as utilising a strong balance sheet to counter supply constraints, are more likely to earn in excess of market returns.
Volatility in public markets has increased and is expected to remain elevated. What adjustments, if any, have you made to your investment strategy?
Operating an investment strategy that focuses on fundamentals – such as a strong balance sheet, low working capital requirements and high margins – should help mitigate negative outcomes in periods of higher volatility. This has been in place since launching our Adapt AIM Portfolios. Monitoring investee companies is also important, and helps identify whether company-related news is fundamental or just market direction.
Van Hoang
Senior Investment Manager Blackfinch Investments
So how are the managers feeling about the AIM market and overall investment market conditions? Here's what they have to say.
Uneven post-pandemic economic growth, expectations of rising rates and higher inflation, and geopolitical conflict in eastern Europe—how do you see these headwinds impacting the AIM market?
We do not expect AIM to make significant gains from current levels until these headwinds subside. These challenges are affecting markets globally, not just AIM. We have more optimism when looking at AIM over the medium to long term, which matches our typical client’s investment horizon, and believe there are still opportunities to earn attractive returns.
Matt Currie
Head of Growth Capital Seneca Partners
Inflation has risen to levels not seen in the UK since the 1970’s and, historically, when inflation has been at these elevated levels, it has been negative for risk assets and this time is no different. The AIM market has fallen from its peak in 2021 and may continue to experience high price volatility during the coming months.
Our investment strategy has not changed in any meaningful way since we launched the service in 2016 and the short-term volatility we are currently experiencing has not led to any fundamental changes. Our data-driven process continues to screen the AIM universe for what we believe are the highest quality and most resilient companies listed on AIM.
There is a lot of bad news out there at the moment, but how this impacts the AIM market most likely depends on how much of it is currently priced in. Some AIM businesses will fare better than others, which is why we seek to only acquire the larger, more financially resilient companies.
Investors are cautious and rightfully so, but with many investors pulling back a little over the last 6 months, prices have fallen accordingly and there will certainly be some attractive opportunities out there on AIM. Obviously all AIM companies will be impacted by the above, some more than others. But so will many of the typical “safe” alternatives and with inflation rising many investors will still look to AIM to provide real returns.
We have certainly made some adjustments in recent times, the main one being a greater emphasis on the size of the fundraise and the cash runway it provides the company with. Companies need to be able to deliver material progress before further funds are required, otherwise they will be back out to market again and raising funds on the back foot.
These factors will clearly impact each company differently, but the general levels of uncertainty will affect investor confidence and share price performance. We are already seeing a reduction in IPO volumes, however many companies already on AIM won’t be impacted significantly yet their cash profile may dictate that they still need to raise funds at low prices, so there will undoubtedly be some interesting opportunities for investors.
Stephen Daniels
Head of Investments TIME Investments
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3. Considerations for investment
3. Considerations or investment
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 22 June 2022.
There are currently 40 open offers in the tax-advantaged space with a focus on companies quoted on the Alternative Investment Market (AIM), from 39 at the time of our last market analysis in March. As expected, the great majority of these offers (38) are focused on business relief (BR). The remaining 2 are offers in the Enterprise Investment Scheme (EIS). AIM has no offers for Venture Capital Trusts (VCTs) at this time. The figures represent a decrease in the number of offers in both EIS and VCTs, which were 3 and 2 respectively in March. The decline may be partly due to the seasonal nature of VCT and EIS sales, which increase as we get closer to the end of the year, leading to the closure of funds that have reached their targets. The low numbers are also perhaps not unconnected with the current market uncertainty. However, the resilient tax-advantaged schemes have survived tougher challenges, and will continue to thrive. The key drivers of both sectors are certainly on the go. By contrast, the number of open offers in business relief has increased, which is no surprise as more and more financial planners have been using AIM portfolios as a mainstream planning tool for IHT planning in recent years. We also know that BR offers tend to be evergreen, always open. This coincides with the continuous rise in inheritance tax. Official inheritance tax statistics reveal that the combined value of all UK IHT receipts has been steadily increasing since 2011, reaching £5.2 billion in 2017-18. This represents an 8% increase (£388 million) from the tax year 2016-17. One of the most significant spikes within recent years was the increase from 2014-15 and 2015-16. The most recent data shows that HMRC collected inheritance tax of £4.6 billion between April and December 2021, an impressive increase of £600 million, or 16%, compared to the same period in 2020. More recently, inheritance tax (IHT) receipts for April 2022 to May 2022 were £1.1 billion, which is £0.1 billion higher than in the same period 12 months earlier, latest data from HMRC reveal. The increase highlights the effects of ‘fiscal drag’, where allowances and reliefs have not increased in line with rising prices. With inflation continuing to rise, this factor will likely play a big role in future tax revenues.
Open offers
The current open offers are further diversified in terms of investment strategy, with Growth and Growth & Income taking precedence:
Target returns
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
In other words, these open offers tie their selections to their main investment objective of growth, income or a combination of both. These strategies could serve as a hedge against inflation, as most seek to provide total returns competitive with the broader stock market. The growth investing strategy focuses on capital appreciation, investing in companies that exhibit signs of above-average growth. The hybrid growth and income strategy also drives growth and income funds to superior performance. Aside from income, dividend yield is also a powerful driver of total return over time. Dividends can be used to accelerate the growth of your investment. The power of compounding, especially when reinvesting dividends, can indeed become quite a lucrative strategy. Indeed, investing during inflation can be a great source of inflation protection, because the losses you sustain from higher prices could be more than made up for by the growth of your invested pounds over the long term.
Max 40 35
The current challenging returns environment highlights the growing importance of tax-advantaged investment within a well-diversified portfolio. These investments can enhance portfolio returns, given higher return expectations. Though volatility in public markets has increased and is expected to remain elevated, the structure of the Alternative Investment Market (AIM) has been evolving for close to three decades, providing steady support for venture capital investment. The pandemic has accelerated trends in technology innovation and resulting shifts in consumer behaviour are creating clear winners in the marketplace. Consumers are adopting new technologies faster, making investments in technology highly attractive to investors. With investment returns under pressure, tax management strategies have become more important, and investors are increasingly turning to the tax benefits available to them on AIM.
Diversification targets
Diversification offers crucial asset protection during volatile market cycles, helping with risk management in financial planning. AIM provides ample opportunity for portfolio diversification to lower overall risk, even as it offers the potential for higher returns. Tax-advantaged investment on AIM attract small companies from various market sectors that are looking to raise capital. Companies listed on AIM come from 37 different market sectors. Businesses operating in the market sectors of Healthcare, Finance, Oil and Gas, Technology, Industrials, and Consumer Services are the most frequently represented in AIM (though restrictions apply as to which sectors qualify for specific tax-advantaged schemes). The large number of investee companies per open offer (over 26 on average, with 30 being the most frequent number) provides great diversification at a time of market volatility.
Fund raising
Money raised on AIM in 2021 topped £9.4 billion, the highest value since 2007, according to the London Stock Exchange. Some 64 companies floated on the junior market, its most active year since 2014. The stellar performance illustrates the strong investor appetite to find higher yields in a record low interest rate environment, which led to a wave of smaller private firms taking the plunge and listing. Years of regulatory improvements and the development of deeper capital pools have strengthened the AIM market’s attractiveness. Marcus Stuttard, head of UK primary markets and AIM at London Stock Exchange Group, said: “We’ve seen a broad range of companies from the UK and internationally join the market, from small companies with valuations in the tens of millions to some of the largest companies ever to float on AIM, from sectors including tech, healthcare and those supporting the transition to the green economy.”
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
250,000 200,000 150,000 100,000 50,000 0
58,077
50,000
200,000
Minimum subscription of open offers
15,000
45 40 35 30 25 20 15 10 5 0
26.45
30
27.5
40
Target no. of investee companies by open offers
Years of regulatory improvements and the development of deeper capital pools have strengthened the AIM market’s attractiveness.
Taxes can be one of the biggest expenses and take the biggest bite out of returns. Tax-advantaged investments, which lose less of their returns to taxes, can therefore minimise tax burden and maximise bottom line. On average, the open offers target returns of 7%, with 10% being the most common target.
On the whole, AIM shares are treated just the same as those on the Main Market, in that income generated through dividends is taxable, and gains are subject to capital gains tax. However, there are a number of tax reliefs that the UK government has implemented to encourage investment in smaller growth companies through the FTSE AIM Market—including the Enterprise Investment Scheme (EIS), the Venture Capital Scheme (VCT), and Business Relief (BR). For example, EIS enables investors to defer capital gains tax on a capital gain (known as deferral relief). And VCT provides capital gains tax exemption on any gain on the sale of the VCT shares as well as income tax exemption for dividends.
Minimum subscription
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. In our November 2021 analysis, we noted that the average minimum subscription applied by the investment managers had dropped significantly since May 2021 when it stood at £62,778. Today, the average subscription for all open offers has fallen lower still to £58,077, although the most common subscription level is £50,000.
Investing during inflation can be a great source of inflation protection, because the losses you sustain from higher prices could be more than made up for by the growth of your invested pounds over the long term.
“Average fees across tax-advantaged AIM-based offers are subject to the mix of offer types open and this snapshot of the market is no exception. This is because the levels of the various fees that may be applied by the managers are set within differing ranges, depending on what is normal and acceptable in each offer type. “On that basis, it is useful to note that, on average, VCT and EIS fees tend to be significantly higher than those set by Business Relief managers. The initial fees and annual management charges (AMC) (the two most widely charged fees in this market) statistics within the offer types are evidence of that.” This is good news for AIM investors, as we noted before, because Business Relief offers make up the vast majority of AIM-based tax-advantaged offers. Unless otherwise indicated, all data is accurate as of 22 June 2022.
Fees and Charges
The above table highlights a trend that has been fairly constant over the past few quarters: most fees have been declining. The total initial charge has dropped by more than 17% since March. The initial charge to investors (excluding adviser fee) is also down by over 16%. But the biggest drops are recorded in the exit performance fee and the exit performance hurdle: both cut by more than half (51%). The resurgence of inflation and the potential of higher interest rates have resulted in changes to the investment environment. In addition to keeping tax considerations in mind, many investors are considering adjustments to their investment and financial strategy in light of these developments. With the UK inflation rate the highest in the G7 at 9.1%, rather than 3%, people are losing purchasing power. Naturally, the strategies to consider will depend on their financial objectives and the level of investment risk they’re willing to assume. This doesn’t necessarily mean that dramatic changes are required to their portfolio, but there may be opportunities to better position certain assets to capitalise on the evolving investment environment. For the right investors, the tax reliefs of some of the government-supported venture capital schemes—whose tax benefits are undiminished by the hard economic times—could be virtual beacons of hope amid the gloom. The next table shows the number of open offers that charge each fee.
*NA: not available
While investment fees aren’t entirely avoidable—they allow the financial institutions to keep running and offering their services—lower fees help to minimise investment costs to investors in order to maximise their gains. This trend ties into the increasing popularity of the investment schemes dealt with in this section.
Average initial fees
Oct 2021 0.60%
May 2021 0.47%
April 2020 0.64%
Mar 2021 0.41%
AVERAGE initial fees
AVERAGE CHARGES Initial Charge to Investors Excluding Adviser Fee Initial Charge to Investee Company Total Initial Charge AMC Charged to Investor AMC Charged to Investee Company AMC Annual Per Fee Exit Per Fee Annual Per Hurdle Exit Per Hurdle Initial Deal Fee Exit Deal Fee Annual Admin Charge
JUNe 2022 0.36% N/A 0.34% 1.24% N/A 1.18% N/A 0.50% N/A 2.50% 0.36% 0.31% 0.04%
OPEN OFFERS
TOTAL INITIAL CHARGE TOTAL INITIAL DEAL FEE TOTAL AMC ANNUAL PERF FEE EXIT PERF FEE ANNUAL PERF HURDLE EXIT PERF HURDLE EXIT DEAL FEE TOTAL ANNUAL ADMIN FEE
Number 9 16 37 0 1 0 1 14 6
Percentage 24% 42% 97% 0% 3% 0% 3% 37% 16%
NUMBER OF OPEN OFFERS THAT CHARGE EACH FEE
In the past couple of updates, we placed the following cautionary notice at the beginning of this page. It remains valid today:
With the UK inflation rate the highest in the G7 at 9.1%, rather than 3%, people are losing purchasing power.
Steadily shrinking fees
The following table compares the average charges for the AIM open offers for March and June 2022.
MARCH 2022 0.43% N/A 0.41% 1.27% N/A 1.24% N/A 1.03% N/A 5.13% 0.31% 0.28% 0.03%
CHANGE -16.28% N/A -17.07% -2.36% N/A -4.84% N/A -51.46% N/A -51.267% +16.13% +10.72% +33.33%
Taking advantage of changing fee structures
Investors should not make investment decisions based primarily on fees (just as they should not decide to invest solely for tax relief). Rather, they should continue to use multiple evaluation factors including the quality for the organisation, investment team, investment process, risk controls, net return, service providers and fund terms. However, it’s a no-brainer that, all other things being equal, lower fees (and the availability of tax reliefs) will lead to higher net returns and make an investment relatively more attractive. Particularly noteworthy is that AMC, the most commonly charged fee, and a recurring one, has been dropping in recent quarters. It is now possible for more small and medium size investors to take advantage of the reduced fees and the generous tax incentives to generate better investment outcomes on London’s junior market.
For the right investors, the tax reliefs of some of the government-supported venture capital schemes—whose tax benefits are undiminished by the hard economic times—could be virtual beacons of hope amid the gloom.
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
Jack Shepherd
Partner, CMS Cameron McKenna Nabarro Olswang LLP
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.
n AIM listed company was publicly censured and heavily fined at the end of 2021 for failing to properly engage with its nominated adviser and for breaching the related party transaction rules. The breaches relate to the payment of one-off cash bonuses paid in 2018 to the company’s CEO and CFO in the sums of £200,000 for the CFO and £850,000 for the CEO, which were characterised as post IPO bonuses in relation to their respective work on the successful IPO of the company in 2018. No reference to the bonuses was made in the company’s admission document published for the IPO. In awarding the bonuses, the company breached both Rules 13 and 31 of the AIM Rules for companies. As directors, the CEO and CFO are related parties of the company under AIM Rule 13. By virtue of the bonuses exceeding the 5% threshold pursuant to the class tests for a related party transaction, the company was required to issue a notification to the market without delay as soon as the terms of the bonuses were agreed, disclosing certain particulars about the transaction and providing a statement that the independent directors consider, having consulted with the nomad, that the terms are fair and reasonable insofar as the shareholders are concerned. However, contrary to AIM Rule 13 the nomad was not properly consulted by the company, such that the nomad believed the bonuses were just a proposal. This was evident by how the company communicated details of the bonuses to the nomad, whereby the CFO sent limited information via text message and described the bonuses in terms that suggested they were not finalised and merely proposals. In reality the bonuses were agreed and expected to be paid shortly thereafter. The company also failed to notify the market when the terms of the bonuses were agreed. The nomad gave advice on the basis that the bonuses remained proposals, noting that they would likely be a related party transaction for the purpose of AIM Rule 13 and advising against proceeding with the proposals for a variety of reasons, including the bonuses had not been referred to in the company’s admission document and the likely adverse shareholder reaction. As discussions between the parties continued, the nomad noted that it would be difficult for it to support a fair and reasonable statement in relation to the bonuses as required under AIM Rule 13. With the nomad continuing to understand that the bonuses were proposals, discussions continued between the parties. When the actual status of the bonuses was clarified, the market was notified but 10 months had passed since the disclosure obligation had arisen and the nomad was unable to support the required fair and reasonable statement. The company was also found to be in breach of AIM Rule 31 which requires an AIM listed company to seek advice from its nominated adviser regarding compliance with the AIM Rules, and to provide the nominated adviser with information required to carry out its role. There were a number of serious failures by the company, which included: The company was fined £580,000 (discounted to £406,000 for early settlement). This case emphasises the importance of AIM listed companies engaging openly and transparently with their nominated advisers to allow the nominated adviser to be able to give fully informed advice and guidance on the AIM Rules. Failing to do so, and consequently breaching the AIM Rules can, as this case demonstrated, be a costly mistake. Editor’s note: AIM rules are there for a reason - to protect investors - and this case shows that they are properly policed. The role of nomads is also a crucial one for governance and investor protection. The concern, however, is that this type of rules breach ultimately led to the company being fined, which then impacts investors's returns. This is one more reason for any AIM investor to check the quality of nomads their investees have, as part of the due diligence process.
The tax reliefs, are useful buffers against total loss.
Engaging with your Nominated Adviser: an important step
lack of a proper understanding of its obligations under the AIM Rules; depriving the nomad of the chance to advise on the company’s obligations under AIM Rule 13; raising matters in a limited manner and failing to deal openly and transparently with its nomad, which lacked the proper level of engagement with the nomad; failing to provide accurate and not misleading information in relation to the award and payment of the bonuses to the nomad, such information being reasonably required by the nomad; not taking into account and following up on the nomad’s reservations about the proposed bonuses; and lacking appropriate procedures and controls in respect of the bonuses, including: (i) not recording decision-making in relation to the bonuses in minutes as a form of evidence to support a fair and reasonable statement from the nomad under AIM Rule 13; (ii) failing to ensure discussions with the nomad were properly understood; and (iii) failures in governance to promote the company’s compliance with its obligations under the AIM Rules.
As directors, the CEO and CFO are related parties of the company under AIM Rule 13.
"AIM investors have a duty to check the quality of the nomads that their investees have" - the editor.
ESG on AIM: using your money to drive positive change
AIM also allows for Environmental, Social and Governance (ESG) investing, which enables investors to put their money to work with companies that strive to make the world a better place. Times have changed. ESG considerations are no longer the sole preserve of large-cap companies with household names, such as Unilever or AstraZeneca. The increasing flow of assets into ESG-focused funds and companies of all sizes reflects the growing demand for investment products that enable investors to put their values into action while pursuing strong financial returns in their portfolios.
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.
The Alternative Investment Market (AIM) is a place where young businesses with innovative ideas go to raise money to ensure their survival and growth. These often-entrepreneurial companies allow new concepts to be explored and bring about changes that may transform our way of life.
An ESG strategy consists in investing in companies that score highly on environmental and societal responsibility scales as determined by third-party, independent companies and research groups. ESG research firms typically rely on multiple criteria to evaluate each of the individual E, S and G components. They produce scores for a wide range of companies, providing a clear and handy metric for comparing different investments. The ESG scores represent ratings that the research firms assign to individual companies. Scores generally follow a 100-point scale (sometimes, they are letter grades): The higher the score, the better a company performs in fulfilling different ESG criteria. Scores may vary among ratings firms, which may employ different metrics and weighting schemes. While the specific factors assessed vary by company, ESG rating firms commonly review things like annual reports; corporate sustainability measures; resource, employee and financial management; board structure and compensation.
ESG ratings and rankings
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
How many Brits have an investment and if current UK investors would consider ethical investing
Source: Finder Research
We pride ourselves on our exit track record across our history in the EIS and VCT markets. Share price volatility is obviously a factor that needs managing, but ultimately our success is driven purely by the price we invest at and the price we sell at.
Matt Currie - Head of Growth Capital Seneca Partners
Gender split by total ethical investment by current investors
Investments with good ESG scores have the potential to drive returns, while those with poor ESG scores may inhibit returns. Moreover, studies have shown that some investors are willing to accept lower returns in exchange for making a real difference. In any case, today’s savvy investors will look beyond the three-letter acronym to see how a company serves all its stakeholders: workers, communities, customers, shareholders and, yes, the environment. Identifying the impact, positive or negative, on these five stakeholders is what should become the measuring stick for quality ESG investing. This is important in terms of the effect on each stakeholder, but it also can be used to identify the strength and sustainability of the company itself. Today’s investors are concerned about environmental and social problems, such as climate change leading to more and severe climate crises, gender and racial inequality, data security and privacy. They want to make sure that they don’t invest in firms that exacerbate or contribute to these problems and would rather invest in those that take their ESG commitment seriously. Ultimately, companies that put in the work to balance the benefits for each of their five stakeholders become well-run companies. And well-run companies become good stocks to own.
ESG and investment returns
Which generation is most likely to consider ethical investing?
There was a time when few people would associate the AIM market with ESG investment. That was then. Now a growing proportion of the nearly-850 companies listed on the AIM market are betting that investors are increasingly concerned with social responsibility and will reward them for it. Many AIM-listed companies – with or without ratings – are considering ESG seriously as long-term winners. They believe that investor’s goodwill will be reflected in the share prices of those companies promoting ESG. One ESG rating firm has assigned ESG ratings ranging from AA to CCC to 70 companies listed on AIM. For the vast majority of AIM-listed companies using this screen, there is still insufficient data and visibility for a score. It’s a work in progress. There’s little doubt that, as we go forward, there’s going to be more pressure on companies to do something about their climate-change story. And companies operating with a view to long-term sustainability will be those who last the course.
AIM-ing for ESG
The growing ESG fund sector has been the subject of public criticism from several quarters, particularly claims of greenwashing levelled against climate-focused funds by various media outlets. According to these critics, many funds with a sustainable or ‘green’ investment thesis are not living up to their names and promises, because their portfolio holdings are not sufficiently aligned with specified standards for addressing climate change—a phenomenon known as ‘greenwashing.’ This is not always the result of fraud or deception. Part of the problem is the subjectivity of disentangling and understanding complex supply chains, labour laws, and social contracts in a hyper-connected world. This means, incidentally, that many investors could gain from the services of an investment adviser. Increasingly, the small- and medium-sized businesses active on the AIM market are finding out (like their larger counterparts) that ESG integration can help them attract new customers, new talent, and enhance their brand. Many have set out to improve their business with sustainable growth. Those who fail to do so face losing their customers to more socially conscious competitors.
Is it green or not green?
The London Stock Exchange (LSE) has created its own green designation, to help issuers and investors in the transition to a low-carbon economy. The Green Economy classification, first introduced in 2019, was created to highlight companies and investment funds listed on all segments of London Stock Exchange's Main Market and AIM that are driving the global green economy.
To qualify for the Green Economy Mark, companies and funds must generate 50% or more of their total annual revenues from products and services that contribute to the global green economy. The contributions may include, for example, climate change mitigation and adaptation, waste and pollution reduction, or the circular economy. As it covers all industries, the Mark provides an investable universe of ‘green economy’ equities, enabling a broad exposure, rather than a focus on one area. To date, more than 100 issuers on LSE have been recognised with the Mark across all Main Market segments and AIM. The Mark addresses what LSE calls ‘the narrow view’ of green equities and facilitates investment. “For the first time, investors can see beyond the ‘pure play’ green companies, to those that have growing business activity in this area,” says the LSE.
The dramatic increase in ESG and sustainable investments has also led to growing concerns about firms confusing, or even misleading, consumers about the nature of some of these investments. The Financial Conduct Authority (FCA) has set out to articulate a set of guiding principles to help firms with ESG product design and disclosure. These rules are designed to help ensure that consumers are protected from potential greenwashing, says the regulator. The financial watchdog has 5 areas for potential principles in mind:
FCA to get tough on greenwashing
Consistency in messaging and approach A product’s ESG focus should be clearly stated in its name. And then reflected consistently in its objectives, its investment strategy, and its holdings. This is all about ensuring that a product really does do what it says on the tin and matches consumers’ expectations. A product’s ESG focus should be clearly and fairly reflected in its objectives Where a product claims to target certain sustainability characteristics, or a real-world sustainability impact, its objectives should set these out in a clear and measurable way.
A product’s documented investment strategy should set out clearly how its sustainability objectives will be met This should include describing clearly any constraints on the investable universe. This includes any screening criteria and anticipated portfolio holdings. This should also include the fund’s stewardship approach and actions the fund manager will take if investee companies are failing to make the desired progress. The firm should report on an ongoing basis its performance against its sustainability objectives This is about giving consumers the information they need to understand whether the stated objectives have been achieved in a quantifiable and measurable way. The firm should assure ESG data quality, understand their source and derivation, and articulate clearly and accessible how it is used This includes the use of ESG ratings in the investment process.
“Looking ahead, sustainable investing is surely here to stay. This is a fast-moving, evolving and innovative space,” wrote Richard Monks, FCA’s director of strategy. “But innovation can’t come at the expense of undermining trust in the sustainable finance market. Trust is hard won but easily lost.”
YES NO
0% 5% 10% 20% 30% 40% 50% 60% 70% 0% 5% 10% 20% 30% 40% 50% 60% 70%
49% 51%
77% 22%
40% 20%
MALE
FEMALE
34%
51%
14%
38%
11%
Don't plan on investing
Would consider ethical investing
Wouldn't consider ethical investing
100% 90% 80% 70% 60% 50% 40% 20% 10% 0%
55%
15%
58%
42%
12%
30%
20%
66%
Silent generation
Baby boomers
Generation X
Millenials
Generation Z
Have an investment
Current investor and would consider ethical investing
FCA: Spotlight on the UK listing regime
The FCA is aiming to build on this success. In a discussion paper published 26 May 2022, the Financial Conduct Authority (FCA) asserts its commitment to make the UK listing regime, the rules companies must follow to be allowed to list their shares in the UK, “more effective, easier to understand and more competitive.” The past two decades have seen a reduction in the number of companies being admitted to both the LSE main market and the AIM market. A study conducted by New Financial, and quoted by the FCA, shows that the UK’s share of global IPOs fell from 10% in 2006 to just 5% in 2021.
For the purposes of the financial promotion rules, an RRS is a security which is: a. “a government or public security denominated in the currency of the country of its issuer; b. any other security which is: i. admitted to official listing on an exchange in the UK or EEA State; or ii. regularly traded on or under the rules of such an exchange; or iii. regularly traded on or under the rules of a recognised investment exchange or (except in relation to unsolicited real time financial promotions) designated investment exchange; c. a newly issued security which can reasonably be expected to fall within (b) when it begins to be traded.
Last year was the UK’s best year for raising investment for listed companies since 2007. In all £16.9 billion was raised in UK Initial Public Offerings (IPOs) including 126 companies listing on the London Stock Exchange.
The financial watchdog has therefore focused on modernising listing rules as a key solution to the problem. “The rules for companies who want to list here have not changed since the 1980s,” noted Clare Cole, FCA’s director of market oversight. “Now is a good time to have an open conversation to make sure our rules are fit for the future, so we have a more accessible, competitive and growing market that is attractive to a diverse range of companies,” she said. Last year, the regulator made some improvements to the rules by lowering free float levels, allowing certain forms of dual class share structures, and introducing digital financial reporting. “These changes promote broader access to listing for a wider range of companies at an earlier stage in their development and help investors use data faster to improve decision-making, while maintaining high standards,” the FCA said. However, the improvement in these stocks was not sufficient to offset the decline in retail and healthcare in Q1-22. Total fundraising on AIM (£0.6 billion in Q1-22) was the lowest since Q3-19 (which was impacted by concerns that Brexit deadlines would not be met and the wider impact of Brexit on the domestic economy). The decline in fundraising was driven by both a decline in transaction volumes (the lowest since Q1-20), and the value of average fundraises (which was in line with Q3-19). Average fundraises were £19.1 million in Q1-22 (calculated on those transactions which raised funds), compared to an average of £73 million across the last six quarters.
Bringing the UK listing rules into the 21st century
As many investors have found out over the years, investing in AIM VCTs presents considerable advantages. High-growth companies: A growth stock investment strategy attempts to find companies that are already experiencing high growth and/or are expected to continue to do so into the foreseeable future. With shares that are expected to grow faster than the overall market average, these businesses offer an obvious appeal. Diversification: Diversification is about spreading risk across different types of investments, the goal being to increase the odds of investment success. By diversifying across a wide spectrum of the UK’s most successful industries, AIM VCTs hope to achieve steady returns even when one sector is adversely hit. Transparency: Quoted companies have much greater transparency in terms of reporting and governance, a benefit to both the businesses and their investors. Among other things, transparency helps improve the value of assets, enables a company to lower its borrowing costs and achieve a better credit rating. Liquidity: Most of the holdings of the AIM VCT are likely to be listed companies; therefore, some liquidity is normally available. Once listed, these companies can benefit as they mature from being able to access larger amounts of capital across the wider market in order to realise their growth ambitions.
Risks and uncertainty are ever presents; paradoxically downside risk is often highest when investors see the fewest risks on the horizon. Stability breeds instability and vice versa.
Stephen English, Investment Director, Stellar Asset Parnters
The importance of access to public markets was evident when private capital became constrained during the Covid-19 pandemic. Those companies that were public were able to raise emergency funding swiftly. In the first half of 2020, some £23.7 billion was raised in new capital with 327 transactions in the UK, more than three times the next busiest European market in both volume and number. Immediately following this, in 2021, about £16.9 billion was raised in UK IPOs. This was more IPOs than in any year since 2007, including 126 companies admitted to the London Stock Exchange. AIM closed 2020 with 819 companies and a total stock market value of £131 billion. While there was a net decline of 44 companies from the 863 at the end of 2019, the overall market value was £16.9 bn higher. The net decline in the number of companies on AIM was reflected in a very poor year for new issues/IPOs, with only 32 new entrants (including reverse takeovers) raising £486 million on their arrival, making it the weakest year for new arrivals since 1999. As the pandemic tested the financial resources of companies across all sectors, many of which were forced to raise new equity capital to bolster their weakened balance sheets, AIM also saw a large number of secondary fund raises. A total of £5.2 billion was raised in the year, making it the best year for secondary raises since 2010. The objectives of the reforms addressed in the discussion paper, designed to follow up on this achievement, are the following:
A lesson from the pandemic
To ensure that the value of being listed is simpler to understand by removing complexity that is not serving a genuine and defined purpose To promote broad access to listing for a wider range of companies, while continuing to set clear, simple and robust minimum ongoing standards for listed companies, providing greater investment opportunities for investors on UK markets To empower investors to conduct their own decision-making over the suitability of listed issuers to meet their investment needs through clear, high-quality disclosures To allow issuers and investors flexibility to agree where additional shareholder engagement, overseen by the FCA, is appropriate.
One of the suggestions made by the regulator is that companies wishing to list in the UK would no longer have to choose between two different segments with different branding and standards. “In the absence of a requirement to have a listing venue that is based on EU mandatory minimum standards, it is no longer clear what purpose multiple listing segments serve for equity shares in companies.” To deliver its new objectives, the government has developed a possible regime based on having a single segment for equity shares in commercial companies. Issuers will list under a single set of eligibility criteria, and would require a sponsor. Issuers will have to follow one set of mandatory continuing obligations. They would then choose whether to opt into a supplementary set of mandatory continuing obligations. Whether or not the supplementary continuing obligations are appropriate for each issuer would be decided by them, following discussions and input from their shareholders. The UK is fortunate to have vibrant junior markets in the form of AIM and Aquis. These markets are regulated by the FCA as multilateral trading facilities, and set their own admission requirements. In some respects, they do set higher standards than that of the standard listing segment, for example, by requiring nominated advisors (Nomads) or corporate advisers. These already provide a public market alternative to listing, that is a suitable steppingstone to the listed market.
A single segment for equity shares
The increase of fundraising activity on public markets has shown how useful they are but also increased the focus on the barriers that exist for certain companies accessing markets. Both the UK Listing Review and the Kalifa Review of UK Fintech highlighted specific elements of the UK listing regime that act as barriers to companies listing—especially for high-growth and fintech companies. This situation reduces the diversity of investment and opportunities available on UK markets for investors. It is hoped that the reforms will help transform the UK public markets into a better-functioning and accessible environment, which companies from all sectors and at all stages of development will be able to take advantage of. As the FCA notes, “more companies listing at an earlier stage of their life cycle means more opportunities for investors to share in the returns of those companies as they grow.” Ideally, this will encourage more such companies to review their public funding pathways, with the smallest selecting AIM with its governance structure designed specifically to facilitate earlier stage development, before moving on to a simplified main market listing.
A place for everyone
The importance of access to public markets was evident when private capital became constrained during the Covid-19 pandemic.
AIM Insight: Q1 2022
3,000 2,800 2,600 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0
Q1-19
Q3-19
Q1-20
Q3-20
Q1-21
Q3-21
Q1-22
Total transactions (RHS)
Natural resources & renewables
Technology & Media
Leisure &Hospitality
Healthcare & Pharma
Other
Industrials
Source: BDO
Blackfinch Investments TIME Investments Seneca Partners Comparison Table
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Manager video content
www.blackfinch.com 01452 717070 enquiries@blackfinch.com
Martin Perrett
Senior Business Development Manager
blackfinch.com 01452 717070 enquiries@blackfinch.com
www.stellar-am.com 020 3195 3500 enquiries@stellar-am.com
CHRIS COX
FUND MANAGER
time-investments.com 020 7391 4747 questions@time-investments.com
Market Composition Fees and Charges MICAP market snapshot
Corporate Governance on AIM AIM VCTs: bringing real potential to life Tapping growth with tax savings:
What has the market been doing? AIM: UK’s most formidable asset for innovation Russia-Ukraine war: market risk and opportunity Spring Buget 2022: What’s in it for small and medium-sized enterprises? What the Managers say
Blackfinch Fundamental Stellar investment TIME Investments Comparison Table
The Ukraine war: What’s next for AIM? AIM: is the market lead sustainable? What the Managers say
AIM’s VCT-qualifying companies can escape dividend tax rise
Blackfinch Investments Limited 2013 £672.4m/£68.1m (as at 03/05/22) The Adapt AIM Portfolios invest in fast-growing firms listed on the Alternative Investment Market (AIM). We only invest where we believe stocks will likely qualify for Business Relief (BR). BR can deliver Inheritance Tax (IHT) relief after just two years (and if held at the time of death). AIM brings return potential and the ability to hold in an AIM ISA. The portfolios offer growth and income options. We manage them in partnership with Chelverton Asset Management, a smaller companies specialist with a proven track record. June 2016 Clients have the choice to hold their investment in an ISA wrapper Target is 20-40 equally weighted stocks. At present, the current buy list for the Growth portfolio contains 29 companies, whilst the current buy list for the Income portfolio contains 21 companies. N/A Income and growth (to qualify for up to 100% Business Relief) N/A Under normal market conditions we would expect exits to be completed within two weeks. Yes (Income portfolio) £15,000 £15,000 0% entry fee for applications 1.5% + VAT per annum on the value of all portfolios Fees will vary by platform. For clients who invest directly with us, the following fees will apply: Dealing Fee - Up to 1% Account Fee - £52.50 + VAT per annum (payable in arrears) Trading Fee - £11.03 per trade Administration fees: Withdrawal: £15.75 Same day payment: £26.25 Stock transfer: £10.50 Account closure: £52.50
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
Seneca Partners Ltd 2010 £167m in total, £18.4m on AIM (after exits totalling £27.8m) A version of our EIS Portolio Fund, our AIM EIS Fund looks to provide an investor with a portfolio of 5 to 10 AIM quoted companies. The fund targets a full exit before the 4th anniversary of holding these shares with a target return of 1.5x after fees. September 2021 (for this fund), December 2012 (for EIS Portfolio) EIS 5 to 10 £5 million. New £5m fundraise will launch straight after N/A 1.5x return equivalent to 10.67% p.a. 4 Years N/A £20,000 £20,000 2% 0% Exit 4%, Performance 20%, Custodian £35 p.a., Dealing 0.1%, Broker (sale only) 0.2%
TIME Investments 2011 £4.5 billion (TIME group), £81 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 applications £15,000 ISA applications £15,000 1% + VAT standard applications 0% ISA applications 0.8% + VAT 1% Dealing Fee 0.32% Custodian Fee
AIM 100 companies: executive pay, governance, diversity, and ESG Climate-related disclosure rules and tax-advantaged investments What the managers say
AIM 100 companies: executive pay, governance, diversity, and ESG
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
The latest AIM Directors Remuneration Report looked at the key trends driving remuneration in AIM 100 companies, providing up to date market intelligence and benchmarking across salary, bonuses, and gender diversity. The analysis shows somewhat of a return to normalcy after a period of uncertainty last year, a time when C-Suite executives were more cautious of salary increases in order to help focus on business stability. Remuneration packages of AIM 100 executives have seen a steady increase year-on-year thanks, in part, to strong corporate and share price performance. “While average salaries and other benefits increased across the board compared to last year, bonuses accounted for a larger portion of packages with the number of executives receiving a bonus growing this year and a significantly larger increase in average bonus when paid,” says the report. The study notes, however, that several factors contribute to this development, including delayed payments and the fact that performance-based packages are becoming increasingly common.
AIM directors’ remuneration: bouncing back post-Covid
Russia’s invasion of Ukraine is arguably the most important geopolitical event since the fall of the Berlin Wall.
A new report by accountancy and business advisory firm BDO delves into issues of AIM market’s executive pay, corporate governance, diversity, and ESG, particularly in relation to the AIM 100 companies. “AIM has proved to be remarkably resilient and adaptable in the face of the turbulence affecting global stock markets and its impressive recovery has helped cushion investors from the worst impacts of the downturn,” said Scott Knight, Head of Audit at BDO. “The market has also proved to be a vital source of finance to help companies weather the storm and put them in a stronger position for the recovery.”
During the Covid-19 pandemic, the largest 100 AIM companies led the market rally, returning the London junior market to its 2020 pre-Covid highs, and outperforming the FTSE all-share index.
Annulaised Change in Median Salary
“Good corporate governance is essential to the long-term sustainable success of an organisation and fundamental to strong business performance,” notes the BDO report. Under AIM Rule 26, AIM-listed companies must follow and report on a recognised corporate governance code. They are required to disclose on their website: details of the corporate governance code that has been applied, how the company complies with that code and any instances where it departs from its chosen corporate governance code. The company will need to provide an explanation of the reasons for departing from their chosen code. Such information must be reviewed annually and the date of review published on the company’s website under the ‘corporate governance statement’ section. The London Stock Exchange has established benchmarks for AIM company codes such as the QCA Corporate Governance Code and the UK Corporate Governance Code published by the Financial Reporting Council (FRC Code). While the more prescriptive FRC code is mandatory for premium listed companies on the Main market, the QCA includes 10 corporate governance principles that companies should follow, and step-by-step guidance on how to effectively apply these principles. Some 22% of AIM 100 companies have declared that they are using the more onerous FRC governance framework in their reporting. Effectively unchanged from previous years, the majority (74%) follow the QCA code and 4% are either eligible and have opted to apply the Association of Investment Companies (AIC) code, or follow an international standard. 71% of AIM 100 companies were using the QCA code three years ago, and 4% followed neither the FRC Code or the QCA Code.
Corporate governance code: a roadmap to business success
Board composition has continued to improve over the past two years. Progress is being made when it comes to gender diversity with seven-out-of-ten AIM 100 boards now including at least 10% female executives. The problem remains the fact that this only equates to one female executive on average across all companies included on the index. “For the second year running, the average number of female executives is one per company. [Only] nine AIM 100 boards now have three or more female members,” the report said. With regards to pay, while female executives received higher basic salaries than their male counterparts in most cases, their male counterparts received higher earnings overall as a result of major differences in the payment of bonus and other awards.
It is important that companies strive for gender balance in board composition, especially with Environmental, Social and Governance (ESG) issues increasingly factoring into the consideration of shareholders. As encapsulated within the ESG agenda, sustainability is truly a multifaceted concept which, at its core, requires a diversity of perspectives to properly address. Research suggests that a reduction in 'group-think' is good for innovation and performance as more creativity is allowed to be expressed with ideas that are different from those in the heads of white, middle-aged males whose backgrounds lead to them having similar experiences.
AIM 100 gender diversity: advancing by fits and starts
Board diversity is intimately linked with stronger governance and shareholder support. “Companies should be striving to make the most of opportunities to enhance their own standing, especially in light of the recent Department for Business, Energy and Industrial Strategy (BEIS) consultation. It is clear that board responsibility will be at the centre of considerations,” the report said. This is likely to mean that directors will be faced with new duties in terms of monitoring of anti-fraud measures, as well as obligations to assess and mitigate financial risk. Some will have to deal with measures around the payment or repayment of bonuses when dealing with insolvency. Moreover, directors could find themselves personally liable for accounting failures in extreme cases. These factors will inevitably affect the composition of remuneration packages moving forward, though we will need to wait for the final decision before we understand exactly how. Over the coming year, boards and remuneration committees of the AIM 100 will not only have to deal with issues around the UK’s economic recovery, which looks likely to face a period of high inflation and price volatility, but will also have to consider improving their ESG credentials as it has become an important topic for the media and the wider business environment. “ESG is not simply about winning hearts and minds, it is about adopting best practice, instilling robust controls, establishing clear mechanisms for engagement with stakeholders, and acknowledging risk through disclosure and transparency,” the researchers note. These fundamentals are also found in the most competitive firms. While the FTSE 350 have a lead on their AIM 100 compatriots, ESG reporting is gaining ground here as well as constituents who are beginning to recognise the advantage of reporting. There is growing evidence that strong ESG credentials can boost a company’s bottom line and access to capital. That's why today it makes sense for CFOs to take on the responsibility of aligning their firms' ESG and financial goals. Recent studies carried out by business services provider DWF show that companies that are failing to improve their environmental credentials are struggling to attract the best talent as well.
ESG credentials: a path to improved bottom line and access to capital
BOARD COMPOSITION (FEMALE)
CEO/MD CURRENT
FD/CFO CURRENT
NON EXECS CURRENT
OTHER EXECS CURRENT
1 year prior
2 years prior
CEO/MD
CHANGE IN AVERAGE REMUNERATION BY ROLE
OTHER EXECS
Latest
UP TO 80%
UP TO 50%
UP TO 30%
UP TO 10%
No. of Co's:
50
60
NIL
UP TO 20%
2%
4%
10%
6%
8%
Gender Balance (All Roles)
84%
16%
FEMALE Directors
MALE Directors
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.
Progress is being made when it comes to gender diversity with seven-out-of-ten AIM 100 boards now including at least 10% female executives.
Climate-related disclosure rules and tax-advantaged investments
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Starting from 6 April 2022, over 1,300 of the largest UK-registered companies and financial institutions are required to disclose climate-related financial information on a mandatory basis – in line with recommendations from the Task Force on Climate-Related Financial Disclosures. The new legislation covers many of the UK’s largest traded companies, banks and insurers, as well as private companies with over 500 employees and £500 million in turnover.
Provided they are part of an investment manager's portfolio, some VCT, EIS or BR managers might be caught by AUM rules.
The following article is excerpted from: An Adviser’s Guide to Environmental, Social & Governance: Tax advantaged investments (First Edition), by Intelligent Partnership.
Our investment process is centred around where these businesses will be in 3-4 years’ time. Whilst short term volatility is a feature of the market at present, it does not fundamentally impact our view when assessing the quality of opportunities.
Victoria Edwards - Investment Director Seneca Partners
Mandatory climate-related financial disclosures by publicly quoted companies, large private companies and LLPs, Department for Business, Energy & Industry Strategy, February 2022
• Publicly quoted companies, large private companies, and Limited Liability Partnerships • implemented 5 April 2022
In scope firms must disclose climate change related risks and opportunities, where these are material covering how climate change is addressed in corporate governance; the impacts on strategy; how climate related risks and opportunities are managed; and the performance measures and targets applied in managing these issues. The scope includes UK companies with more than 500 employees which are listed, or are banking or insurance companies, other companies and LLPs which have more than 500 employees and a turnover of more than £500 million and AIM companies with more than 500 employees. While this may impact some BR-qualifying companies quoted on AIM, any company eligible for VCT or EIS investment must have fewer than 500 employees and will therefore be explicitly excluded.
Application of climate-related disclosure rules to EIS, SEIS, VCTs & BR
There are technical considerations that mean that not all tax-advantaged investments may currently be caught by the new rules. For example, given the threshold as to number of employees, many AIM companies, especially those in the lower end of the market, will not be in scope of the new rules. Provided, however, that they are part of an investment manager's portfolio, some VCT, EIS or BR managers might be caught by AUM rules. Indeed, the relevant calculation has a wider definition than usual as it relates to any activity that is in scope of the regulations. So, if a manager is the AIFM of £3 billion EIS and venture capital funds, delegated manager of a £1.5 billion BR portfolio and has an ongoing advisory mandate for another £0.5 billion with a VCT, the disclosure rules apply to all the entities that these mandates relate to because they hit the £5 billion threshold. However, even if the new rules don't apply, there are other rules to take into account.
Pre-existing disclosure obligations
Where there is no mandatory requirement for EIS, SEIS, VCTs and Business Relief offers or managers to follow the SDRs, that does not leave them entirely without ESG-related disclosure obligations. All companies quoted on AIM, where many BR, EIS and VCT-qualifying companies can be found, are required to adopt a recognised corporate governance code and disclose annually how they comply with that code, where they depart from their chosen code, and an explanation of the reasons for doing so. Generally, these include the UK Corporate Governance Code published by the Financial Reporting Council (FRC Code) or the Quoted Company Alliance Corporate Governance Code (QCA Code). These corporate governance codes have their own reporting requirements that involve ESG factors. For example, the UK Corporate Governance Code is made up of a set of Principles that emphasise the value of good corporate governance to long-term sustainable success and it’s widely expected that environmental best practice may be incorporated into the Code in the coming years. Each of the corporate governance codes follows principles that can and should take into account ESG concerns and prompt appropriate disclosures in annual reporting and corporate governance statements. What’s more, the Companies Act 2006, which applies to all UK companies, places some key ESG responsibilities on the shoulders of directors. Also, the Prospectus Regulation Rules, include Recital 54, which applies to environmental, social and governance circumstances and can constitute specific and material risks for the issuer and its securities which should be disclosed. It’s also important to remember that any firm authorised by the FCA, such as a discretionary fund manager or AIFM, has certain basic obligations that are derived from the FCA’s Principles for businesses. They include conducting its business with integrity, due skill, care and diligence, taking reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems and paying due regard to the information needs of its clients, and communicating information to them in a way which is clear, fair and not misleading. The fact that these broad rules do not specifically mention ESG-related activities and disclosure, does not mean that they don’t apply in that context.
Policy Statement PS21/24, Enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers, FCA, December 2021
• UK-authorised asset managers, life insurers providing investment products & FCA-regulated pension schemes • implemented 1 Jan 2022
In scope firms must disclose annually how they take climaterelated risks and opportunities into account in managing investments. They’ll also have to make disclosures about the climate-related attributes of their products. For asset managers and owners, those with £50 billion and £25 billion respectively in assets under management are now subject to the new rules. Others, with assets greater than £5 billion, will be subject to the new rules from 1 January 2023. In-scope firms must, on an annual basis, produce: • Entity-level – an annual TCFD entity report published in a prominent place on the main website of the firm’s business setting out how they take climate-related matters into account in managing or administering investments on behalf of clients and consumers • Product-level – disclosures (including a core set of climaterelated metrics) on the firm’s products and portfolios made publicly in a prominent place on the main website of the firm’s business and included or cross-referenced in an appropriate client communication, or made upon request by certain eligible institutional clients. Also included is guidance to strongly encourage in scope firms to disclose transition plans that consider the government’s net zero commitment or explain why not.
BR, EIS and VCT-qualifying companies on AIM are required to adopt a recognised corporate governance code.
Responsible and Impact Investing strategies are growing components of clients' portfolios. Environmental, social and governance (ESG) is no longer an undercurrent of investing, but a standalone theme. How do you envision the future of responsible investing on AIM?
Our Adapt AIM Portfolios follow a bottom-up stock picking methodology. While consideration is given to overall sector exposure, as well as the sector outlook for investee companies, individual company fundamentals and outlook largely determine whether a stock will be included in the relevant model. We believe this reduces dependence on any particular sector, and keeps the investable universe relatively wide.
The pandemic has accelerated trends in technology innovation; the resulting shifts in consumer behaviour are creating clear winners in the marketplace. What sectors are you betting on, going forward?
We expect AIM-listed companies will continue to improve their ESG practices and disclosures, in response to increasing investor appetite for responsible investing. This will not only help AIM-listed companies attract ESG conscious investors, but also increase investor confidence in the wider AIM market, as more companies clearly define their ESG roadmap.
So how are the managers feeling about the BR market and overall investment market conditions? Here's what they have to say.
London witnessed a record number of IPOs in 2021. However, this year has seen a notable slowdown in listing activity amid market uncertainty, inflation and geopolitical headwinds. What do you expect for the rest of 2022?
2021 saw a record number of IPOs listed off the back of a difficult 2020. This makes for a tough comparator for 2022. Considering current headwinds, private company owners are likely to delay an IPO to achieve a more attractive price. The total number of IPOs in 2022 will depend on how the macroeconomic headwinds unfold throughout the year.
Lawrence Campin
Investment Manager Blackfinch Investments
Investing in these areas now not only makes sense from an ethical perspective, but these are likely to be some of the biggest winners as sustainability and social impact are proving more vital than ever. We expect this to be a key theme in the IPO market over the next 3-5 years.
We are still seeing many businesses looking to IPO and as such the pipeline for the second half of the year remains strong. Some of these, particularly those operating in industries impacted significantly by wider macro pressures, may find the value doesn’t match their expectations. As such, a number of these will likely shift to “pre-IPO” raises, with a view to coming back to the public markets in 2023.
Our investment process is relatively sector agnostic and so we do not actively take ‘bets’ on any sector. We do however exclude certain sectors from our screening process that we deem to be higher risk, such as the oil and mining sectors.
It is likely that ESG considerations will continue to be an increasingly important factor for companies, investors, and asset managers alike and we are very supportive of this movement. Industry participants who do not adapt and evolve will most likely get left behind. We would welcome greater reporting and disclosure from AIM companies to assist with ESG monitoring.
IPOs have indeed slowed down this year but there has been a fair bit of M&A, both in terms of AIM companies acquiring others but also in terms of AIM business themselves being taken private. I suspect further market weakness could present an opportunity for those with cash on their balance sheet to continue looking for interesting M&A opportunities.
Victoria Edwards
Investment Director Seneca Partners
The regulatory requirements being placed on businesses in relation to sustainability, right throughout their supply chain, mean this will be a key area of focus for us. ESG has been a topic of interest for investors for a number of years now, but the infrastructure required to measure, monitor, manage and report on this simply does not exist yet. Similarly, many areas of medicine and life sciences have been set back as a result of the emphasis and attention on COVID-19 in recent years, so we expect to see a significant catch up required there as well.
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
Describe governance issues and the performance of selected sectors on AIM
Covered in Section 6: What’s on the Horizon
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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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.
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 March 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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