alternative investment market
Industry Update - March 2022
1. INTRODUCTION
The latest news, updates and statistics on everything AIM
2. Market Update
3. Considerations for Investment
4. Industry Analysis
5. Managers in Focus
6. What's on the Horizon
7. Further Learning
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Industry Update - MARCH 2022
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AIM: holding an indispensable place in the funding continuum
Photography by Interview by
Covid changed context for BR
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ow in its 27th year, AIM continues to play a vital role in the wider funding-continuum. By connecting companies with long-term capital, AIM enables them to drive growth, innovation and job creation. During 2021, almost £9.5 billion was raised on AIM by new companies joining the market and by existing AIM companies raising follow-on capital. This was the highest total since 2007, highlighting AIM’s vital role in supporting economic growth in the UK and beyond as the global economy started to recover from the pandemic. AIM also continued to demonstrate its leading position in Europe, accounting for 53% of all equity capital raised on Europe’s growth markets. Importantly, the breadth of AIM remains one of its defining characteristics. The 66 new companies that joined AIM in 2021 - representing over 50% of all London IPOs - came from a broad range of sectors and regions. They included companies such as Big Technologies and Manchester -based media brand LBG Media plc. International businesses also continue to be drawn to AIM. US Gaming companies; tinyBuild and Devolver Digital both joined AIM last year representing the largest US companies to join AIM with a combined market cap on admission of over £1bn. With the increasing focus on the need to transition the global economy towards a more sustainable future, COP26 was a key milestone in the journey towards net-zero. AIM continues to facilitate access to capital to support the transition towards a greener future. Microlise Group was one of the new companies to join AIM last year that qualified for the London Stock Exchange’s Green Economy Mark, making 51 companies on AIM now holding the accreditation. The Mark recognises companies and funds that generate over 50% of their revenue from green products and services. Whilst the number of IPOs on AIM grew in 2021, there is also growing recognition that public markets like AIM provide companies with the ability to raise further capital efficiently, not only to strengthen balance sheets, but also to fund innovation and growth. During 2021, there were almost 300 follow-on capital raisings transactions on AIM, raising a combined £6.2 billion, a further increase of £1bn compared to 2020, underlining the long-term support provided by investors to AIM companies. More broadly, the reform of the UK capital markets regulatory regime gathered pace in 2021 to ensure that the capital raising process in the UK remains globally competitive for companies and their investors. Looking forward, a number of these reforms will make it more straightforward for companies on both AIM and the Main Market to raise capital from a broader set of investors, with the proposed changes to the UK Prospectus Regime enabling AIM companies to offer their securities to a wider set of individual investors. London Stock Exchange remains fully committed to making sure the whole funding continuum is well connected so that companies have the access to the long-term capital they need to fund their growth. AIM remains central to that goal and will remain a vital component of the UK funding landscape.
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
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
2. market update
Market Composition Fees and Charges MICAP market snapshot
3. Considerations For Investment
Blackfinch Fundamental Stellar investment TIME Investments Comparison Table
5. managers in focus
The Ukraine war: What’s next for AIM? AIM: is the market lead sustainable? What the Managers say
6. what's on the horizon
Learning Objectives CPD and Feedback About Intelligent Partnership Disclamer
7. further learning
Corporate Governance on AIM AIM VCTs: bringing real potential to life Tapping growth with tax savings:
Marcus stuttard
head of aim & uk primary markets, london stock exchange
Opening Statement Acknowledgements and Thanks Key Findings
Importantly, the breadth of AIM remains one of its defining characteristics.
AIM continues to facilitate access to capital to support the transition towards a greener future.
2. MARKET UPDATE
3. CONSIDERATIONS FOR INVESTMENT
4. INDUSTRY ANALYSIS
5. MANAGERS IN FOCUS
6. WHAT'S ON THE HORIZON
7. FURTHER LEARNING
This report and the research behind it would not have been possible without the help and support of a number of third parties who enthusiastically shared their time and expertise. These busy professionals went to great lengths to provide us with data, their insights on the market, and useful comments and suggestions while peer reviewing initial drafts. We thank Marcus Stuttard, head of AIM and UK primary markets at the London Stock Exchange (LSE), who once again generously provided the opening statement for this update. We are grateful for his unfailing support over the years. We’d also like to show our gratitude to Dominique Butters, Lawrence Campin, and Van Hoang of Blackfinch Investments; Chris Boxall of Fundamental Asset Management; Hugo Wood of Sarasin & Partners; Stephen English of Stellar Asset Management; andChris Cox 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 omission 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, Sarasin, Stellar, Fundamental, 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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After you have reviewed this publication and before we fulfill your CPD certification request, we will be requesting your feedback on it. Your collaboration will assist us to enhance the learning activity, and will inform improvements to future publications.
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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
Acknowledgements and thanks
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EDITORIAL Mohamed Dabo CREATIVE Gillian Livingstone SUB-EDITING Lisa Best & Mohamed Dabo RESEARCH Mohamed Dabo
MARKETING Carlo Nassetti DISTRIBUTION Michelle Powell SALES Chris White
Contact us: lisa@intelligent-partnership.com Sponsorship Opportunities: chris@intelligent-partnership.com
number of companies that were admitted to AIM in 2021
66
market cap of Victorian Plumbing Group, the largest IPO ever in AIM’s history by market cap
£850 million
amount raised in IPO and follow-on capital on AIM in 2021
£9.5 billion
deals on AIM in 2021
363
proportion of UK businesses that are SMEs with less than 250 employees.
99.9%
government spending on R&D in 2021 to 2022
£14.9 billion
Key findings
the biggest year for capital raising since 2007 for AIM
2021
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.
AIM saw the highest deal volume, with
(This accounts for 53% of all IPO and FO capital raised on Europe’s Growth Markets)
[They raised over £3.2 billion, the most active year for AIM IPOs since 2014 (75 IPOs)]
percentage of UK private sector jobs (a total of 22.9 million) accounted for by SMEs
53.6%
(highest level in four decades)
key findings
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increase in new issue funding ytd vs 2020 ytd
AIM: UK’s most formidable asset in the global innovation race Russia-Ukraine war: market risk and opportunity What has the market been doing and what can we expect this year? Spring Buget 2022: What’s in it for small and medium-sized enterprises? What the Managers say
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thought leadership
Hugo Wood
Portfolio Manager
What has the market been doing and what can we expect this year?
M
AIM companies are increasingly global, but the reality is that few have meaningful exposure to Russia or Ukraine, especially when compared to some larger UK PLCs.
arket performance dominated by two headwinds The sharp decline in the AIM market this year has exceeded that seen in other mainstream equity indices and reflects the risk-off reaction to shifts in central bank policy expectations, and the Ukraine crisis. The sustained increase in interest rate expectations, which is well supported by central bank messaging, has arisen in part due to a realisation that inflation may be less transitory than initially expected, and in part due to central banks’ need to rebase interest rates after an unprecedented period of such low levels. Equity market reaction to rising rates is an entangled relationship with growth expectations and market liquidity. An overly aggressive rate hiking cycle not only suppresses today’s value of future company cashflows, and thus the implied value of the equity, but also risks denting future growth. Furthermore, the parallel prospect of Quantitative Tightening is a new factor that complicates the outlook for volatility in financial assets, exacerbating the rise in rates and removing liquidity from the system with as yet unknown impacts. The other headwind has been the increase in military tension on the Russia-Ukraine border, followed by Russia’s invasion. The impact on human life is of greatest concern, but the global impact is significant and will have long-lasting consequences. Thus far the AIM market has understandably reacted poorly to developments, reflecting the likely spike in inflation, impacts on global GDP, and disruption to the geopolitical landscape. Risks ahead The risks for the remainder of the year are highly correlated to the outcome of the Russian invasion of Ukraine. Whilst a scenario of de-escalation is not impossible, the signs are that it is increasingly unlikely. An attempt at peace talks were seemingly not taken seriously by Vladimir Putin, and there appears to be a ramping up of intent by the Russian military, with worrying consequences for Ukrainian citizens. Indeed, with Belarus acting as an arm of the Russian state the possibility of regime change in Ukraine is clear. Representing 1.7% of global GDP, there is a case to be made that if Russia becomes a pariah state the impact on global economies and markets will be modest. There are nuances within this, not least Europe’s dependency on Russian gas and many countries’ reliance on Ukraine for cereal crops. However, from the perspective of AIM investors there are two clear risks on the horizon. Monetary policy response The Ukraine crisis has exacerbated an already steep rise in energy and agriculture commodity prices, adding fuel to the inflationary pressures seen across most markets in the last six months and dampening GDP growth in the short term. Announcements already made by major central banks suggest a willingness to temper the rate hiking cycle, thereby giving GDP growth a greater chance to flow through, but there remains a risk that persistently high inflation leaves central banks feeling there is little alternative but to increase rates. UK consumer squeeze The rapid rise in energy costs also has a possible influence on more domestic matters. Much media attention has been given to the imminent rise in UK consumer energy bills, as well as other broader inflationary pressures. Without government intervention there is a likelihood that this effect is magnified, and there could be a significant squeeze on consumer incomes in the short term. It is reasonable to expect this to cause issues for some AIM-listed companies. Opportunities AIM market relatively well insulated from Russia AIM companies are increasingly global, but the reality is that few have meaningful exposure to Russia or Ukraine, especially when compared to some larger UK PLCs. The wider macroeconomic effect of Russia’s invasion has introduced significant market volatility that may persist for some time, but this volatility presents opportunities to invest in long-term thematic growth companies with unaffected operations or opportunity sets. Retail emerging from significant challenges The retail sector has experienced unprecedented headwinds in recent months due to inflationary cost pressures arising from global logistics and supply chain inefficiencies. Global supply chain failings have been a consequence of the wider pandemic, but also the retention of China’s zero-COVID policy and the stress this has placed on port activity. With many retailers trading at historic low valuations, despite having healthy balance sheets, the recent news that China are exploring a path towards living with COVID may herald a normalisation of supply chains and expansion of valuations as profitability is restored. Positioning We believe that AIM continues to house many multi-decade growth opportunities. By identifying companies that are supported by long-term themes, appropriate environmental and social characteristics, and robust governance frameworks, there are attractive returns on offer.
contact
sarasinandpartners.com 0207 038 7000 sales@sarasin.co.uk
The sustained increase in interest rate expectations, which is well supported by central bank messaging, has arisen in part due to a realisation that inflation may be less transitory than initially expected
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AIM: UK’s most formidable asset in the global innovation race
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The talk, the annual Mais lecture at Bayes Business School (formerly Cass), part of City, University of London, was delivered on 24 February, the same day Russian tanks rolled across the border from Belarus into Ukraine to pursue President Putin’s dream of installing a puppet government in the former Soviet republic. Chancellor Rishi Sunak delineated the government’s ambitious plan to boost private sector investment with the goal of putting the UK at the front of the global innovation race. “How do we accelerate growth and rejuvenate our national productivity?” Sunak said. “I believe the most important role for the government is to create the conditions for the private sector to do things differently — a new culture of enterprise.” The government’s Innovation Strategy aims to make Britain a global hub for innovation by 2035, using rankings such as the Global Innovation Index to measure progress. This long-term vision, which puts innovation at the heart of building back better, has critical implications for the Alternative Investment Market (AIM). The London Stock Exchange (LSE)’s junior market is characterised by the presence of numerous firms operating in sectors with a high rate of technological innovation. The small and medium sized enterprise (SMEs) that mostly populate the AIM market are seen as the engine of growth for the UK economy, in terms of generating innovation and employment growth. Therefore, SMEs are key to UK national prosperity and its ability to continue to compete in the global marketplace. AIM’s vital role in helping such companies raise equity capital to expand and innovate is a great facilitator of that objective. Britain is reputed to be Europe's best venture capital market. The government’s venture capital schemes (including EIS, SEIS, and VCTs) are designed to help SMEs grow by attracting investment. These schemes, which are very active on AIM, incentivise investors who buy and hold new shares in qualifying businesses for specific periods of time.
UK’s SME action plan
Source: Dealroom
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
VC investment in UK startups and scaleups reached $39.8 billion in 2021, almost two and a half times the amount invested in 2020. Unicorn companies continued to account for a significant amount of VC investment in 2021. AIM is a vital part of the UK’s inspiring unicorn story. The 66 new companies that joined AIM in 2021 represented a startling 50% of all London IPOs, as noted by LSE’s Marcus Stuttard in the Opening Statement to this report. There are now more unicorns — technology-driven businesses valued at over $1 billion — in the UK than there are in Germany, France, and Sweden combined. “In 2021, London produced more new unicorns (20) than in any previous 12-month period, behind only the Bay Area, New York and Boston,” says Dealroom, the global provider of data and intelligence on startups and tech ecosystems. A key objective of the government is to increase growth for SMEs and drive forward the national economy. A healthy and vigorous SME sector can help bring much-needed innovation and dynamism to the competitive markets where SMEs operate, and their agility can help economies recover. In 2021, there were 5.58 million private businesses in the UK and 99.9% were SMEs with less than 250 employees. SMEs accounted for 51.9% of private sector turnover in 2020 and 53.6% of all private sector jobs in the UK (a total of 22.9 million). AIM remains the ultimate SME growth market. Supported by a remarkable community of companies, advisers and investors, it has developed into the world’s most successful and established market for dynamic high-growth companies.
A key objective is to increase growth for SMEs and drive forward the national economy. Government has launched extensive initiatives to improve and increase opportunities for SMEs.
Bull’s eye on innovation
“For a long time, economists thought the dominant factors driving economic growth were capital and people. Economic research shows us, there’s now a third: innovation. “For me, if we want to drive up future growth and productivity, then the highest of the three priorities should be to ensure the UK economy is the most innovative in the world,” the Chancellor said. The government’s three priorities are Capital. People. Ideas. “The first [Capital] is to encourage greater levels of capital investment by our businesses. Second [People], we need to improve the technical skills of the tens of millions of people already in work. And third [Ideas], we want to make this the most innovative economy in the world by driving up business investment in research and development,” Sunak explained. The government is obviously tilling and hoeing a very fertile soil. “The combined value of London tech companies founded since 2000 passed half a trillion dollars in 2021, after +70% growth in value,” Dealroom says. The government aims to embed innovation across the country, drawing on geographical and sector strengths. There’s also a recognition that a diverse workforce increases the opportunity for creativity and innovation within firms. The Chancellor noted that nearly half of UK’s STEM researchers are immigrants and that half of the most innovative companies have an immigrant founder. “Part of the reason to end free movement of labour was to rebuild public consent in our immigration system. Precisely because we can now decide as a country who comes here, based not on their nationality but on their skill level. I believe we now have the public’s backing to create one of the world’s most attractive visa regimes for entrepreneurs and highly skilled people.” According to numerous think tanks, including WorldSkills UK, the Learning & Work Institute, and consulting giant Accenture, a growing digital skills shortage in the UK is having a detrimental impact on businesses and could pose serious risks in the years ahead. The skilled worker visa, which allows highly-skilled professionals to come to the UK to do an eligible job with an HMRC-approved employer, is designed to alleviate this type of problem.
What are the government’s plans for supporting greater private sector investment in R&D? “One obvious answer is to look at our tax regime. On the face of it, we have one of the most generous tax regimes for R&D investment anywhere in the world, measured by how much we spend on it compared to other nations. But in spite of spending huge and rapidly growing sums, clearly it is not working as well as it should.” The chancellor noted that the UK's business spending on R&D amounts to just four times the value of R&D tax relief. The OECD average? 15 times. “So, as I deliver the tax strategy for the years ahead, it would be sensible to make sure our tax regime for innovation is globally competitive and so properly incentivises higher business investment in R&D.” R&D tax credits are an important part of the UK government’s support for innovative business, incentivising businesses to invest in R&D. They allow companies to claim an enhanced corporation tax deduction or payable credit on their R&D costs. One of the areas that R&D touches is Knowledge Intensive Companies (KICs), businesses that are carrying out research, development or innovation at the time that they are issuing shares. They have a special status under EIS, and can raise more EIS investment, more flexibly, than non-KIC companies. One great advantage of KICs is that they open up more doors to invest in promising EIS-qualified companies. Normally, you can invest up to £1m into EIS companies within a tax year. If you invest in KICs, however, you can commit up to £2m. At Budget 2021, the Chancellor announced a review of R&D tax reliefs covering all aspects of the two schemes: the R&D Expenditure Credit and R&D tax relief for SMEs. The review aims to ensure that the reliefs are up-to-date, internationally competitive, and effectively targeted on activities that drive the best outcomes for the UK economy. The government is set to increase investment into research and development to almost $30 billion a year as part of this initiative. UK Research and Innovation (UKRI), a non-departmental public body that offers funding across areas including engineering, environmental sciences, and astronomy, made more than 17,000 research and innovation awards in 2020-21.
Pushing for greater private sector R&D
The government is aiming for a more agile approach to regulation that supports innovation while protecting citizens and the environment. “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.” Innovators operate in a complex environment of legal, voluntary and regulatory frameworks. A well-designed regulation system provides certainty to reduce investment risk and the clarity needed to make markets function effectively. It can encourage innovation, create consumer confidence, steer development of new products, and enable the rapid but safe adoption of new and disruptive technologies. The UK government’s approach to regulation has evolved over the past ten years. Initiatives such as the Red Tape Challenge and the ‘One In, Two Out’ policy sought to reduce regulatory burdens on firms.
Regulation for the fourth industrial revolution
All UK regions have innovative firms that have increased their productivity by using R&D. However, these improvements vary by region and depend on the type of innovation and the type of firms in the region. The government aims to respond to this by collaborating with specific places and building national programmes that are better tailored to local needs. Ultimately, innovation remains central to the largest challenges that the world faces—from poverty to climate change to the ageing society and global pandemics. In the UK, AIM is vital to the success of the country’s innovation strategy. For over a quarter of a century, the junior market has developed and adapted to suit the needs of a changing economy. It has demonstrated its ability to support businesses through both times of significant economic buoyancy as well as periods of recession. With a new economic shock emerging—Russia’s invasion of Ukraine, coming against the backdrop of rising inflation even as the world struggles to shake off a global pandemic—AIM’s resilience will be more important than ever to Britain’s economic recovery.
National programmes responding to local need
So, as I deliver the tax strategy for the years ahead, it would be sensible to make sure our tax regime for innovation is globally competitive and so properly incentivises higher business investment in R&D
- Rishi Sunak, Chancellor of the Exchequer.
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.
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Bay Area Bengaluru, Karnataka Singapore Greater Boston Region New York City, New York London, England Paris, ile-de-France Tel Aviv District, Israel Toronto, Ontario Berlin, Germany
133 Bay Area
69 New York
21 Greater Boston Area 20 London 16 Bengaluru 15 Berlin 12 Paris, 12 Tel Aviv 10 Singapore, 10 Toronto
140 120 100 80 60 40 20
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
FTSE AIM all share index
$4008
$2008
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
$11B
$16B
$20B
$25B
$48B
$66B
$84B
$99B
$155B
$209B
$298B
$509B
$0-250M
$250-1B (Future unicorn)
$1B-10B (Unicorn)
$10B+(Decacorn)
Enterprise value of UK tech companies founded since 2000
Amid all the commotion whipped up by Russia’s invasion of Ukraine, an important speech by the Chancellor of the Exchequer has gone largely unnoticed by both the media and market commentators.
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
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Russia-Ukraine war: market risk and opportunity
The swift escalation of the conflict, coming on top of already-high pandemic inflation, has rattled global financial markets. As sanctions go into effect, stock market indices signal a new phase of market volatility. Two weeks into the invasion, the S&P 500, which had lost almost 8% of its value in the last month, further dropped nearly 3% after the invasion. It has now clawed back some of the loss. Germany's DAX 30 lost 0.65% in the few days following the military assault, but has regained the lost ground and even posted a 0.9% gain on its post-invasion close. Japan’s Nikkei 225 index fell 6.5% after Russian troops advanced into Ukraine, but has also recovered some of the loss to register at 2.9% below its pre-invasion close on 22 February (the market was closed on the following day, in celebration of the Emperor's Birthday).
Source:London Stock Exchange
The swift escalation of the conflict, coming on top of already-high pandemic inflation, has rattled global financial markets.
Source: Trading Economics
The UK markets followed a similar pattern. The FTSE All Share Index, which had closed at 4169.64 before the invasion, recorded 3950.13 two weeks later (10 March, 14:35pm), having shed 5.26% of its value. The FTSE AIM All Share Index fared only a little better. The 1,029-company index tracking the AIM market, which had closed at 1031.91 on the day before the invasion, ended the next day (24 February) at 1007.78, a 2.34% drop in one day. At the time of writing (two weeks into the invasion, on 10 March), the index registered 984.88 at 14:30 pm, a 4.56% decline from its pre-invasion close. History teaches us that market turbulence around military conflicts is typically short-lived, and the initial equity market response this time does not appear out of line with historical patterns. Market reaction to (negative) events tends to decrease over time, as investors gradually ‘price in’ the event, or build it into the price. This is by no means to suggest that we’re already out of the woods. The full impact on markets remains uncertain, and will depend on the outcome of the war and how long sanctions remain.
Unmeasurable risk: financial markets on edge
The current level of market vulnerabilities has investors on edge. Even before geopolitical tensions flared up in eastern Europe, financial markets were grappling with headwinds that have not stopped because of the war. Inflation concerns are likely to continue. The bottlenecks causing supply-chain chaos are unlikely to disappear overnight. Indeed, with Russia and Ukraine being major sources of many metals and other industrial materials (in addition to food and energy), additional supply chain disruptions remain a real possibility. In January, the IMF reduced its estimated global growth rate for 2022 to 4.4%, from the 4.9% it had projected last year, as a result of slowdowns in the United States and China. But Russia’s attack on Ukraine has brought further problems, some of them just an acceleration of existing but latent trends.
Economic slowdown
Another impact of the war is that major economies will probably grow more slowly and with higher inflation. The economic sanctions are likely to bite hard in Europe, which is much more closely linked with Russia economically than the US is. Russia is the EU's fifth largest trade partner, representing 4.8% of the EU’s total trade in goods with the world in 2020. The EU is Russia's biggest trade partner, accounting for 37.3% of the country’s total trade in goods with the world in 2020. And 36.5% of Russia’s imports came from the EU; 37.9% of its exports went to the EU. The US has little direct trade with either Ukraine or Russia, with exports to them collectively accounting for less than 0.05% of US GDP. Nonetheless, a European slowdown will create headwinds for US growth. As for the UK, Russia accounts for just 0.7% of UK goods and services exports, and 1.5% of imports. The UK’s biggest exports to Russia are vehicles and their parts, machinery and appliances. Imports from Russia to the UK were almost entirely composed of oil & petroleum products and precious metals in 2019, the latest year for which data is both available and unaffected by the pandemic. The European Central Bank (ECB) “foresee[s] a significant negative impact on euro area growth in 2022, from the conflict.” The Conference Board forecasts that US Real GDP growth will slow to 1.7% (quarter-over-quarter, annualized rate) in Q1 2022, vs. 7.0% growth in Q4 2021. Annual growth in 2022 should come in at 3.0% (year-over-year). The British economy grew by 7.5% overall in 2021, but this included a 0.2% contraction inDecember. The UK’s economy is recovering well from the pandemic-induced slump last year, and a dreaded recession—i.e., two periods of GDP drops—looks unlikely for now.
The economic impact of this crisis is highly uncertain. It will depend on the war’s duration, its effects on energy markets, whether other nations enter the conflict, and other unforeseeable factors. Volatility will undoubtedly be a feature of capital markets, at least in the coming weeks. While this is not an unfamiliar characteristic of equity investing or unfamiliar ground for portfolio managers, it requires investors to be well informed and to adjust their investment strategy as events change over time. One way to manage volatility risk is to rebalance portfolios to achieve greater diversification. The trick is to spread investments around so that exposure to any one type of asset or holding is limited. Diversification, a key investing tactic at any time, becomes a greater imperative in times of uncertainty.
Heightened economic uncertainty
Stars in the darkness: finding opportunities amid challenges
The darker the night, the brighter the stars shine, so the saying goes. It is at the darkest hour of the night that the stars shine most radiantly. This paradigm applies to the market as well. You can find some of the best opportunities in the worst market conditions. Now is the time to consider ways to invest in what suddenly looks like a less stable market.
The long-term favours investment in the stock market. With central banks expected to further raise interest rates to stem the rise in inflation, equities appear to be a better pick than bonds. But investors buying the dip should use a selective overall strategy. When the economy slows, ‘boring’ sectors like utilities, consumer staples or essential products used by consumers, tend to hold up better.
Equities: stocks are still the best place to be
In recent years, the AIM market performance has turned some market expectations on their ears. During a market crash, investors typically expect smaller companies to see the sharpest falls, and many head for the safe haven of large caps. During the market crash of 2020, the junior market surprised and delighted investors. While the AIM market fell sharply along with larger UK Indices, it outperformed them on the way down; the subsequent bounce also saw it increase this outperformance. AIM is now more broadly diversified than its larger siblings. Its largest sector is healthcare, which has performed well with the increased focus on this industry during the Covid-19 pandemic. Technology is another big component of the AIM market, making up over 13% of the index (far larger than the FTSE’s 1%). This sector, too, has been reinvigorated by the pandemic, as the benefits of technology became ever more apparent. Notably, tech is poised to benefit from the government’s increasing investment in research and development (R&D), a key part of the UK's ambitious strategy to encourage innovation. The latest market crash brought into perspective the fact that AIM has matured as a market. The new AIM has more profitable and dividend paying companies than ever before. Along with its growth characteristics and the opportunity to invest in the potential large companies of tomorrow, a further benefit is that AIM is not classified as a recognised exchange. This means that many of its constituents qualify for the various tax-advantaged schemes.
The new AIM market: more resilient and profitable
Over the last few weeks, the big winners on the stock market have been the likes of the defence and mining sectors, a trend that is not indifferent to the war in Ukraine. With the UK phasing out Russian oil imports by the end of the year (the US has already banned all Russian oil imports), oil prices hit their highest level since 2008 this week. Natural gas prices have also surged to record levels, as Russia threatens to partially close the gas tap to Europe. Perhaps less reported is the impact of the war on global wheat prices. According to the US Department of Agriculture, Russia was the world’s leading exporter of wheat in the last marketing year (ended June 2021), making up 20% of global exports of 39.1 million tons of wheat. With Ukraine also accounting for 10% of exports, a third of the global supply has now dried up. Gold has come to the fore again as a traditional safe haven, rising by 6% since the invasion of Ukraine began, as investors seek to diversify across a range of different asset classes.
Which sectors have fared better?
Stock selection is important in all market environments, but it really comes to the forefront in times of market turbulence. One of the best places to take cover in a volatile stock market is in high dividend stocks. The dividends themselves provide something of a cushion. Even though the price of the underlying stock may fall, you’re still earning steady dividend income. Another area to consider seriously is investments that enjoy preferential tax treatment. The more tax-advantaged investments you have working on your behalf, the more of your investment returns you’re likely to keep. Over a lifetime of investing, higher taxes can drastically shrink the amount of wealth that you’re left with. So, keeping taxes on a tight rein can help you ensure that your pounds and pence are working for you at maximum efficiency. UK residents are particularly fortunate in this respect. The government has put in place a set of venture capital schemes that offer generous tax reliefs for investors. You can choose from the Enterprise Investment Scheme (EIS), venture capital trusts (VCT), Seed Enterprise Investment Scheme (SEIS), or Social Investment Tax Relief (SITR). An investment that’s tax-advantaged can allow you to defer taxes, avoid paying them altogether, or enjoy other tax-related benefits. The scheme you use will depend entirely on your personal or business circumstances and your investment objective. For example, AIM VCT’s tax-free growth and dividend income might appeal to some income investors. AIM EIS, including at least one that invests solely in AIM listed shares, might be suitable for investors seeking relatively more liquidity on top of the generous tax reliefs. AIM shares can also qualify for Business Relief (BR), another tax-favoured scheme. This one offers 100% relief from inheritance tax (IHT), provided the shares have been held for a total period of no less than two years at the time of death. Participation in this scheme could potentially reduce a large inheritance tax bill while still allowing the investor to retain control and ownership of the assets. Ultimately, no one knows for sure what markets will do, as there are always unpredictable events and circumstances that are outside of our control. This is why diversification is a key component of every successful strategy for today’s unpredictable markets. Fortunately for AIM investors, the junior market gives access to an impressive range of geographies, sectors, industries as well as company types and sizes. It is also the gateway to tax-efficient investment into UK’s fastest-growing and dynamic smaller companies. AIM can be an important part of a sensible investment strategy designed to ride out the Russia-Ukraine crisis.
What to do: diversify, select with care, and mind the taxes
Worryingly, these surging energy and food prices mean that inflation could remain higher for far longer.
Apr '21 May '211 Jun '211 Jul '21 Aug '21 Sep '21 Oct '21 Nov '21 Dec '21 Jan '22 Feb '22 Mar '22
1day
1,300.00 1,200.00 1,100.00 1,000.00 900.00
60
70
80
90
100
110
120
130
May
Jul
Sep
Nov
2022
Mar
97.130
Oil price over the past year: Crude Oil WTI (USD/Bbl)
As we go to press, the tragic situation in Ukraine continues to develop rapidly on military, diplomatic, political, economic and humanitarian fronts, with serious implications for the people of Ukraine, primarily, but for the whole world as well.
Source: London Stock Exchange
1,034.25
Soaring commodity prices
The decision by NATO allies to impose economic sanctions on Russia—one of the world's largest exporters of some of the most vital raw materials, from wheat and grains, to oil, natural gas and coal, to gold and other precious metals—is bound to cause far-reaching collateral economic damage. Already, the breath-taking rise of commodity prices is causing a whirlwind of anxiety on financial markets and exchanges. Wild commodity price swings are making investors nervous. As for consumers, the sticker shock of food and energy prices is a bigger risk than flagging corporate earnings. Worryingly, these surging energy and food prices mean that inflation could remain higher for far longer.
The availability of AIM IHT portfolios on adviser wrap platforms, means that advisers benefit from being able to manage everything in one place, reducing time on administration. The platform technology itself also allows advisers to take advantage of advanced reporting systems.
Chris Boxall –Co-founder and Portfolio Manager, Fundamental Asset Managament
09
Spring Budget 2022: What’s in it for small and medium-sized enterprises?
The government says it “recognises that … small and medium-sized enterprises (SMEs) are struggling with rising energy costs, recruiting staff, and navigating turbulent supply chains as the world economy recovers from the pandemic.” The solution? To boost productivity and growth by creating the conditions for the private sector to invest more, train more and innovate more – fostering a new culture of enterprise, says the Chancellor. Notable among the packages designed to support small businesses and improve productivity across the country are the following:
The Chancellor of the Exchequer presented his spring statement 2022 to Parliament on Wednesday 23 March 2022. The budget introduced a series of measures to support businesses.
The business rates multiplier will be frozen in 2022-23 This is a tax cut for all ratepayers worth £4.6 billion over the next five years. Eligible retail, hospitality, and leisure businesses will also benefit from a new temporary 50% Business Rates Relief worth £1.7 billion. The package of changes is worth £7 billion. According to the government, it means for example that-- the average pub, with a rateable value of £21,000, will save £5,200 the average convenience store, with a rateable value of £28,500, will save £7,000 the average cinema, with a rateable value of £95,500, will save £24,000 High-quality training will be subsidised The Help to Grow: Management programme is billed as a training scheme designed to help SME business leaders to increase productivity, seize investment opportunities and grow their business. It offers businesses 12 weeks of leadership training at some of the UK's top business schools, with the government covering 90% of the cost. The cost of apprenticeship training is 95% subsidised for SMEs that do not pay the Apprenticeship Levy. The temporary £1 million level of the Annual Investment Allowance has been extended to 31 March 2023 This is the highest level of support for capital expenditure ever provided through the Annual Investment Allowance, according to the government. It provides relief for investment across over a million SMEs. Green reliefs for Business Rates At Autumn Budget 2021 the government announced the introduction of targeted business rate exemptions from 1 April 2023 until 31 March 2035. The initiative covers eligible plant and machinery used in onsite renewable energy generation and storage. It provides a 100% relief for eligible low-carbon heat networks with their own rates bill, to support the decarbonisation of non-domestic buildings. The government is bringing forward the implementation of these measures and is announcing that they will now take effect from April 2022. A temporary cut to duty on petrol and diesel A temporary 12-month cut will be introduced to duty on petrol and diesel of 5p per litre, representing a saving worth around £100 for the average car driver, £200 for the average van driver, and £1500 for the average haulier, when compared with uprating fuel duty in 2022-23. Soaring fuel prices have a major effect on small businesses. They impacts everything from their supply and overhead expenses, service territories, staffing, to the pricing of their products and services. Further increase to the employment allowance from April 2022 The employment allowance was increased in April 2020 from £3,000 to £4,000; the spring statement announces a further increase from April 2022. The new increase will mean that eligible employers will be able to reduce their employer national Insurance contributions (NICs) bills by up to £5,000 per year. This is a tax cut worth up to £1,000 per employer. R&D tax relief reform The government set out in the Tax Administration and Maintenance Command Paper that R&D tax reliefs will be reformed to include some cloud and data costs and refocus support on R&D carried out in the UK. “The government has listened to stakeholders and can confirm that from April 2023, all cloud computing costs associated with R&D, including storage, will qualify for relief,” the paper says. Targeted support for the most vulnerable To help households with the cost of essentials such as food, clothing and utilities, the government is providing an additional £500 million for the Household Support Fund from April, on top of the £500 million already provided since October 2021. This brings total funding to £1 billion. This initiative is of great benefit to local businesses, because families with the lowest incomes will spend, rather than save, an increase in disposable income, thus boosting economic recovery.
Government’s SME support fits nicely with AIM’s role A vibrant small and medium-sized enterprise (SMEs) sector is a vital ingredient for a healthy market economy. SMEs provide jobs, innovation, and boost local communities. AIM plays a key role in the UK’s SME funding environment, allowing companies to raise external finance at different stages in their lifecycle and providing an exit route for early-stage investors (such as for the company founder(s) or private equity investors). It also offers a regulatory framework designed specifically for smaller, growing companies, proving less prescriptive than for companies listing on the Premium segment of the London Stock Exchange’s Main Market. As companies continue to grow, they also benefit from the advisory and investor support network that has developed around AIM in over a quarter of a century. They also benefit from the ease with which they can return to the market to raise further funds. Most of the companies listed on the Alternative Investments Market (AIM) are SMEs. So, government support for small businesses is essential to the development of the junior market.
Most of the companies listed on AIM are SMEs. So, government support for small businesses is essential to the development of the junior market.
Soaring fuel prices have a major effect on small businesses. They impact everything from their supply and overhead expenses, service territories, staffing, to the pricing of their products and services.
What the managers say
10
What is your AIM investment strategy in a nutshell?
The Adapt AIM Portfolio’s follow a buy and hold strategy, investing in ESG considered AIM listed companies which we believe will qualify for business relief and prosper in the medium to long-term. Both the Growth and Income portfolio target between 20 – 40 investee companies, with strong dividend yields a focus for the Income portfolio, while the Growth portfolio targets sustainable, high margin companies.
What do you think the dangers are for stock pickers on AIM at the moment?
Cost headwinds from supply chain challenges and inflationary pressures squeezed margins last year, and we expect similar headwinds throughout 2022, along with increased costs from rising oil prices. Firms with low pricing power and slim margins are at risk in this environment, therefore stock pickers must consider whether companies can pass on increased costs to customers.
Van Hoang
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.
Looking at the overall market Year-on-Year performance, total returns show 2021 was a more challenging year for AIM than 2020. How do you explain that and account for it in your portfolios?
2020 was characterised by the shock of the pandemic, and then by the strength of the reaction by governments and companies in adapting to the virus. Despite vaccine progress, new variants which were both more transmissible and severe emerged in 2021, impacting markets. Despite the volatility, the Adapt AIM Portfolio’s appreciated in 2021, outpacing the performance seen in 2020, helped by investee companies strong liquidity positions.
Chris Boxall
Co-founder and Portfolio Manager Fundamental Asset Management
Portfolio Manager Sarasin & Partners
Stephen English
Investment Director Stellar Asset Management
Chris Cox
Fund Manager TIME Investments
We seek AIM-listed companies that benefit from multi-decade themes, allowing for through cycle sustainable growth rates above that of the wider market. As well as usual financial modelling and analysis, we incorporate stewardship and ESG factors to inform our view on company valuation and risk, as well as frame our company engagements.
The landscape across the UK small and mid-cap universe is particularly complicated at the moment, driven in part by a general risk-off attitude leading to a withdrawal of liquidity from the sector, and in part by the exceptionally short-term attitude of the market. There is more selling activity than buying, and stocks that disappoint in the short term are seeing greater than normal volatility.
AIM is home to a wide range of dynamic companies with attractive growth potential, and a number of these are amongst the largest in the market. In 2020 several of these were relatively unaffected by lockdown measures which, combined with the deferral of interest rate increases globally, was supportive of share price gains; a trend that unwound to a degree in 2021.
TIME:AIM follows a disciplined, data-driven process to select high quality companies that have the potential to deliver attractive long-term returns. Rather than adopting a traditional fund manager stock picking strategy, the service employs a screening process to select individual companies to include in a portfolio. Our screening process uses a combination of financial, commercial and performance data to select mature and robust BR qualifying businesses which are available on AIM.
Many companies on AIM have recently reported earnings in line with guidance and market expectations but the shares have sold off on the news which can make life more difficult for traditional stock pickers. At TIME we prefer a more systematic, data driven process to select the companies that we invest in. This process removes any biases and emotions in situations where the market reacts differently to what one might have otherwise expected.
The factors that drove much of the performance of the AIM index in 2020 was in a large part down to specific sectors that were beneficiaries of Covid such as online retail and certain healthcare companies involved in vaccine development and testing. In 2021 these parts of the market underperformed whilst other companies that were more directly impacted by Covid and the subsequent lockdowns recovered as the economy reopened. Our portfolios have a greater exposure to the latter type and therefore have performed better in 2021 than they did in 2020, in contrast to the market as a whole.
The Fundamental Asset Management AIM IHT portfolio service invests in well-established, profitable and cash generative AIM companies, which are also growing strongly. Many also offer an attractive and growing dividend. These exciting, ambitious businesses offer excellent investment opportunities, combined with attractive Inheritance Tax planning tax planning benefits, and the opportunity to support the global businesses of the future.
While inflation and interest rate fears were upper most in people’s minds at the beginning of the year, the situation in Ukraine is clearly dominating matters currently and impacting investor sentiment. Perhaps the greatest danger for AIM investors is that many AIM IHT managers are attracted to similar stocks, of which there is a relatively limited supply, although it was encouraging to see plenty of newcomers in 2021.
After a fantastic 2020 when, against all the odds, AIM performed remarkably well, eclipsing the UK main market by a wide margin, the valuations of many higher-profile AIM companies had become increasingly stretched and a correction was overdue. Equity investing is a long term process and markets occasionally have to pause and reflect, as has now happened.
To grow, over time, capital and income in as considered manner as possible. We build the portfolio for a range of different outcomes across a highly diversified portfolio of up to 40 stocks. We focus investment in profitable, cash generative companies with defendable market positions and hold both Growth and Value style exposures. Our bias is towards sub-£250m mkt caps, where we see strongest value.
We have, and continue, to see stretched valuations at the higher end of the market cap spectrum. Beyond that, Value as a style has been in the ascendency for most of this year, while Growth, even at a reasonable price, has de-rated significantly largely on interest rate rise fears. The consensus is that these stocks must fall significantly further; we disagree.
We expected AIM to struggle in 2021 after an abnormal 2020 driven by stay-at-home beneficiaries and healthcare/biotech stocks. Even those barely related to covid-19 saw meteoric rises which were simply not sustainable. Given the sheer number of stocks to pick from, and bias towards the smaller end of AIM, our portfolio never really resembles the headline index. Indeed we returned a top quartile 24% in 2021.
what the managers say
14
3. Considerations for investment
Market composition Fees and charges MICAP market snapshot
3. Considerations or investment
12
Range of attractions for Investors
A rational response to rising financial anxiety is to further diversify portfolios. For investors who decide to stick with these high-risk investments, EIS, VCT, and BR offer great potential for diversification, which minimises risks while investing for the long-term. MICAP lists five EIS offers that are fully focused on AIM listed investee companies (i.e., one more since last October) and three of them are currently open, as noted above. In addition to tax benefits and professional management, these funds provide diversification across the most dynamic—and, as the pandemic has proved in many cases, the most resilient—sectors of the UK economy. AIM VCTs have on average 73.7 investee companies. The lone AIM VCT that is currently open focuses on investment in early- and mid‐stage healthcare companies in the healthcare sector, a massive market that offers unparalleled diversification for portfolios. The sub sectors can range from pharmaceuticals, biotechnology, medical equipment, sales, and insurance to facilities. Another area of diversification for the VCT is the four key themes: prevention, point of care, personalisation and future pharma. The open BR funds target between 20 and 40 investee companies each. Because their investment sector is General Enterprise, their only constraint is BR qualification. Investments that qualify for BR can be passed on free from inheritance tax upon the death of the investor, provided the shares have been owned for at least two years at the time of death. For all open offers on AIM, diversification across investee companies—based on sector, stage of growth, geographic location, and sundry other factors—is the norm. The most frequently cited number of investee companies is an impressive 30. The following chart shows the target number of investee companies for all the 39 tax-advantages open offers currently on AIM.
Diversification targets
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 21 March 2022.
In our last analysis, we noted that as of October 2021, there were 39 open offers in the tax-advantaged space with a focus on AIM companies. These included three EIS offers, two VCTs, and 34 Business Relief offers. The figures represented an increase in the total number of open offers and open EIS offers, since May, with the number of VCT offers remaining the same. As can be seen from the table below, the total has remained the same since our last update (39), even though the number of open VCT offers has declined while BR open offers have increased. There has been no change in the number of open EIS offers.
Open offers
The VCT, which targets a 4% dividend payout, provides a share buyback facility, offered at a nil discount to NAV subject to liquidity. It’s somewhat surprising that there is still one open VCT since the VCT market has been so hot this year that many VCTs have raised funds very quickly and closed earlier than has previously been the norm. Inflation poses a ‘stealth’ threat to investors because it chips away at real savings and investment returns. Most investors aim to increase their long-term purchasing power. Inflation puts this goal at risk because investment returns must first keep up with the rate of inflation in order to increase real purchasing power. A proven solution is to move money into tax-efficient investments, seeking to access the high growth that they target. In addition to the tax benefits, the aforementioned schemes provide access to the UK’s fastest growing companies just mentioned—including, in the case of EIS, for example, to knowledge intensive companies (KICs). Many of these innovative businesses are traded on AIM, and they are given preferential treatment under the relevant schemes, which can help to enhance investors’ returns.
Another diversifying factor is investment strategy. Many of these funds have established an investing strategy that tempers potential losses in a volatile market. As illustrated in the table below, each of the major strategies blends a large number of investments in a single portfolio in order to cut down your investment risk. It stands to reason that a portfolio with many different investments will perform better in various market conditions than one with only a few. The next table shows the extent of the diversification by investment strategy for all the open offers.
Target returns
March 2022 October 2021 May 2021
VCT Open Offers 2 2 2
BR Open Offers 34 34 34
Total Open Offers 39 39 37
EIS Open Offers 3 3 1
It’s interesting that the numbers of EIS, VCT as well as IHT portfolios on offer have generally held steady despite rising inflation and market uncertainty. This suggests a vote of confidence by investors in a sector that’s usually perceived to be high risk and, therefore, subject to desertion in times of market turbulence, as investors ‘fly to safety’. This phenomenon is considered a sign of fear in the marketplace, as investors seek less risk in exchange for lower profits. Meanwhile, escalating tensions between Russia and Ukraine have sent the stock market’s “fear gauge”, the Vix Index, higher. VIX is a real-time market index representing the market's expectations for volatility over the coming 30 days. By noon London time on 23 March, it stood at 23.79, well above its average since 1990 of 19, and steeply higher than its start-of-the-year level of 17. It’s not hard to imagine a scenario where it moves even higher in the coming days as events continue to unfold. That multitudes of investors have decided to stand firm by EIS, VCT, and BR shows that the tax-efficient schemes provide a rare value even in times of crisis. EIS, VCT and BR all tend to be longer term holds with EIS and VCT investment horizons generally sitting between five and 10 years and Business Relief sitting at around seven to eight years. This makes them well-suited to riding out periods of volatility.
Median 25 27.5
Capital Growth Growth & Income
DIVERSIFICATION OF OPEN OFFERS BY INVESTMENT STRATEGY
Mode 30 20
Min 8 17
Average 26 26.5
It doesn’t hurt that, mostly through their Capital Growth and Growth & Income strategies, the schemes focus on the ‘superstar’ sectors, those that lead the UK economy through dynamism and innovation.
Max 40 35
“The rate of inflation went up quickly in 2021 and it has continued to rise this year. We expect it to reach around 8% this spring. We think it could go even higher later this year,” the Bank of England (BoE) said on 8 March 2022. Even investors who may not like thinking about the effect that taxes have on their returns, should now be aware of how much they are paying and look for ways to reduce the size of the tax bite. There’s no question that people who pay attention to the investment consequences of taxes can save themselves a significant amount of money. Tax-advantaged investments, such as EIS, VCT, and BR are either exempt from specific taxation, tax-deferred, or offer other types of tax benefits. The three open EIS funds, all of which have received advance assurance, have mapped out their exit strategies: sale/redemption of shares (for 2 out of 3); trade sale, IPO, MBO (for the other one). For all the open offers on AIM, the most frequent target returns are 10%. The next chart shows the statistical distribution of the AMC for all the open offers.
Minimum subscriptions
In our November analysis, we noted that the average minimum subscription applied by the investment managers had dropped significantly since May when it stood at £62,778. Today, the average subscription for all open offers is still lower than that figure, having nonetheless picked up a bit since the £55,000 recorded in October, as shown in the chart below.
The long-term trend towards affordability of EIS, VCT and BR continues. Two out of the three EIS require a minimum subscription of £20,000 and the third £100,000. The rate of subscription to the three EIS were 100%; 99.65%; 97.60% respectively. The current average minimum subscription for AIM VCTs is £3,833. The open VCT has a minimum subscription of £1,000. It is 100% subscribed. For the 35 open BR, the minimum subscription ranges from £15,000 to £100,000, with the average being £57,941.
Fund raising
The three open EIS have raised £44,507,261 and £28,309,359 and £3,220,000 respectively. The open VCT, which targets £10,000,000 has so far raised £1,660,000. It's Business Relief offers that drive up the overall average. The average BR minimum subscription to AIM based BR funds offers a potential £23,176 IHT saving (40% of the value of the BR-qualifying shares). Where much higher levels of growth are sought - in EIS and VCT, the minimum investment amount can be much lower, particularly where the chief reasons for investing are capital gains (which can be substantial, even from a very small base) and sheltering that from CGT. Investor demand for EIS, VCT and BR shows little sign of letting up. Fundraising levels for the 2021-2022 tax year suggest that inflows will exceed those in 2020-2021 which was also a bumper year.
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
55,553
100,000
50,000
200,000
Minimum subscription of open offers
1,000
45 40 35 30 25 20 15 10 5 0
26.025641026
30
8
25
40
Target no. of investee companies by open offers
It’s interesting that the numbers of EIS, VCT as well as IHT portfolios on offer have generally held steady despite rising inflation and market uncertainty.
EIS, VCT and BR all tend to be longer term holds with EIS and VCT investment horizons generally sitting between five and 10 years and Business Relief sitting at around seven to eight years. This makes them well-suited to riding out periods of volatility.
“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 then, because Business Relief offers make up the vast majority of AIM-based tax-advantaged offers. The following table shows the average charges for all current AIM open offers.
Fees and Charges
In the next two tables, we can see the evolution of the initial fees and the annual management charge. While initial fees have been seesawing a bit, the long-term trend seems to be heading downward:
CHARGES Initial Charge to Investors Excluding Adviser Fee 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
Average 0.43% 0.41% 1.27% 0.00% 1.24% 0.00% 1.03% 0.00% 5.13% 0.31% 0.28% 0.03%
Average initial fees
Oct 2021 0.60%
May 2021 0.47%
Mar 2021 0.41%
AVERAGE initial fees
Annual Management Charge (AMC)
OPEN OFFERS
The bit of cautionary notice we placed at the beginning of this page in our last update is still valid today:
April 2020 0.64%
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.
Oct 2021 1.30%
May 2021 1.33%
April 2020 1.32%
Mar 2021 1.24%
Total AMC
Here too, we see the same fluctuation over time, summed up in what seems to be a downward movement. The next graph shows the current statistical distribution of AMC, the most prevalent fee, as noted below.
Looking at the specific investment schemes, we can see that the total initial fee for the open AIM Enterprise Investment Schemes (EIS) comes to 0.45%. For Business Relief (BR), the initial fee is 0.26%. The open AIM Venture Capital Trust (VCT) has a total annual fee of 0.97%. For BR, the equivalent rate is 0.83%. Not every offer charges every fee. The following table gives a perspective on the prevalence of each fee (for all open offers on AIM). The most prevalent fees are the annual management charge (AMC). No open offer currently charges an annual performance fee or an annual performance hurdle fee.
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 TOTAL
Number 10 14 37 0 2 0 2 13 5 39
NUMBER OF OPEN OFFERS THAT CHARGE EACH FEE
Percentage 26% 36% 95% 0% 5% 0% 5% 33% 13% 100%
AMC is the most common fee charged, it also seems to experience the most consistent decline over time.
While the AMC is the most common fee charged, it also seems to experience the most consistent decline over time.
No open offer currently charges an annual performance fee or an annual performance hurdle fee.
2.50% 2.00% 1.50% 1.00% 0.50% 0.00%
1.24%
1.50%
2.00%
Open offer total amc fees
1.25%
Fees & Charges
16
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
Corporate Governance on AIM AIM VCTs: bringing real potential to life Tapping growth with tax savings: EIS and VCT on AIM
Corporate Governance on AIM
Four years ago, in 2018, the London Stock Exchange (LSE) announced that all AIM companies will need to report on their implementation of a recognised corporate governance code. Effective September of that year, Paragraph 26 to Part 1 of the AIM Rules for Companies was updated to require all AIM companies to disclose some important information on their company’s website: “Details of a recognised Corporate Governance Code that the board of directors of the AIM company has decided to apply; how the AIM company complies with that Code; and, where it departs from its chosen Corporate Governance Code an explanation of the reasons for doing so.” The new rules did not define or prescribe a list of the ‘recognised Corporate Governance Code’ allowing AIM companies a choice. This flexibility has been particularly beneficial for AIM companies that also have a home listing, as it is often more suitable for them to report using recognised standards in their home jurisdiction. (Not applicable to companies looking to qualify for tax-advantaged investments in the UK, as listings on other exchanges will most likely make them ineligible.) Once the information is posted on the website, the company is required to review it annually and to disclose the date on which the last review was performed. Many companies find it convenient to carry out this review at the same time as they prepare their annual report and accounts.
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.
Given the rising prominence of ESG (Environmental, Social, Governance) within investments, we thought it a good idea to revisit the overall external governance requirements for AIM-quoted firms. While firms should obviously have their own internal frameworks of accountability and processes for running efficiently and, more and more, sustainably, the LSE has required a certain level of transparency from its AIM-quoted firms for some years.
The AIM Notice 50, issued at the time, summarised the LSE’s position: “The London Stock Exchange considers that good standards of Corporate Governance are a significant contribution to a company’s long-term success. Accordingly, AIM companies and nominated advisers are reminded that good Corporate Governance is supported by a meaningful explanation of the company’s practices against the principles of the chosen code, rather than simply identifying areas of noncompliance. This principles-based approach to Corporate Governance is consistent with our overall approach to AIM.” The changes came following an increase in demands made by institutional investors—whose support is in large part responsible for AIM’s growth—for better compliance with corporate governance recommendations. The collapse of some high-profile AIM companies in previous years was also a contributing factor.
The UK is a global leader in corporate governance, with the UK Corporate Governance Code setting out how premium listed companies can achieve sustainable success over the long term. The UK Corporate Governance Code (sometimes referred as the FRC code, because it’s published by the Financial Reporting Council, or FRC) does not generally apply to companies quoted on the AIM market. However, it does apply to some larger AIM companies. Moreover, nominated advisers request that their client companies which are new to the AIM market adopt the Code’s principles insofar as they apply to a company of its size. In practice, this doesn’t necessarily mean that the AIM company will adopt the Code. What it means is that the company will give it careful thought when dealing with corporate governance matters. In other words, it’s a halfway-house in that AIM companies are not expected to follow the Code rigidly, the requirements of which are better suited to larger and more sophisticated companies, which the majority of companies quoted on AIM are not. While the code is not legally binding, publicly quoted companies—including those on AIM—that decide to ignore it (without having a very good reason for doing so, which they explain to shareholders) do so at their own peril.
AIM companies and the UK Corporate Governance Code (‘FRC’ Code)
In past years, the representative bodies most actively involved in the AIM market have produced their own literature on the Code and, in some cases, have gone so far as to produce their own corporate governance guidelines. The last revision to the Code saw both the National Association of Pension Funds (NAPF) and the Quoted Companies Alliance (QCA) publish their own respective corporate governance guidelines for AIM companies. Both have issued revised guidelines in recent years.
The NAPF said its guidance was in response to the continued internationalisation of AIM and the growing interest among institutional investors in AIM companies. Here again, the Guidelines are not binding on AIM companies, although investors will often expect companies to comply with such guidelines to the fullest extent possible. Although AIM companies are not subject to the Combined Code, the Guidelines are based on this and the NAPF Policy and Guidelines. In addition, NAPF consulted with the Quoted Companies Alliance with the aim of ensuring consistency between the Guidelines and the Quoted Companies Alliance Corporate Governance Guidelines for AIM Companies. NAPF said the degree of compliance by companies with corporate governance regimes should be reflective of a company's size, stage of growth and complexity of its business. So, NAPF expects a large company on the AIM market to comply with the provisions of the Combined Code or, where appropriate, to explain any non-compliance. On the other hand, NAPF recognises that small growth companies should not be unnecessarily burdened with inappropriate guidelines and should instead concentrate on growing their businesses. Following the last revision to the Code, the influential NAPF noted that an increasing number of institutions, including pension funds, were investing in AIM quoted shares. The NAPF pointed out that such investors look to the NAPF for guidance on voting guidelines. The NAPF believes that by encouraging higher standards of corporate governance, “AIM companies will be more adept in managing their growth and attracting greater institutional investor following, thereby enabling them to raise fresh capital and on potentially more advantageous terms”. Increased investment appetite in AIM companies is obviously welcome news to a market which suffers from accusations of limited liquidity.
NAPF’s Corporate Governance Policy for AIM Companies
The QCA describes its code as “a practical, outcome-oriented approach to corporate governance that is tailored for small and mid-size quoted companies in the UK”. The new and updated version of the QCA Corporate Governance Code includes 10 corporate governance principles that companies should follow, and step-by-step guidance on how to effectively apply these principles. The Code was put together by the QCA’s Corporate Governance Expert Group and a standalone Working Group “comprising leading individuals from across the small and mid-size quoted company ecosystem”. The QCA claims that its code is used by nearly 90% of companies on the AIM market, as well as those on other markets or pre-IPO.
QCA Corporate Governance Code
Given the existence of more than one corporate governance code, which one is an AIM company to follow? Ideally, each company will choose the one that gives it the correct structure and adaptability to ensure it can continue to run the business in the most efficient way possible. Due to the ‘comply or explain' rule mentioned earlier, AIM companies will be wary of adopting a code which does not reflect the requirements of their business or industry. Doing so could lead to disclosure of negative statements which, in turn, may, inadvertently, give activist shareholders ammunition to question the board's commitment to corporate governance. AIM Regulation refers to the FRC Code (aka, the UK Corporate Governance Code) and the QCA Code as established benchmarks for AIM companies, indicating that these two codes would be accepted as being appropriate for AIM companies to follow. The QCA Code is followed by substantially more AIM companies than the FRC Code. While the FRC Code represents the gold standard of corporate governance, the QCA Code is often seen to be easier for smaller and mid-size quoted companies (i.e., those on AIM) to follow. However, a different corporate governance standard may be more suitable for a particular AIM company. For example, where the company was incorporated overseas, a standard from that home jurisdiction may be the most appropriate. Again, this doesn't apply in the context of companies that are eligible for tax-advantaged investments. Ultimately, what seems to be most important from a governance perspective is not necessarily the code to which AIM-quoted firms sign up, but their following its rules and posting their updates compliantly and with the required transparency.
Which code to follow?
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
Admissions and on-going obligations
Corporate Governance
Boards & Committees
Benchmark UK Corporate Governance Code mandatory for fully-listed companies and applied by some larger AIM companies. No mandatory code for AIM companies but Quoted Companies Alliance guidelines widely adopted:
Directors: ensure there are sufficient independent board members and that the remuneration of the executive directors is appropriate Audit: ensure that appropriate controld are in place and that the company's records are audited by an appropriate firm; and the monitoring of the performance of that firm Shareholder relations: ensuring that the investors are able to properly raise concerns and are consulted on major decisions
Audit Committee - Non-executive directors only
Remuneration Committee - Non-executive directors only
Nominations Committee - Non-executive directors only
Operating board - executive directors only
PLC board Executive & Non-executive directors
The UK is a global leader in corporate governance
ESG oversight continues to be applied to, and welcomed by, AIM companies. This leads to broader and more informed discussions with management teams and boards, and we hope represents an enduring trend that benefits all stakeholders.
Hugo Wood - Portfolio Manager, Sarasin & Partners
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AIM VCTs: bringing real potential to life
VCTs were created to provide finance for small, expanding companies with the aim of making capital returns for investors; the Alternative Investment Market (AIM) was set up to provide the same companies with access to capital from the public market. It comes therefore as no surprise that the AIM market has become a fertile ground for VCT investment into the UK’s most ambitious young companies. AIM VCTs invest in VCT-qualifying companies listed on the AIM market. These are not necessarily small or start-up companies, but they have to meet the VCT rules at the point of investment. Investing in an AIM VCT gives you access to a portfolio of investments in innovative businesses selected for their potential to become successful AIM quoted growth companies.
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.
Venture Capital Trusts (VCTs) are investment companies listed on the London Stock Exchange (LSE) but they share a common purpose with London’s junior market.
VCTs have moved mainstream in recent years. By all accounts, demand for venture capital trusts is on track to set a new record in 2022 (although not all of it will be deployed into AIM-quoted companies). The table below shows data updated to the end of January and gives an indication of the depth of VCT investing on AIM.
Current VCT investment in AIM
Nick Britton Nick, AIC’s Head of Intermediary Communications, explains what ‘pre-qualifying means’: “Pre-qualifying VCTs are those within their initial three years of launch – they have three years to get 80% of the money they raised invested in qualifying companies. “Before the three-year mark they have a special status as pre-qualifying – they are treated from the tax perspective as if they are fully fledged VCTs, investors get tax relief etc. The term ‘pre-qualifying’ reflects the fact they are allowed to have less than 80% of their money in qualifying investments until they hit that three-year mark.” AIM is home to many innovative and ambitious companies that have great potential to become leaders in their field with world-changing businesses. Needless to say, getting exposure to these companies via a VCT can prove hugely attractive. As well as the long-term potential growth of smaller companies, the tax benefits associated with a VCT can enhance the position for investors further. VCT portfolios are typically well diversified with holdings in technology, industrials, pharmaceuticals, and many other growing sectors. A larger and more diversified portfolio of companies can provide a higher level of confidence that if one company fails, the performance of the other holdings can compensate. As well as being a good place for smaller companies to gain access to funding to help them grow, AIM remains one of the best places for growing businesses to take their first steps to becoming public companies. Some AIM VCTs always keep an eye out for private companies that are aiming for either an IPO or a trade sale in the near future. This strategy allows such VCTs to hold more significant stakes in companies coming to AIM, and to support high-potential businesses as they navigate the delicate process of floating their company on a stock market.
The benefits of AIM VCTs
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.
Some VCTs maintain a share buyback programme, albeit typically at a discount to NAV. Subject to the availability of distributable reserves and the company’s cash requirements, this can provide liquidity for shareholders who wish to sell their shares. Also, some VCTs offer investors the option of reinvesting any dividends they are entitled to receive, using the proceeds to purchase more VCT shares. If you are an investor, this could increase your shareholding, enabling you to get further income tax relief on the additional shares allotted. Note, however, that the holding period starts from the reinvestment date. New shares invested in will attract 30% income tax relief (if held for five years) as well as tax free dividends. The share will also be spared any capital gains tax (subject to an investment limit of £200,000 in any tax year). It should be noted, however, that HMRC places restrictions on buying and selling shares in the same VCT within a six-month period. This means that if you have recently sold shares in a given VCT, in order to benefit from the 30% upfront income tax relief available, you will need to wait six months from the date of sale before investing in the same VCT again. Ultimately, the junior market of the London Stock Exchange is home to hundreds of outstanding and exciting smaller companies. This makes AIM a market of great opportunity, where the investment expertise of AIM VCT managers, coupled with all the existing and anticipated benefits of VCTs, can bring huge potential to life for investors.
Share buyback and reinvestment
AIM - Liquidity vs. Main Market
£0-5m
AIM
MAIN MARKET
£5-10m
£10-50m
£50-100m
£100-500m
£500-1bn
£1-5bn
£5-10bn
£10bn+
0.6%
0.5%
0.4%
0.3%
0.2%
0.1%
0.0%
Average FF-adj. turnover ration
AIM 0.32%
Main Market 0.21%
Av. free floated adjusted turnover ratio
1,101 5,183 44 76 14 21 21 12 11 6,483
1,031 4,725 41 70 14 20 14 9 11 5,936
7 36 1 3 0 1 1 4 1 54
Total assets (£m)
VCT AIM quoted VCT Generalist VCT Generalist Pre Qualifying VCT Specialist: Enviromental VCT Specialist: Enviromental Pre Qualifying VCT Specialist: Healthcare & Biotechnology VCT Specialist: Media, Leisure & Events VCT Specialists: Technology VCT Specialist: Technology Pre Qualifying
Market cap (£m)
Number of companies
VCT Sectors
VCTs: their role within AIM (II)
AIM VCT: the search for hidden gems
Compared with larger companies, smaller companies are lesser known and tend to be under-researched. So, the investment teams of AIM VCTs conduct several hundred meetings with AIM companies every year to help identify the best investment opportunities. The teams undertake comprehensive research into each company's business plan, its management, its growth rate, its profitability, its valuation relative to its peers and its overall financial strength. The goal is to uncover hidden gems with the opportunity for significant long-term returns. After investment, managers continue to monitor the progress of the companies they have chosen to invest in. Selling profitable investments can help the VCT achieve its aim of paying out regular tax-free dividends to investors. Because they focus on acquiring emerging companies exposed to attractive growth markets, many of the investments made by these VCTs will be held for the long term. This has the effect of balancing the portfolio between younger and more mature holdings, which helps to manage the risks within the portfolio as a whole. The older, more established AIM VCTs typically feature a large number of maturing AIM-listed businesses. This means investors who are able to buy into existing share classes within VCTs, can instantly benefit from owning established portfolios of 50, 60 or even 90 companies, many of which could continue to deliver sales growth and generate profits. Somemanagers of mature VCTs work extensively on AIM investments and many have a great performance history, based on uncovering value in smaller companies. Some of these VCTs have also built a strong track record of paying a steady stream of tax-free dividends to investors. In short, these VCTs can offer an attractive combination of instant dividends, more readily available liquidity levels than may be offered by VCTs focusing on private company investees and the best of both worlds: existing maturing portfolios built up over many years, as well as promising new qualifying opportunities identified by the investment team.
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
Total
After investment, managers continue to monitor the progress of the companies they have chosen to invest in. Selling profitable investments can help the VCT achieve its aim of paying out regular tax-free dividends to investors.
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Mark Ward
Associate Director, BDO
Tapping growth with tax savings: EIS and VCT on AIM
T
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.
he Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) exist to help independent UK trading companies raise equity finance to fund growth and development. This is a vital source of funding for many companies and both can interact very effectively with AIM. In order to qualify for EIS or VCT status, investments must have objectives to grow and develop over the long term and a significant risk that there could be a loss of capital to the investor of an amount greater than the net return. AIM can offer both of these features. However, the EIS and VCTs are, broadly, aimed at early-stage companies, and most AIM listed companies won’t qualify, perhaps because they are too old, too big, carry on an “excluded activity” or may have already raised the maximum available under EIS and the Venture Capital Trusts Scheme. Some AIM companies do qualify though and if they do, there are substantial tax reliefs available, and these should not be overlooked. It is important to say straight away that EIS tax reliefs, including income tax relief, capital gains tax exemption and CGT deferral, will only be available if you subscribe for a new share issue – shares bought second hand on AIM will not qualify, as the EIS’s objective is to help companies directly raise equity finance. EIS is most likely to be available on a Company’s Initial Public Offering (IPO), and investors should not overlook pre-IPO share issues. While this is also the case with income tax relief claimed through VCTs, VCT investors are able to claim 100% CGT exemption on disposals of shares in VCTs acquired on the secondary market. The same applies to dividends. There are minimum holding periods for both EIS and VCT shares in order to successfully claim the tax reliefs - 3 years for EIS and 5 years for VCTs. This can be helpful in offsetting AIM’s reputation for heightened volatility, giving ample opportunity to ride out significant share price fluctuations. 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. This refers to the risk of an investment continuing indefinitely, to the extent that described exit routes cannot be achieved at either a gain or a loss. In this scenario the funds remain tied up indefinitely. For VCTs, the trust rather than each individual investor (as in EIS), owns the investee company shares. And there can be an additional potential layer of liquidity where the manager of the VCT offers a share buy-back programme. Many give investors this option as an exit route to investors by buying back their shares. Nevertheless, this is not guaranteed and is usually at a discount to the Net Asset Value (NAV) of the shares. The tax reliefs, are also useful buffers against total loss, although there are important differences to take into account when considering losses related to EIS and VCTs and their interactions with AIM: If a loss is incurred on AIM shares, that loss can generally be claimed against other gains of the same tax year or carried forward. However, if the shares are EIS qualifying shares, the loss can be set against income of the same or prior tax year – given that income tax rates are typically higher that CGT rates, this is normally beneficial. While the shares of VCTs are listed on the main market of the London Stock Exchange, the investee company shares will either be unlisted or AIM-quoted. Losses made on disposals of shares in VCTs cannot be used to offset gains made elsewhere when calculating an investor’s CGT liability. These are just some of the technicalities to be aware of when AIM, EIS are combined. Consequently, individuals should always take professional, personal, advice when considering investing under tax-advantaged schemes, from both their financial and tax advisers.
The tax reliefs, are useful buffers against total loss.
Blackfinch Investments Fundamental Asset Management Sarasin & Partners Stellar Asset Management TIME Investments Comparison Table
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Manager video content
www.blackfinch.com 01452 717070 enquiries@blackfinch.com
Dominique Butters
Executive Business Development Manager
blackfinch.com 01452 717070 enquiries@blackfinch.com
video content
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www.stellar-am.com 020 3195 3500 enquiries@stellar-am.com
www.fundamentalasset.com 01923 713890 enquiries@fundamentalasset.com
co-founder and portfolio manager
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Investment Director
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CHRIS COX
FUND MANAGER
time-investments.com 020 7391 4747 questions@time-investments.com
AIM’s VCT-qualifying companies can escape dividend tax rise
Blackfinch Investments Limited 2013 £643.4m/£66.7m (as at 21/02/2022) 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 company specialist with a proven track record. June 2016 ISA & non-ISA available & expected to qualify for BR Target is 20-40 equally weighted stocks N/A Income and growth (to qualify for up to 100% Business Relief) N/A 4 days (calculated as an average from the last 12 months). 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
Sarasin & Partners 1983 £21.0bn / £102.1m The Sarasin & Partners AIM Service provides investors with a discretionary portfolio of 20-30 UK smaller companies listed on AIM. Companies are selected for their strong growth and ESG characteristics and, under current legislation, are expected to qualify for Business Relief (BR) and thus be exempt from Inheritance Tax. January 2007 ISA and non-ISA eligible and expected to qualify for Business Relief 20-30 N/A - evergreen Long-term capital growth N/A Daily liquidity Yes £300,000 £100,000 0.0% 1.5% + VAT (assuming adviser acts agent-as-client) 0.0%
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
Stellar Asset Management 2008 c.£220m Asset Backed; c. £82m AIM High conviction portfolio of 25-40 well diversified stocks. Unique alpha generators include: dealing execution; growth & value exposure; unique portfolio design to increase robustness to a range of different economic outcomes; reduced volatility; growing dividend yield; strict risk control metrics. Model portfolio available on in-house platform or other leading platforms for optimal distribution. 2010 ISA and Non-ISA; BR qualifying 25-40 Evergreen; strategy capped at c. £250m (soft close £200m) to preserve performance integrity capital preservation, growth potential, growing dividend yield N/A 90% T+2, 10% T+5 historic 2.5%-3%; fees netted off income £40k or £20k ISA £20k 1% 1% + VAT 0.225% + VAT: 0.25% dealing
Unicorn Asset Management 2000 £1.5bn (In total) / £500m (on AIM) Evergreen January 2016 IHT and ISA 29 N/A The service aims to invest in a portfolio of 25-40 companies listed on the Alternative Investment Market (AIM), independently assessed as qualifying for Business Relief (BR). Dividend Income paid monthly (or reinvested) N/A Daily N £50,000 £20,000 (nil for platforms) 1.0%+VAT (current discount available, usually 2%) 1.25%+VAT Custodian Fee 0.25% / Dealing Fee 0.85%
Sarasin & Partners 1983 £19.9bn / £110m The Sarasin & Partners AIM Service provides investors with a discretionary portfolio of 20-30 UK smaller companies listed on AIM. Companies are selected for their strong growth and ESG characteristics and, under current legislation, are expected to qualify for Business Relief (BR) and thus be exempt from Inheritance Tax January 2007 ISA and non-ISA eligible and expected to qualify for Business Relief 20-30 N/A - evergreen Long-term capital growth N/A Daily liquidity Y £300,000 £100,000 0.0% 1.5% + VAT (assuming adviser acts agent-as-client) 0.0%
Manager name Year founded AUM (n total) AUM (on AIM) Description of Offer Launch Date Tax wrapper or relieF No. of holdings Target FundraiseR Investment Objective Target Annual Return (where stated) Liquidity (days to exit) Income (Y/N) Minimum Investment Minimum Increment Initial Fee AMC Other fees
TIME:AIM 2011 £4 billion (TIME group), £73 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. N £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
TIME Investments 2011 £4.5 billion (TIME group), £74 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
Fundamental Asset Management Ltd 2004 £150m/£140m (AIM) The Fundamental AIM IHT portfolio service invests in well-established, profitable and cash generative AIM shares, which are also growing strongly. Many also offer an attractive and growing dividend. These exciting, ambitious businesses offer excellent investment opportunities, combined with attractive Inheritance Tax planning tax planning benefits, and the opportunity to support the global businesses of the future. October 2004 ISA & non-ISA available and qualification for Business Relief 20-35, subject to portfolio size Core/Satellite weightings N/A – evergreen Capital growth with the added benefit of Business/Inheritance Tax relief N/A 5 days (normal market, subject to individual portfolio size) Yes, but fees netted off income £20,000 (on platform) £40,000 (direct - can be split across husband and wife ISA allowance) No minimum Nil (Wrap Platform) 1% (Direct - but capped at £2,000) 1% +VAT (Advised) For portfolios £1m+, fees on discussion No exit fees Wrap Platform = as per platform charges. Direct = max £50 per trade.
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Fundamental Asset Management Ltd 2004 £150m/£140m (AIM) The Fundamental AIM IHT portfolio service invests in well-established, profitable and cash generative AIM shares, which are also growing strongly. Many also offer an attractive and growing dividend. These exciting, ambitious businesses offer excellent investment opportunities, combined with attractive Inheritance Tax planning tax planning benefits, and the opportunity to support the global businesses of the future. October 2004 Business Relief 28 N/A – evergreen Capital growth with the added benefit of Business/Inheritance Tax relief N/A 5 days (normal market, subject to individual portfolio size) Yes, but fees netted off income £20,000 (on platform) £40,000 (direct - can be split across husband and wife ISA allowance) No minimum Nil (Wrap Platform) 1% (Direct - but capped at £2,000) 1% (Advised) For portfolios £1m+, fees on discussion No exit fees Wrap Platform = as per platform charges. Direct = max £50 per trade.
The Ukraine war: What’s next for AIM? (The lessons of history) AIM dominated European junior markets in 2021 – but is its lead unassailable? What the managers say
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The Ukraine war: What’s next for AIM? (The lessons of history)
In order to qualify for EIS or VCT, a company must generally: - Be unquoted although trading on AIM is allowed - Have gross assets valued at no more than £15 million before and £16 million immediately after fundraising (although it can continue to grow afterwards) - Be no more than seven years old (ten years for a knowledge-intensive company) - Have fewer than 250 full time equivalent employees (500 for a knowledge-intensive company) - Not be operating in excluded trades including dealing in land, investment activities, banking, insurance, hire purchase, money lending, legal and accounting services, property development, farming and market gardening, forestry, operating or managing hotels or residential care homes, coal production, steel production and shipbuilding, and all energy generation activities.
These are companies that undertake a significant amount of R&D and because of the longer term potential of their activities are allowed to be older (up to ten years), larger (with up to 499 employees) and receive more venture capital schemes (EIS, SEIS, VCT and SITR) funding (up to £5 million annually and £20 million in their lifetime) than other companies that otherwise qualify for venture capital schemes funding. The annual investment limit for individuals is also increased to £2 million for KICs, allowing up to £600,000 of income tax relief in a tax year
Russia’s invasion of Ukraine is arguably the most important geopolitical event since the fall of the Berlin Wall.
Russia’s invasion of Ukraine is arguably the most important geopolitical event since the fall of the Berlin Wall. With tensions ratcheting up between NATO allies and Russia, investors are left grappling with market uncertainty. In finance, ‘uncertainty’ refers to the difficulty of predicting outcomes because of limited or inexact knowledge. However, the immediate impact of geopolitical events on financial markets is well known and fairly predictable. As soon as disquieting noise wafts through markets, government bond yields fall, while the price of gold, and gold miners’ shares rise sharply, as does the oil price. Generally, the tensions would lower stock prices and boost returns from perceived safe haven assets. We know all this from past geopolitical events. History, indeed, has lessons for the market. We also know that geopolitical events have rarely left a deep scar on markets. Risk aversion around these events is quite temporary. Volatility would last for a while but, before long, stocks would bounce back. Therefore, in the long run, stock valuations are not damaged. Economic activity and financial markets are generally more affected by geopolitical threats than by actual events (such as the start of an invasion or imposition of sanctions). Threats tend to increase uncertainty and downside risks, while actual events tend to resolve uncertainty and prompt protective policy responses. This means that markets generally sell off into the build-up of geopolitical escalations but do rally after the invasion. Ultimately, these market movements are less of a risk to long-term investors than they are to short-term investors, such as traders and market timers. It’s worth noting, however, that nothing in the foregoing assessment is meant to trivialise the potential impact of a dangerous crisis that may well turn out to be a global catastrophe. Geo-political events are always worrying, particularly as any one of them could spiral into something much larger and more sinister. NATO’s showdown with Russia over Ukraine presents more peril than almost any other international conflict in our lifetimes.
Is AIM strong enough to withstand the storm?
Storms at sea are harrowing experiences. Towering walls of water, driven by powerful winds, slam into the ship. Sometimes, only the largest, sturdiest vessels can pull through. So it is with economic storms, where often only the hardiest players will survive the devastating blows. The Alternative Investment Market (AIM) emerged from 2020, a year of anxiety, uncertainty and turmoil for financial markets, to strongly outperform London’s main market, something highly unexpected in periods of economic downturn. The AIM All-Share index rose 22% between 01 February 2020 and 31 January 2021, while the FTSE All-Share Index fell 10%.
Buoyed by its large exposure to some of the economy’s best-performing sectors, such as technology, London’s junior market marched through 2021 with gusto. It was its biggest year for capital raising since 2007, according to London Stock Exchange (LSE) data. “AIM, with over £9.5 billion raised in IPO and follow-on capital accounting for 53% of all IPO and FO capital raised on Europe’s Growth Markets. AIM also saw the highest deal volume, with 363 deals, 1.5x more than the next most active exchange,” wrote Lucy Webber, research & analytics associate for primary markets at LSE. The 66 companies that listed on AIM in 2021 raised over £3.2 billion, the most active year for AIM IPOs since 2014. “Three of the top 10 largest IPOs since launch on AIM (by amount raised) were admitted in 2021 – Life Science REIT plc (£350m), Revolution Beaty Group plc (£300m) and Victorian Plumbing Group Plc (£298m, the largest IPO ever in AIM’s history by market cap),” Webber wrote. To cap that stellar performance, AIM managed to bag three of the top 10 largest IPOs (by amount raised) since its launch. These were Life Science REIT plc (£350m), Revolution Beaty Group plc (£300m) and Victorian Plumbing Group Plc (£298m, the largest IPO ever in AIM’s history by market cap).
And there’s more, wrote Webber. “The record for the largest US company to list on AIM since launch was broken twice in 2021, first by tinyBuild and followed by Devolver Digital, reinforcing AIMs status as the leading European Growth Market.” Indeed, AIM has developed into the world's most successful and established market for dynamic high-growth companies. The market is probably in as good a position as any to withstand a potential economic downturn.
Before Russian tanks began rolling into Ukraine, many investors were preoccupied with too many active risks (e.g., rising interest rates, high inflation, tighter monetary policy, and the pandemic) to be concerned with something that might not happen. Now that Russian troops that were amassed on Ukraine's border are fighting inside the country, some investors might be tempted to overreact and sell their investments. However, panic is the biggest enemy in this situation. Advisers must make an effort to convince investors to avoid the serious investing mistakes that come from short-term thinking during a sell-off. Whether it is panic selling, hiding out in cash, or trading frantically during volatile markets, investors tend to make several mistakes that can hurt them long-term. It is true that the invasion has increased volatility in the short term, with market uncertain about the impact of rising energy prices on inflation—which is already at 30-year highs in the UK. But history tells us that while the initial market sell-off can be sharp, equity markets are typically higher three, six and 12 months later. The rebound is partly due to savvy investors taking advantage of oversold levels brought on by extremely bearish sentiment. Indeed, the momentary fall in stock prices does present potential buying opportunities for long-term investors. Here’s an example. The day that the Iraq war began in 2003 proved an incredibly good time to invest, as it marked the end of the previous bear market and the start of four years of almost uninterrupted rising share prices. If you had held off investing at the time, you would have missed out on the tremendous returns that equity investors earned for years afterwards. The rapid market movements we see when the news headlines are dominated by geopolitics are a knee-jerk reaction, with sharp price movements that subsequently reverse, leaving the investor who tried to follow such trends holding the bag.
Market response: letting cooler heads prevail
Geopolitical risk analysis should play a significant role in asset allocation decisions. Investors and their advisers should explore the different ways geopolitical developments can be leveraged. Agile portfolios with appropriate risk tolerance can take advantage of shifts—temporary or structural—brought on by geopolitical risk. Investors looking to reposition their portfolios in the face of high inflation and geopolitical pressures should consider UK’s lucrative venture capital schemes. Depending on the investor’s unique circumstances this can be the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS), Venture Capital Trust (VCT). In return for investing in small, promising companies, investors can gain access to significant tax reliefs. Because AIM is not considered a ‘recognised exchange,’ AIM-quoted companies can raise money under these schemes as long as they satisfy the other conditions. Business Relief (BR) is another scheme that can offer significant tax relief. It allows you to claim inheritance tax relief on business assets, including shares in qualifying businesses, provided you own them for at least two years before your death.
Building portfolio resilience
History shows that broader spread and greater diversity protects capital better when unexpected turbulence appears. The emphasis should be on diversifying, staying invested while buying on dips where appropriate, and seeking out companies that can grow earnings regardless of rising rates and inflation. Here again, the aforementioned venture capital schemes—because they invest in companies spread across a range of different industries and sectors—can provide a measure of diversification, in addition to growth and tax relief.
Diversification
Over the past 30 years, three major conflicts, the Gulf War in 1990, the 9/11 terrorist attack and the following Iraq war in 2003, shook financial markets significantly. Evidence from these events suggests that investors often panic during times of geopolitical noise. The lesson is that, while investors should be prepared for additional volatility, history does seem to suggest that stock declines associated with geopolitical fears are generally a temporary setback and an opportunity to buy at discounted prices. The trick, however, is that investors need to participate on the upside as well as to mitigate the downside. This means that investors and their advisers need to modify their portfolios to be more diversified and resilient. The goal here is to capitalise on shifting market opportunities while managing risk and mitigating volatility. To maintain exposure to multiple uncorrelated sources of return in order to deliver a steady risk-return performance. For most investors, professional financial advice and expert investment management have never been more important.
Professional financial advice: more needed now than ever
Economic activity and financial markets are generally more affected by geopolitical threats than by actual events.
AIM maintains its position as the European growth market capital of choice
In 2021, AIM accounted for 53% of all IPO and FO capital raised on Europe’s Growth Markets, topping the league table for capi tal raised, through£3.2bn in IPOs and £6.3bn in FOs AIM also saw the highest deal volume, with 363 deals, 1.5x more than the next most active exchange (First North) High profile listings such as Victorian Plumbing, the largest IPO ever in AIM’s history by market cap, and Devolver and tinyBuild , the largest everAmerican IPOs on AIM, reinforced its status as the leading European Growth Market. Three of the top 10 largest IPOs since launch on AIM (by amount raised) were admitted in 2021 Life Science REIT plc (6th at £3 50m), RevolutionBeaty Group plc (8th at £300m) and Victorian Plumbing Group Plc (9th at £298m).
Turnover reached record highs in 2021
Turnover Value (£m)
2001
Turnover Vale (£m)
Total Number of Trades
120,000
80,000
60,000
40,000
20,000
Total no. of Trades(millinos)
2003
2004
2005
2006
2007
2008
2009
15
5
0
2002
FTSE AIM All-Share exhibits a strong bounce back since Covid lows in 2020
1,400
1,200
-
400
200
800
600
Inflationary pressures are likely to present hurdles for AIM-listed companies to overcome in 2022, along with opportunities to showcase attractive products and services with strong pricing power.
Lawrence Campin, Assistant Investment Manager, Blackfinch Investments
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Daniel Hutson
Partner UHY Hacker Young
AIM dominated European junior markets in 2021-but is its lead unassailable?
Fund managers have made a short-term gain from accepting a takeover premium for those UK tech stocks but potentially at the expense of better long-term returns.
he last 12 months have seen a fairly intensive debate over how successful London is in competing for IPOs with rivals such as New York and Hong Kong. Whilst that debate rages, it does at least look like AIM (the London Stock Exchange’s junior market) is outperforming its European rivals in terms of fund raisings for growth companies. Just how well is AIM performing relative to other European markets and are there any areas where AIM’s performance as a home for growth companies could improve? Data from the London Stock Exchange shows that UK’s AIM market was responsible for 53% of all the funds raised on European growth stock markets last year. £9.5bn was raised on the London based exchange through both IPOs and secondary fundraisings compared to £18bn on Europe growth markets as a whole. AIM’s closest competitor was First North Stockholm, which saw £5.3bn raised in 2021, just 56% of the UK’s total. However, First North Stockholm did see a higher total number of actual IPOs than AIM last year, 75 IPOs vs 66 on AIM. The First North Stockholm Exchange has been particularly successful in attracting smaller technology IPOs over the last 12 months. However, Stockholm is one of very few credible challengers to AIM’s dominance. By comparison, the Paris Alternext market raised just 5% of the European total with £827m, and the Borsa Italiana raised only 4% with £740m. The last decade, AIM has solidified its reputation as the best junior stock market to float on in Europe. This is partly due to a programme of improved regulations, with companies on the index having to comply with a corporate governance code aimed at providing greater investor protection. AIM’s largest fundraisers last year were: £350m raised by scientific land trust Life Sciences REIT £306m raised by vegan cosmetics brand Revolution Beauty Group £300m raised by identity data provider GB Group AIM’s improved reputation, which has attracted more institutional investors to the market, has also helped increase its liquidity, with the average value of daily trading in AIM shares surging 47% to over £480,000 in 2020/21, from around £329,000 the year before. As liquidity is a key metric from both investors and the companies listing, investment-grade companies are likely to be more encouraged to list on a market with higher liquidity. Adding more of these companies has helped create a virtuous circle - improving AIM’s reputation as a highly credible index for institutional investors. However, within certain sectors such as technology companies, AIM still faces very strong competition from other bourses. This is an area the LSE and HM Treasury will want to keep under review. Critics have highlighted that just a small proportion of companies on AIM are from the technology sector. The London Stock Exchange in general has tried to become more attractive to technology companies. The LSE has seen progress to some extent, with tech IPOs in the UK last year raising a total of £6.6bn – more than double 2020’s figure. Perhaps UK-based fund managers have been too willing to accept bid offers for higher growth tech companies. Those takeovers have stripped the LSE of many of its tech growth companies. Fund managers have made a short-term gain from accepting a takeover premium for those UK tech stocks but potentially at the expense of better long-term returns. But is the AIM market really at such a big disadvantage? It is still packed with tech stars and the recent downturn in the value of tech shares globally has raised the question of whether a stock market really should be too overly reliant on one sector, albeit a very important sector. After the recent correction, investors are approaching the tech sector with a healthier attitude. They no longer expect untroubled exponential growth from the tech sector. The rotation from growth stocks, into value stocks such as mining, oil & gas plays, shows the value of having a stock market that is properly diversified. AIM already has core strengths in mining and oil & gas. These sectors have performed relatively well during the recent market downturn. If concerns over inflation remain in place for the next six months, then we are very likely to see a rush in IPOs from those sectors. AIM’s reputation for IPOs and secondary fundraising within those sectors, should protect from the turbulence of the first half of this year and help sustain London’s reputation as the centre for Europe’s equity capital markets.
The last decade, AIM has solidified its reputation as the best junior stock market to float on in Europe.
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The pandemic has shown the importance of having a well-diversified portfolio. What role do you see alternative assets playing in portfolio management in coming years as a means of better portfolio diversification?
2022 is the third full year of COVID, and companies have now built frameworks on how to adapt to any further pandemic-related developments. Inflation, particularly the impact on supply chains, monetary policy decisions and the energy market, is something to keep an eye on. The ongoing Ukraine conflict will also affect AIM in 2022.
With 2021 now in the rear-view mirror, many investors are starting to predict what 2022 has in store for the alternative investments market (AIM). What is your prognosis for the London junior market? (What factors will drive performance?)
Exposure to multiple sectors can spread the risk of events such as a pandemic, as well as selecting stocks of varying sizes. AIM can provide diversification to a client’s overall portfolio. We see particular benefit in the small- to medium-cap range, with this size of stock not typically included in major indices.
So how are the managers feeling about the BR market and overall investment market conditions? Here's what they have to say.
The funding gap for high-potential entrepreneurial businesses persists. What do you hope to see happen to help bridge this gap for high-potential companies?
Many AIM-listed companies have shown adaptability and resilience throughout the challenging environment. We expect this experience will be viewed positively by institutions and investors, and help guide their decision-making on where to deploy capital. While the funding gap is still present, we expect AIM to remain an attractive proposition for risk capital from here.
Lawrence Campin
Assistant Investment Manager Blackfinch Investments
There are a number of factors that support positive performance in 2022, not least the likely acceleration in earnings growth from a subdued 2021 for most of the higher quality growth opportunities. However, in the short term it is challenging to look beyond the Russia-Ukraine crisis and the knock-on impact for inflation and global growth.
AIM is, and always has been, a way to enhance the growth prospects of a UK equity portfolio. The number of UK equity funds that now invest in AIM is a strong sign of its role in portfolio diversification. We expect this trend to continue, supported by further improvements in corporate governance across the market.
The availability of capital to incoming AIM companies varies with market conditions, and there have been times when it has been scarce and prevented IPOs from completing. The UK investor landscape remains sceptical of growth stocks, especially when compared to the US market, and we hope that this bias falls away over time.
The two I’s of inflation and interest rate will have an outsized impact on AIM returns. We feel that interest rate expectations have overshot on the upside, causing higher quality, growth stocks to overshoot on the downside. The headline index number will benefit from its commodities exposures, which have been a deadweight on the index for over 10 years.
Some alternative assets undoubtedly will offer diversification benefits but to identify them will require skilled due diligence. We fear many will be canards, long on rhetoric, short on actual performance. Private equity may not be a panacea given many apply high levels of leverage and require long lockups; both facets being the opposite of what you want in a rising interest rate environment.
Education has a key part to play to convey the multitude of funding options available to such companies, while a more joined up way of thinking about risk and returns within institutions would also be helpful. The default view across many that such companies are risky, so best avoided, is lazy and outdated, especially given their potential to deliver outsized returns.
2021 was the first year since 2014 that IPOs on AIM had exceeded cancellations. While the share prices of many of AIM’s newcomers have struggled to make any progress in the short term, we very much hope the influx will encourage other fast-growing companies to join. Several of the newcomers are candidates for our AIM portfolios.
The outstanding performance of AIM in 2020, relative to the main UK stock market, highlighted the benefit of diversification better than anything - who would have expected the AIM index to have outperformed the main UK market by 35% in a pandemic! AIM has also become the UK market of choice for fast-growing technology and alternative energy stocks, providing the ideal platform for these to grow.
It remains a very costly, time-consuming and onerous process to list on AIM, little different in many respects to listing on the main stock market. This may detract many small entrepreneurial companies from considering joining. We would ideally like to see the standardisation of some elements of the admission process, which will help lower costs and speed things up.
On the one hand, we expect increased volatility and a reduction in liquidity as financial conditions tighten. We have already seen this as central banks have begun to increase interest rates and reduce the size of their balance sheets to combat high levels of inflation. On the other hand, economic growth is strong and is expected to continue to improve over the course of year which should be beneficial to company earnings.
Diversification has always and will continue to be one of the most important considerations when building and risk managing portfolios. Recently we have seen the correlation between traditional asset classes increase which means that the benefit of diversification has diminished. Alternatives, that have lower levels of correlation to traditional asset classes are therefore expected to be of increasing importance to portfolios going forwards.
We have seen many new and existing companies raise money on both the public and private markets recently, but many have not been so lucky. One potential solution for this could be the democratisation of early stage investing using technology and platforms such as Primary Bid to facilitate it.
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 4: Industry Analysis
Define some of the key events likely to impact AIM in the near future
Covered in Section 6: What’s on the Horizon
Evaluate the key fees and charges applied by AIM managers
Covered in Section 3: Considerations for Investment
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CPD and feedback
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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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