alternative investment market
Industry Update - NOVEMBER 2021
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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opening statement
Photography by Interview by
Covid changed context for BR
02
021 continues to be a year of growth and resilience. As businesses around the world continue to navigate the economic impact of the pandemic, capital markets have been a powerful tool to support recovery and provide innovative financing solutions and routes to market for growing businesses from the UK and beyond. Continued stability in the capital markets has enabled more companies to make their debut on the public markets, with the UK recording its biggest year for IPOs since 2014. AIM continues to play a vital role in supporting the UK economy, by connecting companies with long-term capital to drive growth, innovation and job creation. During the first nine months of 2021, almost £7 billion in IPO and follow-on capital has been raised on AIM, the highest total for this period since 2007. AIM has also accounted for 52% of all equity capital raised on Europe’s growth markets this year, demonstrating how it continues to be a world leader. Businesses from across the UK have joined AIM in 2021 to finance their future growth, including Plymouth-based CMO Group, Kent -based Revolution Beauty Group, Oxfordshire-based Saietta Group and Liverpool-based Victorian Plumbing, which joined AIM with the largest ever market capitalisation at admission (c. £850 million). As well as the strong pipeline of UK companies, international business continues to be drawn to AIM. tinyBuild, the largest ever US IPO on AIM, is one of seven North American businesses that have joined AIM this year, showcasing the investor support the market attracts for both international and domestic companies. London also continues to provide an ecosystem where founder-led businesses can thrive, with 20 founder-led businesses joining London Stock Exchange’s markets in 2021. These include Microlise Group, Big Technologies, BiVictriX Therapeutics and Made Tech Group, all admitted to AIM in the third quarter of 2021. In total, 43 new companies have been admitted to AIM so far this year, raising a combined £2.2 billion, the highest volume and activity since 2016. Microlise Group is also one of four AIM companies so far this year that has qualified for the London Stock Exchange’s Green Economy Mark at admission. The Mark recognises companies and funds that generate over 50% of their revenue from green products and services. With a growing number of businesses contributing to the green economy and shifting their operations towards low-carbon business models, support from public capital markets is crucial in mobilising sustainable finance efficiently and driving the UK towards its net-zero goals. While confidence in the IPO market has been growing over the past year, a key benefit of public markets during unprecedented market conditions in 2020 was the ability for companies to raise further capital efficiently, not only to strengthen balance sheets, but also to fund innovation and growth. This has continued into 2021, with more than 200 follow-on transactions by AIM companies, raising a combined £4.7 billion, an increase of 31% compared to the same period in 2020. This underlines the long-term nature of support provided by investors to companies on the market. The London Stock Exchange remains fully committed to providing companies with access to long-term patient capital, supporting their contributions to innovation, economic growth and job creation. We look forward to ensuring that AIM continues to meet the evolving needs of companies and investors, and continues to be the place for growth companies to achieve their ambitions.
name surname
2
- 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? More AIM Positivity 2021 AIM Listing What's Driving the Market? The Autumn Budget 'AIM' for success, not perfection Focus Drives Pandemic Return Small is Beautiful Combatting Climate Change Health is Wealth What the Managers Say
2. market update
Market Composition Fees and Charges
3. Considerations For Investment
Amati Global Blackfinch Blankstone Sington Close Brothers Hawksmoor investment Puma investments Sarasin & Partners Stellar investment TIME investments Unicorn Comparison Table
5. managers in focus
More AIM-focused EIS Future Market Changes Considered What The Managers Say
6. what's on the horizon
Learning Objectives CPD and Feedback About Intelligent Partnership Disclamer
7. further learning
Are Hostile Takeovers A Danger To AIM? AIM In FCA’s Proposals
Marcus stuttard
head of aim & uk primary markets, london stock exchange
2. MARKET UPDATE
3. CONSIDERATIONS FOR INVESTMENT
4. INDUSTRY ANALYSIS
5. MANAGERS IN FOCUS
6. WHAT'S ON THE HORIZON
7. FURTHER LEARNING
Opening Statement Update Overview
We couldn’t do this without the help and support of a number of third parties who have contributed to writing this update. Their contributions range from inputting into the scope, sharing data, giving us their insights on the market, providing copy, and peer reviewing drafts. So, a big thanks to: Marcus Stuttard of the London Stock Exchange, Neil Pearson of Mills & Reeve, Anna Macdonald and Paul Jourdan of Amati Global Investors, Lawrence Campin and Van Hoang of Blackfinch Investments, Neil Blankstone of Blankstone Sington, Sam Barton of Close Brothers Asset Management, Ian Woolley of Hawksmoor Investment Management, Dr Stuart Rollason, Andrew Derrington and Joseph Cornwall of Puma Investments, Chris Cox and Simon Housden of TIME Investments, Hugo Wood of Sarasin & Partners, Stephen English and John Fearon of Stellar Asset Management, and Alex Game and Max Ormiston of Unicorn Asset Management. Their input is invaluable, but needless to say any errors or omissions are down to us. 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 Amati Global Investors, Blackfinch Investments, Blankstone Sington, Close Brothers Asset Management, Hawksmoor Investment Management, Puma Investments, Sarasin & Partners, Stellar Asset Management, TIME Investments, and Unicorn Asset Management.
update overview
learning objectives for cpd accreditation
Identify the main developments and news 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 how AIM fits into the FCA’s current regulatory focus 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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Acknowledgements and thanks
Find out more at Managers in focus
Readers can claim up to 2 hours’ structured CPD. By the end of the update readers will be able to:
increase in new issue funding 2021 ytd vs 2020 ytd
5x
The AIM All-share’s highest daily close of the year to date and since March 2001
1314
Victorian Plumbing Group’s 2021 AIM listing was the market’s biggest ever
£850 million market cap
raised by AIM companies to 30 September 2021
£5.7 billion
£
Increase in value traded on AIM All-share 2021 ytd vs 2020 ytd
20%
key findings
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
Foreword Opening Statement Update Overview Key Findings
What has the market been doing? More AIM positivity 2021 AIM lisitng What's driving the market? The Autumn Budget The benefits of Building an AIM portfolio Small is Beautiful Combatting climate change Health is wealth What the Managers say
Market Structure Fees and Charges
Amati Global Blackfinch Blankstone Sington Close Brothers Hawksmoor investment Puma investments Sarasin & Partners Stella investment TIME investments Unicorn Comparison Table
More AIM-focused EIS Future markets changes considered What the managers say
Learning Objectives CPD and Feedback About Intelligent Partnership
Are hostile takeovers a daneger to AIM? AIM In FCA’s proposals
increase in new issue funding ytd vs 2020 ytd
WHAT HAS THE MARKET BEEN DOING? MORE AIM POSITIVITY 2021 AIM LISTINGS WHAT’S DRIVING THE MARKET? The Autumn Budget AIM FOR SUCCESS NOT FOR PERFECTION FOCUS DRIVES PANDEMIC RETURN Small is Beautiful Companies' role in combatting climate change Health is wealth What the Managers say
WHAT HAS THE MARKET BEEN DOING?
05
AIM has established itself as the market of choice for small, fast-growing businesses and despite, or possibly because of Covid-19 caused difficulties, statistics report 800,000 new firms incorporated in 2020 placing us in a boom-time of young, entrepreneurial companies that are the future of the market. Last year small firms received a record breaking £8.8bn worth of equity investment. That appetite remains strong, with survey results reported in September showing that 16% of investors are looking to back startups and small firms in 2021. According to London Stock Exchange’s (LSE) Secondary Market factsheet for September 2021, AIM has seen a 21% year to date jump in the number of trades and a 20% year to date increase in the value traded versus 2020. Considering the FTSE main markets have seen 17% and 11% drops in these figures over the same period, there is certainly evidence here of the sense of opportunity AIM currently radiates.
Fuel for AIM’s growth prospects
Performance packs a punch
The performance of the AIM All-share index since 18 March 2020 low of 589 has been decidedly positive, reaching its previous 2020 high of 975 by the close of 8 October 2020, breaking 1000 by mid November 2020 and ending the year at 1157, the highest daily close of 2020 and since August 2007. By the end of the second quarter of 2021, it had climbed to 1248 although it had shrunk back a little by the end of the third quarter at 1243. Q2 21 also saw the AIM All Share reach more than double its pandemic low in March 2020. The 2021 high to the end of October was 1314 in the first week of September, the highest daily close since March 2001. Supply chain disruption and associated uncertainties knocked investor confidence later in the month and the index had dropped to 1223 by the end of October. For the first three quarters of 2021 the FTSE AIM All-Share index showed a very respectable year to date total return of 8.2%, although the FTSE All-Share posted figures of 13.6% for the same period.
Source: London Stock Exchange, FTSE Index Records and Daily Closing Values, 1 October 2021
But the FTSE All share’s three-and-five-year total returns of 3.1% and 5.4% respectively are eclipsed by the FTSE AIM All share’s 5.4% and 10% respectively, giving significant credence to the argument that a longer term hold can ride out volatility. Having said that, in the last year, it seems that the volatility associated with smaller listed companies has been lower than that seen among larger ones. Perhaps this points to greater confidence in the more nimble and innovative small market constituents as they proved their value during the pandemic upheaval? Nevertheless, the overall AIM index certainly hides both big growth and big loss stories within this stock pickers market. We take a look at some of this year’s big winners on AIM later in this Update.
Volatility bears fruit in the longer term
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
As a mechanism for feeding growth, AIM has enjoyed a successful year to date. To 30 September AIM companies raised over £5.7 billion, with almost £1.2 billion of that attributed to new issues. In the same period in 2020, just under £4 billion was raised with almost £227 million attributed to new issues. This is an overall funding uptick of over 40% on the same period last year with new issue funding showing a 5x increase.
Fundraising flying high
OVERALL FUNDING (£M) AND NEW ISSUE FUNDING (£M)
Source: LSE
£2.3bn was raised on AIM in Q2 2021, the highest fundraising in a quarter since Q4 2017 and in Q3 of 2021, the newly admitted companies raised £468 million in new money, an increase of 353% compared to the same period last year. Meanwhile existing AIM companies raised £991.51 million in further issues during the third quarter, a rise of 9% versus the same period last year. In terms of sectors, it is no surprise that Life Sciences and Software Services have garnered substantial interest on AIM this year, with Healthcare & Pharma the largest sector on AIM in Q2 21 (£0.8 billion raised), continuing the strong performance of the sector since the pandemic. Other significant sectors included Industrials (£310 million raised in Q2 2021) and Financial Services (£323 million). Industrials activity was spread across a number of companies (and a reflection of demand for the sector) but Financial Services was driven by a few significant fundraises including Draper Espirit Plc (£111 million, for further investments) and Mattioli Woods Plc (£94 million, for two acquisitions).
Total value of funds raised by sector for AIM across last 3 years
Source: BDO
FTSE AIM ALL-SHARE INDEX OCTOBER 1997 - OCTOBER 2021
Q3 18 Q4 18 Q1 19 Q2 19 Q3 19 Q4 19 Q1 20 Q2 20 Q3 20 Q4 20 Q1 21 Q2 21
Millions £2,400 £2,200 £2,000 £1,800 £1,600 £1,400 £,1200 £,1000 £800 £600 £400 £200 £0
700 650 600 550 500 450 400 350 300 250 200 150 100 50 0
Total Transactions (RHS)
Healthcare & Pharma
Natural Resources & Renewables
Industrials
Leisure & Hospitality
Financial Services (general)
Other
3,000,00 2,000,00 1,000,00 0.00
01/01/2000 01/01/2005 01/01/2010 01/01/2015 01/01/2020
FTSE AIM ALL-SHARE
- Hugo Wood, Portfolio Manager, Sarasin & Partners
The AIM market has continued to grind higher in the year to date, supported by healthy IPO activity and the gradual reopening of global economies.
£5,000 £4,000 £3,000 £2,000 £1,000 0
2017
2018
2020
2019
2021
Overall Funding (£m)
New Issue Funding (£m)
MORE AIM POSITIVITY
06
According to EY, global IPO volumes rose 87% and proceeds rose 99% year-on-year in the third quarter of 2021. A key driver was the rebound of the IPO markets in Europe, Middle East, India and Africa (EMEIA). IPO activity in the AIM market has mirrored the strong EMEIA showing for 2021, with 43 IPOs in the year to 30 September. Breaking down the figures, there were 20 new admissions in Q2, including 14 IPOs and the good news continued in Q3 with IPO numbers boosted by 15 in July alone, giving a total of 20 IPOs in that quarter, the highest quarterly number since Q4 of 2014. In the whole of 2020, there were just 16 AIM IPOs and in 2019, arguably a more normal year than 2020, only 10. In fact, the third quarter of 2021 is the fifth consecutive quarter of rising IPO numbers. However, in terms of boosting the number of firms listed on AIM and available for investment, there has actually been a slight decrease, since 2021 has seen 44 cancellations, albeit nine have been reverse takeovers, two have been transfers to the main market and 17 have been acquisitions and mergers. At the end of September 2019, there had been 51 cancellations, pointing to potential reduction in the number of companies leaving the market. This will be pleasing to Business Relief, Enterprise Investment Scheme and Venture Capital Trust managers with a focus on AIM. They look for a broad universe of potential investee companies offering good investment opportunities and decent levels of diversification. Follow-on fundraising by existing issuers saw a drop in Q3 with 389 further issues compared to 516 in Q3 2020 and 542 in Q2 2021, 650 in Q1 2021 and 576 in Q4 2020. Nevertheless, the 2021 year to date total of 1575 is the highest since 2017. These numbers still offer plenty of scope for potential investee opportunities to be brought to the attention of Business Relief, Venture Capital Trust and Enterprise Investment Scheme investment managers and their investors.
According to Link Group’s September 2021 AIM Dividend Monitor, AIM dividend payments are on the up. Ian Stokes, managing director of corporate markets EMEA at Link Group, said: "We are confident AIM’s dividends can regain their previous highs by some time in 2023, almost two years sooner than our expectation for the main market.” This was following the announcement of a £265 million jump in underlying dividends (which exclude one-off special dividends) paid by AIM firms in Q2 this year, a 56.6% increase in the three months to June. AIM payouts fell by over 40%, marginally less than the main market, between April 2020 and March 2021 when Covid-19 disrupted markets and businesses. This is despite what Stokes called the greater vulnerability of AIM companies to economic disruption than their multi-national counterparts as a result of lower levels of diversification and more limited access to funding. Consequently, “they must move quickly to preserve cash to ensure they can ride out a brewing storm”, Stokes said. Two thirds of AIM companies that normally pay dividends cut or cancelled these payments during the pandemic, a similar figure to the main market. AIM dividends also fell back to a level last seen in 2016, but the wider market investor payouts declined to 2011 levels. 2021 will see AIM’s payouts back to a level last reached in late 2018. The forecast for the second half of 2021 is for full-year 2021 payouts to rise 21.9% to £918 million. H2 dividends are expected to rise 24.2% to £519 million including special dividends. Stokes commented that, “Even though relatively few AIM companies habitually pay dividends, those that do tend to grow them faster than the main market.” This is amply demonstrated by Link’s expectation that a small contribution to the increasing dividend payments in 2021 will come from newcomers to the market.
IPOs hitting the heights and follow-on funding highest for four years
Dividends getting back up to speed
Source: Link Group AIM Dividend Monitor, September 2021
- AIM Dividend Monitor, Link Group, September 2021
The strong performance reflects the miraculously early rollout of vaccines that has boosted corporate confidence, and the successful policy response in terms of economic support. But it is also a testament to the creative power of many AIM companies to adapt their operations through such unprecedented disruption.
Every sector saw higher dividends in Q2 2021 and among the companies making significant payouts in the first half were back-office outsourcing services provider iEnergizer, which paid AIM’s largest ever special dividend of £94 million, RWS Holdings, an intellectual property services firm with £28.2 million payouts and housebuilder Watkin Jones, a dividend payer of £25.5 million. Although Link’s forecast for AIM dividends has risen, share prices have recovered more quickly, so the prospective yield for the next twelve months has dropped by a small amount, from 1.1% this time last year to 0.8%.
Of course, dividend yield is now vulnerable to further erosion thanks to the recently announced increase to dividend tax. The 1.25% increase will apply from 1 April 2022, taking rates to: 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers. The £2,000 dividend allowance will remain. But AIM is home to Venture Capital Trust (VCT) qualifying companies, although it is important to remember that not all AIM companies will meet the eligibility criteria. Those that do offer investors tax-free dividends, as well as 30% upfront income tax relief and tax-free gains on investments of up to £200,000 per year. There are already reports of investors surging into VCTs ahead of the implementation of the dividend tax rise and the expert VCT AIM stock pickers who already direct a large portion of the £700 million VCTs raise annually into AIM, could well be upping that figure very soon.
AIM's VCT-qualifying companies can escape dividend tax rise
AIM DIVIDENDS 2012-2022
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021e 2022e
Millions £1400 £1200 £1000 £800 £600 £400 £200 £0
Regular Dividends
Special Dividends
- Van Hoang, Investment manager, Blackfinch Investments
The clearer market environment post-Brexit, as well as a tighter grip on the pandemic, creates an outlook conducive to increased listings on AIM.
07
2021 AIM LISTINGS
Unlike earlier in the life of AIM, in the last decade, it has become home to some of the UK’s largest household brands including ASOS and Fever Tree Drinks. Despite AIM listed companies numbering more than 350 higher in December 2010 versus September 2021, there were 28 companies with a market value of over £1 billion in September 2021 compared to only nine in December 2010. What’s more, that trend is repeated in the £500-1000 million range, the £250-500 million range and the £100-250 million range, resulting in a much higher percentage of higher value constituents. In fact, at the end of Q3 2021, 299 companies valued at over £100 million represented almost 90% of AIM constituents. At the end of Q4 2010, there were more than a third less companies of this value making up just over 70% of the overall market. These types of successful constituents have driven a trend towards higher value companies listing on the market. In turn, this has pushed up the average market capitalisation of AIM listed companies to around £178 million. This tends to signal greater financial stability among a greater proportion of AIM companies, but it does not necessarily point to a lack of growth ambitions. It also reaffirms the attractiveness of the market for larger players and potentially extends the choice of very well capitalised and stable investees for Business Relief managers in particular who are looking to place allocations of portions of hard-earned life-savings into AIM listed firms.
AIM has been called the place to find tomorrow’s winners and that very much includes smaller companies that listed this year. While they may not yet have a long-term track record and be without the financial muscle of companies like Boohoo Group PLC and Hutchmed (China) Limited, they do have huge possibilities. Take Nightcap PLC, a chain of bars which listed in January, raised £4 million, with a market cap of £14.2 million which had jumped to £33 million and seen an 80% uplift in its share price by 12 October. Then there is specialist life sciences group focused on exploiting intellectual property in the field of gene therapies and vaccines, 4basebio UK Societas. It listed in February with a £18.17 million market cap which had risen to £87.45 million by 12 October. In the same period, its share price soared from 118p to 700p. That is a meteoric rise of 593%.
The big winners aren’t just the big constituents
August saw the anniversary of rules which allowed AIM shares to be held in stocks and shares ISAs for the first time. It has been estimated that up to half a billion pounds a year is now flowing into AIM listed companies through ISAs that are offered by specialist investment management companies to combine 100% IHT relief (thanks to the Business Relief qualification of many AIM companies) with 100% income tax and CGT relief available through the ISA wrapper. As the average size of AIM companies has increased, they have arguably become more investible for the older investors seeking IHT mitigation with some measure of security for their funds. The number of subscribers for stocks and shares ISAs grew by 300,000 to just over 2.7 million from 2019 to 2020. While cash ISA subscribers went up by 1.8 million to 13 million, even the minimal 0.65% inflation rate experienced in that period cost cash ISAs savers £540 million as the very low returns, averaging less than 0.5%, were outstripped by inflation. That said, HMRC statistics show that the market value of stocks and shares ISAs dropped by 9% between the 2018/19 and 2019/20 tax years, after Covid-19 shocks caused steep declines in markets. For stocks and shares investors, though, those losses have been recoverable as markets bounced back, with AIM having a particularly vigorous rebound.
The ISA boom and AIM shares
Greater weighting towards higher market caps
Source:London Stock Exchange
2021 has certainly seen a number of AIM listings at relatively high values including Victorian Plumbing Group’s Q2 IPO. The online retailer of bathroom products and accessories was the subject of the market’s biggest ever listing raising £298 million, with a market capitalisation of £850 million. At the time, Mark Radcliffe, founder and CEO, said: “Today is a landmark day in the history of Victorian Plumbing. The successful completion of our IPO and admission to AIM is an exciting next step on our growth journey.” Revolution Beauty Group, a global mass beauty and personal care business, raised £300 million upon listing in Q3 with a market capitalisation of £495 million. Its CEO, Adam Minto attested to the relative youth of the company and future intentions: “We began eight years ago to start a revolution in beauty and in order to ensure high quality cosmetics and skincare are affordable for everyone. There remains a considerable opportunity and we are now in the best possible position to broaden our global reach and deliver against our significant growth prospects.” Big Technologies PLC also joined the market in Q3. The UK-based, remote people monitoring technology company raised gross proceeds in excess of £200 million and a market capitalisation of £577 million. Other big IPOs in Q3 included Peel Hunt (mid- and small-cap specialist) with a raise of £112 million and market cap of £280 million, Lendinvest (an asset manager for property finance) with a raise of £40 million and market cap of £256 million and Made Tech Group, with a raise of £15 million and market cap of £200 million. It is worth noting that much of the strong performance of the overall AIM market in recent years can be attributed to a relatively small number of the larger companies. For example, in the five years to September 2021, RWS Holdings PLC, which has a market cap of just under £2.5 billion, posted a total shareholder return of 192%. Nevertheless, the opportunities to get in on the ground floor of the potentially explosive growth of much smaller companies is still attractive, although the early identification of the best offers is not for the inexperienced.
New entrants bring size and resilience
AIM constituents market cap weighting 2010 vs 2021
0 20 40 60 80 100 120 140 160 180 200
Over 1000 500-1000 250-500 100-250 50-100 25-50 10-25 5-10 2-5 0-2
- Alex Game, Fund Manager & ESG Officer, Unicorn Asset Management
When used as part of a diversified investment portfolio, an exposure to AIM stocks within an ISA can help provide long term growth opportunities.
Source: London Stock Exchange
SEPTEMBER 2021
DECEMBER 2010
Market Value Range (£m)
Initial fee 3.35% 3.03% 1.23%
Annual management charge 1.8% 2.13% 1.25%
no. OF companies
%
September 2021
december 2010
28 45 59 167 113 131 136 94 41 21
35.80% 21.30% 14.20% 17.90% 5.40% 3.20% 1.50% 0.50% 0.10% 0.00%
9 17 48 108 137 214 246 161 147 95
13.90% 14.90% 20.40% 21.60% 11.90% 9.80% 5.00% 1.50% 0.60% 0.10%
08
WHAT’S DRIVING THE MARKET?
There are several factors at play and Scott McCubbin, EY UK IPO leader, told City AM that the London IPO market had “never been so strong” and was experiencing a “post-Brexit-Covid kick”. But what are the keys to this robust market?
Notably, AIM has benefited significantly from its low exposure, in comparison to the main markets, to more traditional sectors such as oil and gas, mining and heavy industrial businesses. These businesses have suffered the most during Covid-19 and its associated lockdowns. On the other hand, AIM has a higher weighting of fast-growing sectors such as technology, e-commerce and healthcare, some of which were very positively impacted by Covid-19. And many of the smaller AIM businesses have been well-placed to pivot activities and shed costs during the last, difficult and turbulent period. Another favourable aspect of AIM is the sustainable nature of a larger cohort of its companies than those listed on the main UK markets; 48 AIM listed companies (around 6%) qualified for the London Stock Exchange’s Green Economy Mark in October 2021 versus 57 companies (around 5%) on the main FTSE markets. The Green Economy Mark is awarded to companies and investment funds listed on all segments of London Stock Exchange’s Main Market and AIM that are driving the global green economy. These businesses must generate 50% or more of their total annual revenues from green activities. With the myriad of ratings and metrics that are currently available to measure investments with a sustainable focus, this is a useful starting point for the increasing numbers of investors looking for a green element to their investments.
AIM composition suits conditions
According to September 2021’s, ‘Small Business Finance Markets report 2020/21’ published by the British Business Bank (BBB), “Equity finance supports companies with innovative operating models and products, who can quickly respond to new opportunities created in the market.” The report went on, “equity backed businesses affected by pandemic induced disruption may have found themselves forced to raise earlier than expected due to lower sales to extend their runways and avoid business failure. Given the uncertainty around how long the pandemic will last, some businesses may have also chosen to bring forward the date of their funding rounds whilst funding is currently available.” Data confirms that the average gap between funding rounds for early-stage equity-backed companies dropped from 19.7 months in 2019 to 18.5 months for deals in 2020.
Constituents extending funding runways
Of course, it is not just Business Relief qualifying companies that can be found on AIM. Venture Captial Trusts (VCT) routinely mine the market for the high growth prospects that give their investors access to the 30% upfront income tax relief, 100% capital gains tax (CGT) relief on growth and 100% dividend relief claimable through this government-backed venture capital scheme. We have already discussed how the tax-free dividends available through VCTs, many of which focus on AIM listed investees, could drive more AIM investment. Since qualification for Enterprise Investment Scheme (EIS) status is very similar to that which applies to VCTs, with similar tax benefits applying including CGT deferral on gains reinvested into EIS qualifying companies, the impetus for AIM investments has been strengthened: The March budget’s freezing of IHT thresholds, income tax and CGT allowances for at least five years will likely drive tax-advantaged investment interest as the rising value of assets pushes individuals into higher tax brackets. One of the biggest components of estate values - house prices - is being driven by an electric housing market and it does not seem to be going away, despite the end of government subsidies. In fact, the Halifax reported that September 2021 saw the strongest monthly house price growth in 14 years.
The tax context
While rising inflation rates have undeniably hit investor confidence, successful growth investing is a great way to offset inflation and buck the recent trend of stuttering GDP growth which slumped to 0.1% in July 2021 (although annual GDP growth is forecast at record levels.) Speaking to the Commons Treasury select committee in the first week of October, the Bank of England’s new chief economist Huw Pill, said that the recent rise in prices would prove to be temporary but the “magnitude and duration of the transient inflation spike is proving greater than expected”. A longer term inflation issue has led to the Bank of England raising the possibility of base rate hikes. This could be viewed as confirmation that keeping pace with or beating inflation is going to be a harder task than it has been for a number of years. But this is still a public market and although the improving domestic outlook earlier in the year fostered greater interest in small-cap equities, promoting growth in AIM, it is important to remember that it is not all smooth sailing.
Inflationary erosion of capital
The eye-catching performance during the Covid-19 recovery and variation in companies listed on AIM in terms of both size and sector has stimulated diversity among its investors. The growing size of AIM constituents has not been lost on institutional investors, while the fast-growing tech-enabled businesses are appealing to mainstream retail investors. Covid-19 has also led many to consider their own mortality in a way they had not previously. For many, this has inevitably led to much more active contemplation of their estate planning. It is estimated that over half of AIM companies qualify for Business Relief, which offers those who hold qualifying shares for a minimum two year period at their death, 100% inheritance tax relief on their value.
Range of attractions for Investors
The BBB states a simple fact in its ‘Small Business Finance Markets Report 2020/21’: “Greater use of growth orientated finance will be needed to help the UK achieve its stated aim of building back better.” After its push for businesses to recover after the Covid-19 pandemic, the government is now refocusing the economy on challenges such as transitioning to a net zero economy, levelling up in the UK and adapting to life outside of the EU. And the kind of external funding that AIM can and has been providing is now integral to that process. While not specifically referring to AIM, BBB was in no doubt about the role of business funding in “facilitating the business investment that drives productivity improvements [which] is mirrored in the environmental and scientific space. External finance can empower businesses to invest in changes that will reduce their environmental impact and it can also fuel the innovating researchers and smaller businesses that develop new technologies, including green solutions, for others to adopt.”
- The British Business Bank, Small Business Finance Markets Report 2020/21, September 2021
evidence shows how finance can make a difference. For leading-edge companies with global potential, venture capital backing can help companies accelerate away from comparable unbacked companies on several metrics, including productivity.
Political goals align with AIM investing
- Anna Macdonald, Fund Manager, Amati Global Investors
Investors are becoming cautious about the economic rebound amid supply chain disruption, labour shortages and rising prices, with worries that inflationary impacts will remain even after these problems are resolved
09
AUTUMN BUDGET
While Rishi Sunak went on a spending offensive in the second budget of 2021, with increases taking it to over £150 billion this parliament, the tax rises discussed so enthusiastically in the media, largely failed to materialise. Concerns about the possible introduction of restrictions to Business Relief that would remove eligibility for the relief from AIM listed companies, also proved groundless. There has been criticism that many Business Relief investment managers place funding in larger AIM constituents that simply do not need the funding in the same way as SMEs. But such a move had also been branded as, “cutting off the nose to spite the face”. The government’s position was made plain by one sentence from the chancellor: “Now is not the time to remove tax breaks on investment.” Given Mr Sunak’s comment that, “our future cannot be built by government alone but must come from the imagination and drive of our entrepreneurs,” those campaigning for increasing the tax incentives available through VCT and EIS investment, including those focused on AIM where there are entrepreneurs aplenty, may have suspected that their luck was in. But there were no announcements with direct impact on EIS or VCT, Business Relief or inheritance tax. Having said that, some of the statistics announced reveal increasing drivers for interest in EIS, VCT and Business Relief and the prospect of elevated levels of funding for the appropriately qualified AIM companies. In his speech, Mr Sunak said, “wages are rising: Compared to February 2020, they have grown in real terms by almost three and a half per cent.” This is despite rising inflation. Greater earnings create the potential for more income tax liability (where EIS and VCT can offer solutions) Other indirect impacts of some of the pledges include:
No Direct changes to AIM-focused tax-advantaged investments
As well as publishing the eligibility criteria for the new scale-up visa designed to allow skilled individuals to work in the UK and doubling the available scholarships for AI and Data Science Master’s conversion courses with a £23 million investment for under-represented groups, the budget included the announcement of a new UK Global Talent Network. The network will work with businesses and research institutes to identify and attract the best global talent in key science and tech sectors. A team will offer support to these individuals in moving to the UK, by providing tailored advice and linking them to UK-based opportunities. Sufficient availability of skilled staff is one of the keys to innovation turning into successful commercial outcomes. It will be heartening for the AIM-listed innovators to hear that there is a growing focus on giving them access to the talent that will allow them better develop ideas and bring them to profitable fruition.
Talent and expertise
R&D
The chancellor announced more Increases to R&D investment, set to reach a record £22 billion in 2026/27 and an economy-wide target to invest 2.4% of GDP in R&D in 2027. The goal is to help to drive economic growth and create the jobs of the future. As well as more funding, R&D tax reliefs will be reformed to support modern research methods by expanding qualifying expenditure to include data and cloud costs. Measures will also be put in place to prevent abuse and to ensure more of the relief claimed is spent on research taking place in the UK. Of course, there are many younger companies on AIM that will benefit from these changes, particularly in the technology sector. Many of these also benefit from being eligible for EIS and VCT funding and this avenue for cutting costs could result in that money targeting faster growth and ultimately better returns to investors.
- Chancellor Rishi Sunak, Autumn budget, 2021
I want this to be a society that rewards energy, ingenuity and inventiveness
While not heeding calls to abolish business rates, there was good news for companies in this area. Over 90% of the businesses in the retail, hospitality and leisure sector were handed at least a 50% reduction in their business rates bills in 2022-23 up to a maximum of £110,000. This is a £1.7 billion acknowledgement of the damage caused to pubs, bars, gyms, restaurants, holiday firms, hotels and high streets during Covid. What’s more, from 2023, a new ‘business rates improvement relief’ will be introduced so that all businesses will be able to make property improvements – and, for 12 months, pay no extra business rates. This would apply, for example, to a hotel adding extra rooms, or a manufacturer expanding their factory. The business rates multiplier (the amount per £ used to multiply the basic rateable value of a business property to calculate the basic annual rates charge) will also be frozen for a further year. In addition, the £1 million Annual Investment Allowance will not end in December as previously planned and instead will be extended to March 2023. This was dubbed a move to provide more upfront support to help businesses across the UK to invest and grow. On top of that, almost £750 million of funding has been earmarked to give business rates reductions to encourage businesses to adopt green technology like solar panels. Since EIS, VCT, Business Relief and AIM are all about investing in companies, anything that helps them to save on taxes which can then be used in their growth journey, is good news.
Tax cuts for businesses
Originally introduced in April 2021, it provided lenders with a guarantee of 80% on eligible loans between £25,000 and £10 million to give them confidence in continuing to provide finance to UK businesses. The scheme was originally open to all businesses, including those who have already received support under the existing COVID-19 guaranteed loan schemes. The budget extended the Recovery Loan Scheme until 30 June 2022, with the following changes coming into force from 1 January 2022:
Recovery loan scheme extension
This suggests an even greater focus on the companies EIS and VCTs would normally fund, with a high portion of that funding going to qualifying companies listed on AIM. These loans may well offer potentially EIS and VCT-eligible companies cheap funding that won’t require additional equity funding which could dilute existing shares. That said, these loans will need to be repaid, unlike equity funding.
The scheme will only be open to small and medium sized enterprises The maximum amount of finance available will be £2 million per business The guarantee coverage that the government will provide to lenders will be reduced to 70%
'The Autumn Budget and Spending Review 2021, A Stronger Economy for the British People', continued to ratchet up the focus on all things green by announcing that, “Building on the Energy White Paper published in December 2020, the government has announced a new ambition for all of the UK’s electricity to be from low carbon sources by 2035, subject to security of supply.” What’s more, Mr Sunak referred to the government’s Net Zero strategy investing £30 billion to create the new, green industries of the future and noted that the recent issue of its second Green Bond, makes the UK the third-largest issuer of sovereign green bonds anywhere in the world. AIM is the home to a number of green energy innovators and this is a sector in which Business Relief investment managers have a significant interest. Consequently, any driver of green energy alternatives is also potentially good for Business Relief investors as this is a popular sector of Business Relief investment.
Green energy
A raft of investments into the housing market will be made following the budget. Mr Sunak declared, “We're investing more in housing and homeownership too, with a multi-year housing settlement totalling nearly £24 billion: £11.5 billion to build up to 180,000 new affordable homes, and we're investing an extra £1.8 billion, enough to bring 1,500 hectares of brownfield land into use, meet our commitment to invest £10 billion in new housing and unlock a million new homes." Yet, some in the housing industry are sceptical that this will address the housing shortage, leaving demand continuing to oustrip supply and an ongoing lack of housing at affordable prices. Director of Benham and Reeves, Marc von Grundherr, commented: We need more homes to satisfy our ever-growing appetite for homeownership and an insignificant level of brownfield development is more of a slap in the face than it is an outstretched hand. It simply isn’t enough and with the government consistently failing to meet their previous housebuilding targets, it will be a miracle if we see a brick laid on brownfield land or a meaningful level of affordable homes delivered in our lifetime.” This means competition and prices are likely to remain high. Housing is one of the biggest drivers of estate values and since IHT thresholds were frozen in the previous 2021 budget, this budget does little to stem the tide of rocketing house prices, pushing estates above the nil rate and residence nil rate bands and driving up IHT liabilities. This is where Business Relief can be helpful.
Housing
- Ian Woolley, Head of AIM Services, Hawksmoor Investment Management
Whether to strengthen the fortress against the downturn or for specific acquisitions, right across the market cap spectrum we see high quality companies able to access capital from a supportive shareholder base when they need it.
10
thought leadership
Neil Blankstone
Lead Investment Manager IHT Service Business Development Director
'AIM' for success, not perfection.
Building an AIM portfolio is about building for the long-term, with ‘time in the market’ as important as any other exchange.
Neil Blankstone, Director at Blankstone Sington, comments on how sustainable the recent market performance is, and how judicious portfolio management will be required as we move into an economically tough winter. At the end of Quarter 2 we commented that we remained cautiously optimistic that the longer-term prospects continue to be positive but are prepared for the inevitable bumps in the road. Q3 has helped demonstrate that. The record jump in inflation continues to beg the question as to whether it is merely transitory or more embedded. Markets are watching carefully for movement by Central Banks who are treading a fine line between the need to keep economies positive as we emerge from the pandemic v. the almost inevitable rise in prices as both pent up demand and supply chain issues impact. The signals are there that the Bankers stand ready to act. Individual company results in general have exceeded expectations – and similarly, with demand for quality earnings and a positive outlook, this has meant prices have risen considerably amongst many of the stocks we follow/hold. As we often talk about, it is the blend of all stocks in your portfolio that is just as important. With the strong performers, we continually judge whether they are being priced for perfection or still offer growth – whilst the more disappointing ones are monitored against the original investment case and the changes that have occurred in between. Our investment process sees us look to reduce as a single investment reaches a percentage of the portfolio as a whole i.e. a trigger point. On the other side we ensure that the metrics continue to offer us comfort and when measured against peers or alternatives, support our belief that patience will be rewarded. The overall level of performance year to date we do not anticipate being sustainable, but with judicious management would hope to maintain values for the remainder of the year. As we head for winter, a note of caution is right to be sounded as we see the threat from COVID still very much around, as well as the economic challenges that are clear to all. We “AIM” for success overall, not perfection. This article does not constitute personal advice. If you are in doubt as to the suitability of an investment, please contact one of our advisors. Past performance is not a reliable indicator of the future. The value of your investment can go down as well as up, and you can get back less than you originally invested.
contact
blankstoneSington.co.uk 0151 236 8200 Enquiries@BlankstoneSington.co.uk
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SAM BARTON
Investment Director Close Brothers Asset Management
Focus on quality drives pandemic returns
In this divergent market we found new opportunities that met the Close Inheritance Tax Service’s quality criteria at reasonable valuations.
A consistent strategy and focus on quality drives pandemic returns It is a paradox that the Alternative Investment Market (AIM), often seen as an incubator of small businesses, has outperformed London’s Main Market during the COVID-19 pandemic. Looking closer at the junior market’s performance, we saw a rather nuanced picture with clear winners and losers during distinct phases of the crisis as investors reacted to the changing economic conditions. In this divergent market, we found new opportunities that met the Close Inheritance Tax Service’s quality criteria at reasonable valuations. Phase One In the early stages of the pandemic, we saw unprecedented Government action to combat the virus. Restrictions on travel, closures of businesses and schools, and limiting personal movements all had a material (and devastating) impact on economic activity. Thankfully, as the lockdown commenced, there was a co-ordinated policy response from HM Treasury and the Bank of England supporting companies and their employees. While this response enabled many businesses to stay solvent, it did not protect their earnings. This caused many to cancel dividends, lower cost bases and raise capital from shareholders to plug the deficit caused by lockdowns. Some winners emerged from the crisis: companies benefitting from the closure of retail outlets (online shopping), the adoption of working from home (cloud computing and connectivity) and increased leisure time (video gaming). With AIM’s heavy weighting to these higher growth businesses, it outperformed the main list by over 30% in the six months to 30 September 2020. AIM’s growth stocks got a further boost from lower interest rates. As “long duration” assets, where more of a company’s perceived value sits further out in time, a lowering of the discount rate made them worth more in today’s money. We had been cautious about the valuations ascribed to some of the COVID-19 “winners” even before the pandemic, and we stuck to our disciplined investment philosophy. We relied on the library of knowledge built up in our proprietary financial models, met more companies - virtually – than ever before and looked for mispriced stocks. We added holdings in Next Fifteen to access the growth from the tech sector. Renew Holdings, a provider of essential infrastructure services, was being valued as if its services were optional; this was not the case. We bought quality companies at discount prices. Phase Two The announcement of effective (and safe) vaccines in November 2020 ushered in a new phase in the crisis. Boosted by a successful roll-out programme, the economy reopened faster than expected. Businesses raised growth capital. M&A activity returned. As economies reopened, investors faced a new set of questions. Foremost amongst these was whether to allocate capital to highly rated COVID-19 “winners” where the tailwinds were abating, or to “old economy” stocks whose profits were recovering rapidly. In the case of the latter, there was a compelling combination of both value and growth on offer. During this phase, we added to quality names that had been left behind in the recovery trade, including Begbies Traynor, the insolvency specialist, and Sanderson Design, the interior furnishings business. Phase Three While the rapid economic bounce-back has been welcome, unprecedented demand has temporarily overwhelmed supply chains, which have been unable to respond to surging activity. Shortages have fed through into levels of inflation not seen for a decade. In response to this, central banks have signalled a normalisation of interest rates; this will have an effect on all assets, particularly those whose perceived value sits further out in time. We have focussed on businesses with the ability to sustain their margins in an inflationary environment and with the potential to deliver consistent growth. Mattioli Woods and Calnex Solutions both offered these qualities at reasonable valuations. So what to make of it all? The main lesson from the pandemic was “stick to your guns”. Having a disciplined investment framework has been key to delivering strong returns for our clients this year. We do not believe in the pursuit of growth at any price. One of the tenets of our philosophy is to protect clients’ capital, and overpaying for assets is one of the main risks to that capital. A consistent focus on quality companies was another core contributor to performance. The varying market conditions have presented the chance to invest in businesses that have consistently delivered high returns on capital, excellent cash conversion and strong margins. With AIM’s broad waterfront and an active IPO market, you do not need to chase growth at any price. Finally, we kept an open mind. Much as we have a focus on capital preservation, we are not averse to growth stocks. As the pandemic has shown, markets often offer multiple facets, meaning that today’s value stocks might be tomorrow’s growth companies and vice versa. We continue to see new opportunities, including companies that have the potential to deliver above market growth with favourable risk reward profiles, leaving us cautiously optimistic for future returns from CITS portfolios. No investment, or investment strategy, is without risks. The value of investments may fall as well as rise. CITS is a high risk investment by virtue of its target market of AIM listed stocks.
closebrothersam.com/ifa 01606 810325 ifaclient@closebrothers.com
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Ian Woolley
Head of AIM Services
Small is Beautiful
H
AIM has had a tremendous eighteen months – and not just because share prices have risen, but also for the fact that so many companies were able to raise fresh equity capital throughout this extremely uncertain and challenging period.
awksmoor’s AIM Portfolios have seen total returns of 38.9% over the past three years, triple the return of the MSCI UK Small Cap Index (figures to 30th September 2021). One of the key reasons behind our success is our ability to be nimble. When investing in smaller companies, there is a tremendous advantage in being a smaller asset manager. Hawksmoor’s boutique size means we can be nimble. Our deal sizes mean we are not confined to only the largest stocks on AIM but can hunt for opportunities right across the market size spectrum. Small is beautiful, supple, flexible. Larger institutions managing hundreds of millions, or even billions, on AIM are mathematically constrained only to the largest and most liquid of shares. Try to buy anything too small and they’d struggle to find enough stock – or if they did, they may end up owning too much of the company. A ‘whole of market’ approach doesn’t equate to higher risk. Hawksmoor’s sweet spot for investments is around the £100m to £300m size bracket: here you can find established, high quality, growing businesses, but without the valuation premium that prevails amongst the larger AIM shares. Our investees are not start-ups; they are industry leaders or challengers, profitable, well-invested, cash-generative and with huge growth potential… but who fly underneath the radar and reach of the financial industry’s larger institutions. To give one example, Volex Group was a sub-£150 million market capitalization business in 2019. As well as being one of the world’s largest suppliers of power cables for household appliances, Volex has a rapidly growing business supplying complex systems for use in data centres, electric vehicles, industrial and medical markets. In electric vehicles, it specializes in ‘grid cords’ – plugs and cables used to connect cars to the mains electricity. These need to be rugged enough to withstand being accidentally driven over, or left out in the rain, without risk of electrocution. This is a well-invested, highly-automated operation with deep customer relationships and exposure to several ‘structural growth’ markets. It’s share price has risen by over +160% in the past 12 months. It is essential when investing in small caps to do your homework. We think that having an experienced Investment Committee made up of a number of investment professionals who meet formally regularly is essential. So is meeting the management teams of every investee both before investing and on an ongoing basis. The proof is obviously in the pudding and there is clearly outperformance with the right management of this investment strategy on AIM. For the 5 years to the end of September 2021, our portfolios have delivered returns of +51%, against an Index at just +17%. The UK is home to some world-class smaller companies with huge investment opportunity, particularly further down the size spectrum. Especially when it comes to small cap investing, small is beautiful.
hawksmoorim.co.uk 01392 410180 bdteam@hawksmoorim.co.uk
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Hugo Wood
Portfolio Manager
Companies' role in combatting climate change
S
Once emissions data is being regularly gathered and disclosed, companies are able to look to the future and contribute to the global effort to combat climate change.
ustainable Investing in AIM This year’s United Nations Climate Change Conference, otherwise referred to as the Conference of Parties, or COP26, has concluded and has gathered more column inches than previous years in the UK press. This is in part due to it being hosted in Glasgow, but mostly due to environmental issues being more front and centre in society’s conscience than ever before. As society looks to world leaders to enact substantive change and decarbonisation commitments, it is an appropriate moment to reflect on the role that publicly listed companies, and by proxy their shareholders, play in combatting climate change. A company’s environmental footprint is wide ranging, covering not only the emissions footprint from its direct operations, but also the impact of its entire value chain, as well as its use of water and production of waste products. Considering the live debate around carbon and COP26, this piece focusses on emissions. Disclosure The past few years have witnessed a steady improvement in emissions disclosure across public equity markets. Beginning with Scope 1 and 2 emissions data gathering, being the emissions footprint attributable to controlled operations and the generation of purchased energy respectively, a significant number of public UK companies have begun making disclosures in their annual reports. Fewer companies, however, have made progress in measuring more complicated Scope 3 emissions. This represents the remaining emissions footprint across the value chain, and taken together with Scope 1 and 2 emissions presents a picture of an enterprise’s entire direct and indirect footprint. Measurement and disclosure is a key first step enabling a productive engagement between shareholders and companies in matters of climate change. Without a starting point it is challenging to evaluate the success or failure of a company’s journey to a more sustainable model. As a result, a core facet of our dialogue with investee AIM companies has been that of disclosure with a view to building longer-term targets. Target setting Once emissions data is being regularly gathered and disclosed, companies are able to look to the future and contribute to the global effort to combat climate change. We actively encourage companies to set long-term reductions targets that are suitable to the business model in question. For high growth companies selling physical goods it can be more appropriate to have emissions intensity targets such as emissions per order or per unit of revenue, whilst others, often lower growth or service focussed companies, are able to target absolute emissions reduction targets. We think it is important to ensure targets are aligned with the Paris Climate Accord, which targets a limiting of temperature increases to 1.5 degrees, and are explicitly linked to executive remuneration through annual bonuses and share option grants. Many companies are already setting promising targets, most notably ASOS recently committed to have net zero carbon emissions across their value chain by 2030. Decarbonising vs offsetting Whilst the topics of disclosure and target setting are now well entrenched in investor consciousness, the route to net zero is less often discussed. Companies have the option of either decarbonising, meaning reducing the carbon intensity of existing operations, or offsetting by investing in net carbon negative projects away from the business. Again, the business model will often dictate the approach, but as we look forward it will be interesting how financial performance may be impacted by a particular company’s path to net zero. Offsetting has no direct impact on operations and may simply represent an additional cost, whilst decarbonisation strategies have the potential to improve efficiency and deliver sustainable margin improvements. In this latter case, stronger returns may be on offer.
sarasinandpartners.com 020 7038 7037 sales@sarasin.co.uk
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STEPHEN ENGLISH
Investment Director
Health is wealth
A
We believe that the lines between the two sectors are becoming increasingly blurred as technology increasingly disrupts the Healthcare sector
s well as differentiating in the IHT AIM space by having a lower median market cap than many of our competitors, our go anywhere ability allows us true flexibility to diversify across up to 40 stocks, yet still take high conviction positions in certain sectors (up to 30% per sector). Through analysis of history and our own experience, the much fabled ‘multi-baggers’ that are able to return multiples on initial capital invested are overwhelmingly found in both the Software and Healthcare sectors. We believe that the lines between the two sectors are becoming increasingly blurred as technology increasingly disrupts the Healthcare sector; one that has been slower than most other industries in embracing productivity-enhancing technology. As an aside, we deliberately target such ‘hybrid’ companies that straddle two industries as it can create an ‘analysis gap’. In this case the Software analyst not fully appreciating the dynamics of the Healthcare market and the Healthcare analyst not fully appreciating the dynamics of the Software market. Falling between two stools can often lead to valuation opportunities ripe for exploiting for those prepared to see the bigger picture developing. We prefer those companies supplying services into the Health industry, akin to the ‘picks and shovels’ trade during the goldrush. This avoids the binary risk of a pioneering drug discovery company, while retaining companies often possessive of strong intellectual property and high returns on capital. The sector lends itself to buy and hold with the power of compounding allowed to flourish over the fullness of time. We highlight two such ‘hybrid’ investee companies: EMIS – EMIS is a software provider across a variety of healthcare settings from: Primary care, Community, Acute care, Community pharmacy and Digitally enabled patient care (Patient access is the UK’s leading GP online services platform). The majority of its revenues come from this division, but the faster growing division is its Enterprise offering, where revenues are derived predominantly from the business-to-business healthcare sector including pharmacies and life sciences. Their CEO on a recent results call wasn’t overstating things when he said if “EMIS fell-over the NHS would too”. Their software underpinned a key part of the vaccine roll-out recently too and EMIS sits right at the heart of changes in healthcare towards emerging integrated care systems, where EMIS software is key to bringing together both health and social care. This will unlock significant efficiencies, cost savings while enhancing patient outcomes. A win-win scenario for the patient and the tax payer. Oxford Metrics (OMG) – Within OMG sits Vicon, a technology that spans a multitude of large and global markets, for example, Hollywood where it is used for special effects production (think green screens and white measurement balls attached to actors) and even NASA for engineering performance monitoring. It is known globally as the gold standard for measuring objects and or people in space. It also has real world applications in the medical profession where it is gaining strong traction in treating injuries across a whole range of sports. Vicon’s hardware and software solutions measure minute differences in loads, force, and gait to detect underlying injuries, often unbeknownst to the athlete themselves. Its solutions are also used in clinical settings as part of amputee rehabilitation, lower limb movement studies, cerebral palsy research, motor control, and neuroscience.
www.stellar-am.com 020 3195 3500 enquiries@stellar-am.com
what the managers say
15
2021 has seen a boom in ISA subscriptions. How do you think that sits within the AIM context?
The UK remains good value when set against global market valuations and opportunities, and has become something of a destination for quality technology, media and healthcare companies. Buying Alternative Investment Market stocks incurs no stamp duty, which is a benefit, and business property relief still applies to many companies within it.
Are there any indicators that AIM’s robust bounceback and performance during the pandemic have drawn greater numbers of investors and consequently driven up the price of shares that you would normally be interested in?
There are more retail investors coming into the market, which has been affecting short term performance. We will be cautious when entering or exiting positions in order not to disturb prices too much, and we will selectively take profits when we feel that share prices are too out of kilter with what we consider the underlying value of the stock.
Anna Macdonald
Fund Manager Amati Global Investors
So how are the managers feeling about the AIM market and overall investment market conditions? Here's what they have to say.
Has the volatility we’ve seen over recent months settled to pre-Covid-19 levels for your investees?
We have seen additional volatility from retail investors in some stocks. Overall volatility remains quite low as investors consider where markets may be heading. Whilst the recovery in economic growth from the pandemic continues, concerns are growing over the health of the supply chain, amid fears that sharply increasing commodity prices, wage inflation and logjammed ports will cause significant setbacks.
Lawrence Campin
Assistant Investment Manager Blackfinch Investments
One result of lockdowns was the build-up of retail savings. With inflation at the forefront of many investors’ minds, AIM represents an opportunity to achieve inflation-beating returns over the medium-term, as well as using the ISA allowance to defend any gains. Consequently, we expect further inflows into AIM.
Our portfolio companies have recovered well since the pandemic. Pleasingly, volume has picked up and on average, is above the pre-pandemic level, allowing further capacity to invest for our clients. With our buy and hold strategy, while we are vigilant to overpricing, we believe that high quality companies still offer good value over the medium and long term.
Volatility has been falling steadily for the portfolios following the first six weeks of successful vaccination deployment in the UK and is now at pre-pandemic levels. Risks remain in inflation and the supply chain; we are confident that the benefits of our holding companies having strong balance sheets will again bear fruit and help navigate these challenges.
2021 has continued to see many with more time to re-examine their finances resulting in the likes of increased ISA subscriptions and greater take up of tax advantaged wrappers and services. The fallout from 2020 and recovery into 2021 has seen retail investors seek a degree of solace in the opportunity for growth that AIM companies can offer.
Liquidity and the effect on price can be a concern, particularly in certain AIM stocks. Whilst not necessarily causing a so-called “squeeze” on the price, there is evidence that it has maybe taken a little longer to fulfil certain types of orders. Ultimately, though, demand and supply is part and parcel – and it is for the investor to judge value/price.
Volatility remains an issue, primarily as a reflection of the lack of real visibility in terms of economic outlook and earnings. Certain companies on AIM are less exposed to factors such as inflation and supply chain issues. However, many are not immune. As the visibility on earnings improves, undoubtedly the legacy volatility from COVID will abate.
Neil blankstone
Lead Investment Manager IHT Service and Business Development Director Blankstone Sington
With savings ratios hitting all-time highs in 2020 and markets recovering strongly, it was unsurprising to see ISA funding increase. Simultaneously, the Chancellor’s temporary reduction in Stamp Duty has boosted house prices, sending the value of more individuals’ estates above the personal allowance for Inheritance Tax. Given certain AIM shares offer IHT relief, we have seen very strong demand for the Close Inheritance Tax Service.
Recovering economic conditions have attracted investors, which has driven up the prices of most UK equities. AIM indices bounced back much faster than their peers due to their heavy weighting to high growth companies that were, in the main, COVID beneficiaries. Since the start of the year, market leadership has flipped, with “old economy” stocks delivering the strongest returns.
Markets have remained volatile in spite of higher than usual levels of liquidity. As long-term investors, this suits our process, enabling us to buy into some of AIM’s great companies at prices that offer good risk-reward profiles. Given the backdrop over the last 18 months, we have been unusually active in repositioning portfolios.
Sam Barton
As well as a boom in ISA subscriptions, we’ve also seen record inflows into our AIM Service from individuals’ estate planning. The wider context is that the pandemic and lockdowns last year meant many people had concerns other than seeking financial advice. Now that we’ve seen some return to normality, and face-to-face advice meetings can resume, we’ve seen inflows come back very quickly. Perhaps too the pandemic brought home the importance for estate planning, even when we are generally in good health. Of course, it’s also great that AIM shares can now be held within ISAs for even more tax efficiency.
AIM has had a tremendous recovery since the lows of pandemic in Spring 2020, and within that there has been a general rise in valuation levels – though from very depressed levels. We have certainly seen a big increase in the number of our stocks being acquired, either by private equity or strategic buyers. A large part of that has to be greater clarity on not just COVID-19 but also Brexit. As those two heavy clouds abate, investors have spotted some great businesses at cheap prices. That said, there remains plenty of value on AIM – and the UK is still on a heavy discount to international markets.
2021 to date has been a benign year for volatility – if anything volatility has been lower than pre-COVID-19. Our investees have experienced very strong returns with the recovery in markets from last year, and in general a favourable trading environment for most companies.
Head of AIM Services Hawksmoor Investment Management
AIM shares are well-suited to an ISA-wrapper, given the high growth nature of many of the companies available on the AIM market. This, along with the possibility for individuals to potentially mitigate IHT using business relief, has meant that we’ve seen exceptionally strong ISA inflows into the Puma AIM ISA IHT Service.
The AIM market performed well by virtue of consisting of many nimbler companies, and disruptors that benefited from the changing ways in which we consume. We all recognise that the business world is evolving at an accelerated pace and supporting the growing businesses within AIM will remain attractive long after the various impacts of COVID have dissipated. We would argue that the inherent value of many investee companies has increased in line with share prices.
Since the vaccine roll-out markets have stabilised as companies have been able to reinstate forecasts and dividends. We remain vigilant on supply chain disruption. Where investee companies have pricing power, any issue can be short-term in nature. Nevertheless, the market is seeing renewed volatility this autumn as nervousness over supply chain and inflationary risks persist, which have compounded the current profit taking effect.
DR STUART ROLLASON
Investment Director Puma Investments
It has been well reported that a rise in the personal savings rate during the pandemic has led to a boom in ISA subscriptions. One of the side-effects of the pandemic has been an increasing awareness of personal mortality, resulting in a significant increase in estate planning. Combined with the rise in ISA investment, this creates a real opportunity for growth in the AIM ISA market. There have also been reports of record amounts of inflows into equity funds, so it would not be surprising to us if some of this has made its was to the AIM market. This likely reflects an increased appetite for risk and confidence in the outlook for the UK economy as it continues it recovery from the depths of the pandemic.
There are signs that more individuals have become interested in trading and investing in the stock market since the start of pandemic as can be seen by the number of new customers signing up to investment platforms here in the UK. Whether this has been caused by AIM’s robust performance or the fact that more people had more time on their hands, due to being on furlough for example, is hard to say. What is perhaps an easier conclusion to make, however, is that these new investors have most likely provided additional liquidity to this equity bull market, driving many share prices higher.
Volatility has been trending lower since it spiked early in 2020 at the outset of the pandemic. Whilst it is hard to say that volatility has settled, due to the numerous short and sharp spikes we have seen this year, the general level of current volatility is comparable to pre-pandemic levels.
Stephen English
Investment Director Stellar Asset Management
Given the range of interesting AIM-listed stocks and their potential for attractive returns, the AIM market attracts a higher proportion of retail trading than the main market. The recent rise in ISA subscriptions would thus naturally impact AIM as new capital supports heightened buying activity.
There has certainly been evidence of higher trading volumes during 2021, with the cumulative value traded on AIM around 30% ahead of 2020, and a particularly significant increase in the first quarter. Given most of the gains for the year to date were accumulated during these first few months where trading activity was heightened, it follows that investors were drawn in.
We measure volatility monthly on a rolling 3 year basis, and on this basis volatility is still elevated compared to pre-pandemic levels. However, daily volatility has returned far closer to pre-pandemic levels, albeit not quite at the levels seen at the end of 2019, which were exceptionally low.
hugo wood
Portfolio Manager Sarasin & Partners
When used as part of a diversified investment portfolio, an exposure to AIM stocks within an ISA can help provide long term growth opportunities. As an individual’s ISA portfolios increase in value, more investors become worried about a potential IHT liability, and an AIM IHT investment within an ISA could be one way to mitigate such a risk. As the total size of the ISA market grows, you would expect this to have a follow-on effect on the amount being invested in AIM.
Our investments have had a good run since the lows of the pandemic, however we see this as a reflection of the underlying strengths of these businesses being recognised as markets normalise. The types of companies we target on AIM also tend to be lower down the market cap scale and less covered research wise, so we see less retail flows into those stocks than, for example, a Fevertree or BooHoo, which we don’t hold. Even with the recent rally, we think our companies are well-positioned to grow further and we don’t see their share prices as overly inflated.
The level of volatility on the AIM market largely declined during the summer months of 2021 and the AIM Index has broadly traded within a range over this period. However, individual AIM listed shares remain inherently more volatile than shares in larger companies and as such it remains important to invest in a diversified portfolio of AIM shares to mitigate stock specific risk.
Alex game
Fund Manager and ESG Officer Unicorn Asset Management
We have seen consistent growth of AIM ISAs since they were first allowed in 2013. With no stamp duty and the ability to shield against CGT (important for growth stocks), dividend tax and inheritance tax, we see AIM ISAs forming a core part of investors’ tax planning. Regular yearly investment can also allow an investor to benefit from any volatility in share prices by pound cost averaging into the market.
We populate our portfolio with strongly financed, well established, market leading companies, profitable and able to pay a growing dividend. Within that there is a B2B over B2C focus. Last year saw strong retail inflows into the micro and more speculative areas of AIM, not areas we were or are exposed to. We continue to see good value in our stocks.
We have noticed an increasing number of profit warnings across both the main and AIM market, with a growing realisation that, in aggregate, share prices had gotten a little too far ahead of themselves. While volatility has crept up of late, it is still a little lower than pre-covid levels.
Chris Cox
Fund Manager TIME Investments
3. Considerations for investment
MARKET COMPOSITION FEES AND CHARGES
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There are currently 39 open offers in the tax-advantaged space with a focus on AIM companies, including three EIS offers, two VCTs, and 34 Business Relief offers. In May this year the total number of open offers stood at 37, with just one EIS offer, but the same number of VCTs.
MICAP lists just four EIS offers that are fully focused on AIM listed investee companies and three of them are currently open. Two out of three of them aim to invest in around ten companies and the other targets between ten and 20. This is in stark contrast to the VCT managers whose diversification targets are much higher - with an average of 48 for the two open VCTs focusing on AIM and 72 for the other 33 that focus on AIM but which are currently closed. Although qualification criteria for investee companies are almost identical for VCT and EIS qualification, two of the three EIS AIM focused managers do not have VCTs. As a result, these diversification statistics might be explained by the fact that EIS managers, particularly those with experience of private companies in their EIS portfolios, are much more used to managing smaller numbers of underlying investments. Many of the AIM focused VCTs that are currently closed are expected to reopen before the end of the tax year to accommodate new funding rounds and the tax planning requirements of investors who need to invest in the current tax year in a VCT in order to offset income tax liabilities in this year. For EIS investors, there is a two year window that drives their tax-advantaged investing allowing them to claim income tax relief against liabilities in the tax year of the investment or in the previous year. When it comes to BR-qualifying AIM portfolios, the average number of target investees is 28, making these offerings less diversified than AIM focused VCTs but more diversified than AIM focused EIS. The average across all three offer types is now 27.9 as opposed to 26.8 in May. This continues a trend of increasing diversification, which is an interesting statistic given the opening of two more EIS offers in the intervening period, which would normally be expected to lower this figure.
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 19 October 2021.
How we use MICAP Data
Founded in 2013, MICAP provides quality independent due diligence, research tools and panel support services on the tax-advantaged investment market. It is a sister company of Intelligent Partnership, and a part of the Indagate Group of companies.
The average minimum subscription applied by the investment managers has dropped significantly since May when it stood at £62,778. This is very likely as a result of the two EIS offers that have since opened, bearing in mind the average minimum EIS subscription in September was £19,138 and the minimum was £5,000. As more VCT offers open, even more individual investors will find AIM tax-advantaged offers within their reach as both VCTs currently open have a minimum subscription of £5,000 and some VCT managers have set the bar as low as £2,000.
Minimum subscription
13 of the 34 Business Relief offers currently available have been open for more than a decade, with eight of those open for 15 years or more and one which passed its 20th anniversary in March. Where open EIS offers are concerned, two were launched over eight years ago and there is a new kid on the block, launched in August this year by an experienced EIS manager. Meanwhile, both the VCT managers with new AIM share classes have been managing AIM VCT investments for over 10 years. The experience of those currently closed goes back up to twenty years.
A wealth of experience
Inflation rose by 3.1% in the 12 months to September and is forecast to reach 4% by the end of the year. Tax-advantaged offers generally look to make above inflation returns (in addition to the tax reliefs) which clearly becomes more difficult as inflation heads in an upward direction. One thing that can obviously dilute returns is tax which is applicable to any income or growth that is derived from shares within Business Relief portfolios. In the open Business Relief AIM offers, most simply do not quote a target return, but in August, their private company counterparts averaged target returns of 3.63%. Those open Business Relief AIM offers that do publish their ambitions, of which there are only four at the moment, tend to be looking much higher than this at between 8% and 10%. EIS offers tend not to pay any income at all, although growth is tax-free. Not all EIS offers quote a target return, but two of the three EIS AIM offers now open do, with one at 130% and one at 150%. These would certainly be inflation busting. VCTs are expected to receive a big boost in funding since they can pay tax-free dividends which is a major bonus when dividend taxes will be rising in 2022. Only one of the open VCTs quotes a target dividend which is 4%, with 5% also being a common target dividend among recent AIM-quoted VCT offers. With reinvestment of these types of values, compounding growth over a period of years can certainly offset and outpace an increasingly inflationary context.
Target returns
BR 87.2%
VCT 5.1%
EIS 7.7%
OFFER TYPES OF OPEN TAX-ADVANTAGED AIM OFFERS
Minimum subscription levels
Minimum Subscriptions
Mode £100,000
Min £5,000
Median £40,000
Max £200,000
Average £55,000
OPEN OFFERS
- Joseph Cornwall, Investment Analyst, Puma Investments
Owner-managers remain a feature of AIM, with managers aligned with shareholders. They are operationally involved and live and breathe their business. The passion comes across.
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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. Since Business Relief offers make up the vast majority of AIM-based tax-advantaged offers, this is good news for AIM investors.
Fees in each offer type skew AIM tax-advantaged averages
FEES AND CHARGES
An increase in the number of open EIS offers has contributed to an increase in average initial charges since May. The average initial charge across AIM Business Relief offers is 0.40%, lower than the average across AIM and non-AIM Business Relief offers taken together. The overall average for these offers is pushed up significantly by the higher rates typically charged where the underlying investees are unquoted. This magnifies the amount by which initial fees charged by AIM-focused BR managers are lower than those charged by their EIS and VCT counterparts. The most often quoted initial charge in AIM focused tax-advantaged open offers is zero, but there is a wide range with the maximum currently standing at 7% from a Business Relief offer. When it comes to VCT AIM-focused offers, the average initial charge is 2.5%. As is the case in Business Relief, non AIM private company offers push up the overall average to above 3%.
Initial Fees
The variation in AMCs since the last Update is less notable as there is somewhat less variation between AMCs across the different tax wrappers and one of the EIS offers has no AMC at all. The mode here is 1.5% and maximum is 2%, but, as is the case with the abovementioned EIS offer, some managers do not charge an AMC at all. The average AMC for open AIM-focused VCT offers is 1.75%.
Annual Management Charge
Average fee (AIM and non AIM offers) EIS (Open offers at September 21) VCT (Open offers at October 21) Business Relief (Open offers at August 21)
Total Initial Charge
may 2021 0.47%
april 2020 0.64%
october 2021 0.60%
Total AMC
may 2021 1.33%
april 2020 1.32%
october 2021 1.30%
- Simon Housden, Sales and Marketing Director, TIME Investments
The AIM market was launched to provide capital to growth businesses and will be vital for supporting UK businesses that continue to be affected by the pandemic.
AVERAGE initial fees
AVERAGE annual management charge
Average EIS, VCT and BR fees
HOSTILE TAKEOVERS A DANGER TO AIM? AIM IN FCA FOCUS
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ARE HOSTILE TAKEOVERS A DANGER TO AIM INVESTORS AND UK PLC?
There has been recent speculation that hostile takeovers are likely to become a growing part of the UK investments landscape, with AIM listed companies being a prime target. What’s more, they may present an obstacle to the prime minister’s call for more inward investment from UK investors. According to the LexisNexis, ‘Market Tracker Trend Report: Trends in UK Public M&A deals in H1 2021’, there were 48 transactions involving Main Market and AIM companies, 22 were firm offers and 24 possible offers. Firm offers made by UK bidders (7) were outnumbered by offers from US companies (11). Other bids were made by companies from Australia, Luxembourg and Russia. Where AIM is concerned, the increase in the average market capitalisation of its constituents to its record current value of £178 million, appears to have been attractive to those who view it as a reflection of their growing quality. But there are also wider drivers for the high levels of M&A activity. Big private equity players built up significant reserves of dry powder when pandemic uncertainty hit and they are finding the best deals in the UK. As a result, Pinsent Masons legal director, Adam Cain, said, “it is likely that we will see an increased number of hostile approaches, particularly for companies with an attractive asset base that are perceived to be significantly undervalued.” Even after the market bounce backs since the initial Covid-19 shock, the combined impacts of Brexit and Covid-19 have seen UK assets trading at a discount to global markets since 2016.
US bidders are particularly well-placed to take advantage of the relative weakness of sterling and the opportunities that the pandemic has presented. They are cash rich and are experiencing a sustained surge in the popularity of SPACs. This is not exactly what Boris Johnson and Rishi Sunak had in mind when, in August, they sent an open letter calling on the UK’s institutional investors to seize the moment for an ‘Investment Big Bang’ to boost Britain’s long-term growth. In fact, Kate Cooper partner at Freshfields Bruckhaus Deringer said, “One interesting global trend that we have observed in recent months is activist opposition to deals increasing and in fact exceeding demands pushing for M&A. We have certainly seen this being played out in the UK market in a number of recent takeovers. Rather than opposing the deal in principle, activists are questioning the timing of some deals and pushing for better terms, claiming that UK plc is being acquired on the cheap by opportunistic funds.”
American interest is high
- Dominic Ross, Partner, White & Case
We are seeing more opportunistic bid processes, particularly from international and private equity bidders, even if they are not ultimately leading to hostile bids. We expect this to continue, and to see shareholders engaging and contesting valuations.
Source: Market Tracker Trend Report: Trends in UK Public M&A deals in H1 2021, LexisNexis, July 2021
What are SPACs?
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.
Unfortunately, individual retail investors are unlikely to hold a large enough stake to change the outcome of these votes. But, on the other hand, in the vast majority of takeovers seen in the first half of 2021, there was a substantial bid premium where the share price increased during the offer period. The highest was an eye-watering 79%, although more commonly, it was in the lower, but still very pleasing 20% - 50% range.
Smaller stakes have little choice
BIDDER JURISDICTION (FIRM OFFERS)
UK US UK/US AUSTRALIA LUXEMBOURGH RUSSIA
1
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Neil Blankstone, Lead Investment Manager IHT Service, Business Development Director, Blankstone Sington
The seemingly exponential growth in Model/Managed Portfolio Services, as well as the ESG explosion, has changed a lot of people’s focus, but the fundamental requirement for appropriate due diligence associated with investment will never change
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AIM IN FCA’S PROPOSALS TO STRENGTHEN FINANCIAL PROMOTION RULES
AIM shares fall into the regulatory category of Readily Realisable Securities (RRS). They are liquid securities for which there is a reliable market and pricing. The FCA generally expects that, because they are traded on a venue providing liquidity and are subject to initial and ongoing transparency requirements, they are more likely to be appropriate for retail investors than an unlisted security. However, the financial watchdog points out that these securities still come with a risk that an investor could lose their money. RRS were included in the FCA’s Discussion Paper DP21/1, considering,’ Strengthening our financial promotion rules for high-risk investments and firms approving financial promotions’ published in the second quarter of 2021 and closed on 1 July. The paper’s aim was to address the harm to consumers from investing in inappropriate high‑risk investments which do not meet their needs. The intention is to make changes to the financial promotion rules. The regulator stated in the paper that, “we recognise that higher‑risk investments can have a place in a well‑functioning consumer investment market for those consumers who understand the risks and can absorb potential losses.” It goes on, “Even where it might make sense for someone to take more risk, consumers should be spreading their money across a diverse range of investments. This is to avoid a significant loss if a single investment, or type of investment, fails.” This is, of course, the benefit of the portfolio approach taken by the investment managers of tax-advantaged AIM offers.
Readily realisable securities
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.
While RRS can generally be marketed to retail investors without restrictions under the FCA’s financial promotion rules, and they are not necessarily associated with high-risk investments, the FCA considers the actual liquidity levels available to fundamentally impact the real risk profile. Consequenty, there are concerns regarding the wide range of investment exchanges/multilateral trading facilities taken in by the official RRS definition in the financial promotion rules. There is global scope in terms of exchanges with varying due diligence requirements, admission standards and regulations. The current definition also includes the legacy concept of a designated investment exchange (DIE), which is now defunct and the definition of “officially listed” varies between the UK and certain EEA states. For the FCA, these issues present “an unacceptable risk of arbitrage.” The FCA’s proposal is to stop treating exchanges in EEA Member States differently from exchanges in other third countries such as the United States, and therefore to remove “or EEA State” from the definition of RRS for the purposes of the financial promotion rules. The regulator also aims to remove any fixed income securities traded on an exchange‑regulated multilateral trading facility from the definition.
Removing regulatory arbitrage risks
RRS Definition
Except in cases of attempted regulatory arbitrage, these changes are unlikely to have an effect on investments in AIM shares. However, views were sought on how to amend the definition of an RRS in the context of the financial promotion rules. The main question is whether the focus on liquidity by reference to a list of investment exchanges is the right way to distinguish securities which are appropriate for mass‑marketing without restrictions to retail investors from those which are not. Given AIM’s status as a market with some much smaller constituents than the main markets, a reputation for higher volatility and the need for experienced stock picking, it is possible that some respondents may have the opinion that some level of mass-marketing restrictions should be in place. At this point though, that is not a stated aim of the FCA.
Possible impacts on AIM?
AMATI GLOBAL INVESTORS BLACKFINCH INVESTMENTS BLANKSTONE SINGTON CLOSE BROTHERS ASSET MANAGEMENT HAWKSMOOR INVESTMENT MANAGEMENT PUMA INVESTMENTS SARASIN & PARTNERS STELLAR ASSET MANAGEMENT TIME INVESTMENTS UNICORN ASSET MANAGEMENT Comparison Table
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manager video content
www.amatiglobal.com 0131 503 9115 info@amatiglobal.com
ANNA Macdonald
FUND MANAGER
manager content
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www.blackfinch.com 01452 717070 enquiries@blackfinch.com
Martin Perrett
Business Development Manager
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pumainvestments.co.uk 020 7408 4070 advisersupport@pumainvestments.co.uk
Andrew Derrington
Senior Business Development Manager
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JOHN FEARON
NORHTERN RELATIONSHIP MANAGER
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CHRIS COX
time-investments.com 020 7391 4747 questions@time-investments.com
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www.unicornam.com 020 7071 3940 unicornam@lgbrcapital.com
ALEX GAME
Fund Manager and ESG Officer
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AIM’s VCT-qualifying companies can escape dividend tax rise
Amati Global Investors 2010 As at 30/09/2021: Firm: £1,401.0m AIM IHT Portfolio Service: £49.5m A discretionary investment management service useful for the purposes of IHT planning. An investment in the Amati AIM IHT portfolio service will be invested in a carefully curated portfolio of 30-40 rigorously analysed, well financed AIM listed businesses, which we believe will qualify for Business Relief We are able to select qualifying companies from all sectors, given our waterfront research coverage, and our in-depth knowledge of both established companies and those coming to market. August 2014 Funds can be held within a General Investment Account or within an ISA. 30 (as at 30/09/2021) N/A Growth N/A All portfolio companies are quoted on AIM. Under normal market conditions we would expect to liquidate client portfolios within 1-2 weeks, although in certain circumstances this could take much longer No. Dividends are reinvested into the portfolio. £50,000 £20,000 Nil Annual 1% plus VAT on portfolio value, paid monthly in arrears • Annual 0.3% on portfolio value, subject to a £120 minimum and £3,000 maximum, paid quarterly in arrears • Annual £35 nominee fee • No additional charge for the ISA wrapper • HMRC-approved probate valuations £25 • No additional platform or manager charges • No performance fees Other Charges • Advisory charges as agreed between the client and their financial adviser
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
Blackfinch Adapt AIM Portfolios 1992, 2013 as Blackfinch Investments Limited. £582.3m / £53.4m at 06/09/2021 The Adapt AIM Portfolios invest in fast-growing firms listed on the Alternative Investment Market (AIM). We only invest where we believe stocks will likely qualify for Business Relief (BR). BR can deliver Inheritance Tax (IHT) relief after just two years (and if held at the time of death). AIM brings return potential and the ability to hold in an AIM ISA. The portfolios offer growth and income options. We manage them in partnership with Chelverton Asset Management, a smaller companies specialist with a proven track record. July 2016 Clients have the choice to hold their investment in an ISA wrapper The current buy list contains 30 companies for the Growth Portfolio and 21 for the Income Portfolio. N/A Income and growth (to qualify for up to 100% Business Relief) N/A Under normal market conditions we would expect exits to be completed within two weeks. "01/07/2020 - 30/06/2021 Dividend Yields: Growth = 1% Income = 2.1% The 2020-21 year saw dividends decrease as companies weathered the COVID-19 economic downturn. Historically performance has been between 1.4%-1.9% for the Growth and between 3.6%-4.8% for the Income portfolio." £15,000 £5,000 0% entry fee for applications 1.5% + VAT per annum on the value of all portfolios Dealing Fee of up to 1% on the value of the transaction. Dealing fees may vary depending on the platform used to invest or the value of each trade. For clients who invest directly with us, the following fees will also apply: Annual account fee: £50 Trading fees: £10.50 per trade Administration fees: Withdrawal: £15 Same day payment: £25 Stock transfer: £10 Account closure: £50 For clients who invest via a platform, while overall fee structure varies between platforms, transaction fees can be as low as zero in some cases.
Blankstone Sington Limited 1976 AUM/A = £475mn Total AIM IHT Portfolio Service AUM = £43.75mn Bespoke Investment Management service that targets Business Relief (BR) through investment in between 25 and 40 companies across a range of sectors, listed on the AIM market. 2010 BR Qualifying investments on the AIM market - can be undertaken in ISA 25-40 Soft Close @ £150-£175mn Growth & Income N/A Shares all AIM listed….90% immediately anticipated maximum 14 days Y if required or can be used to offset fees. Advised = £20k Direct Investors = £40k £5k Nil Advised Investors: AMC 1% on first £500k, 0.75% on balance over (plus VAT). Annual Administration charge 0.25% subject to a minimum of £200 maximum £1200 (plus VAT) No dealing charges
Close Brothers Asset Management 1878 £15.6bn at 31/7/2021 / £375.1m 31/8/2021 The Close Inheritance Tax Service (CITS) is a specialist, discretionary investment management service designed to provide accelerated relief from IHT by investing in Business Property Relief (BPR) qualifying shares quoted on the Alternative Investment Market (AIM) and the Aquis Stock Exchange (AQSE). January 2001 Eligible for ISA investment 25-35 N/A - evergreen 1. To achieve a beneficial tax status by capitalising on Business Relief (BR) 2. To preserve capital** and achieve growth over the long-term within the context of BR 3. To diversify risk *A company that qualifies for BR at the time of investment may cease to qualify for reasons outside our control at a later date, which means any tax benefits will be lost until the capital is reinvested in BR qualifying company. **This is not a capital protection service and your client’s capital is at risk. N/A Target under 10 days for withdrawals of £25,000 and below N £50,000 £50,000 £250 + VAT 1.25% + VAT of portfolio value 1% dealing fee on the value of each transaction
Puma Investments 1985 (Shore Capital, parent company of Puma Investments) £1.5 billion / £87 million A discretionary portfolio service that seeks to deliver long-term growth and mitigate IHT by investing in a carefully selected portfolio of AIM shares. The Service is available in ISAs via a new or existing account and is also accessible via the Ascentric, Fidelity, Standard Life and Transact wrap platforms. July 2014 ISA and non-ISA eligible, and expected to qualify for Business Relief 25-35 N/A Investing in profitable companies with sustainable margins. Ultimately a company must be able to deliver free cash flows. We look for this cash to add shareholder value through reinvestment to drive organic growth; facilitate acquisitive growth, and; potentially pay out as dividends. N/A Immediate, subject to ability to realise investments. Yes - via regular withdrawals £20,000 £10,000 1% 1.25% Dealing fee: 1%
Hawksmoor Investment Management 2007 £1.5 billion / £25 million Hawksmoor’s award-winning AIM Portfolio Service enables your clients to invest in growth opportunities among the UK smaller companies listed on AIM, as well as to reduce their potential inheritance tax (IHT) liability. Its boutique size means it is not contrained only to AIM's largest companies but can seek high quality investments from a wider opportunity set. This results in genuinely differentiated portfolios that stand on their own investment merit. January 2016 ISA, IHT relief 20 - 30+, depending on size of portfolio N/A To provide sustainable capital growth by investing in high-quality smaller UK companies, whilst also enabling clients to reduce their potential inheritance tax liabilities. N/A 1 week Y £30,000 £1 NIL 1.5%+VAT £30 per transaction
Manager name Year founded AUM (In total) AUM (on AIM) Description of Offer Launch Date Tax wrapper or relieF No. of holdings TARGET FUNDRAISE 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 £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%
TIME Investments 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
Unicorn Asset Management 2000 £1.5bn (In total) / £500m (on AIM) Designed to mitigate IHT liability after only 2 years by investing in a portfolio of 25-40 AIM stocks that qualify for Business Relief. Access Unicorn’s AIM expertise and choose between two portfolio options – Dividend Focus (paid monthly or reinvested) and Growth Focus. Investors can now also opt for an ESG overlay via the Responsible Investment Portfolios. Growth Focus Portfolio (January 2016) / Dividend Focus Portfolio (April 2016) IHT and ISA Growth Focus Portfolio (29 holdings) / Dividend Focus Portfolio (28 holdings) 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 Y (For Dividend Focus Portfolio) £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%
Stellar Asset Management 2008 c.£220 million asset backed; c.£82 million 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%
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
Close Brothers Asset Management 1878 £15.6bn at 31/7/2021 / £375.1m 31/8/2021 The Close Inheritance Tax Service (CITS) is a specialist, discretionary investment management service designed to provide accelerated relief from IHT by investing in Business Property Relief (BPR) qualifying shares quoted on the Alternative Investment Market (AIM) and the Aquis Stock Exchange (AQSE). January 2001 Eligible for ISA investment 25-35 N/A - evergreen 1. To achieve a beneficial tax status by capitalising on Business Property Relief (BPR)* 2. To preserve capital** and achieve growth over the long-term within the context of BPR 3. To diversify risk *A company that qualifies for BPR at the time of investment may cease to qualify for reasons outside our control at a later date, which means any tax benefits will be lost until the capital is reinvested in BPR qualifying company. **This is not a capital protection service and your client’s capital is at risk. N/A Target under 10 days for withdrawals of £25,000 and below N £50,000 £50,000 £250 + VAT 1.25% + VAT of portfolio value 1% dealing fee on the value of each transaction
Stellar Asset Management 2008 c.£220 million asset backed; c.£82 million 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
More AIM-focused EIS - a glimpse of the future? FUTURE MARKET CHANGES CONSIDERED What the managers say
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More AIM-focused EIS - a glimpse of the future?
In the summer a new AIM-only EIS offer launched. It is not the first offer of this kind, but it is the first to open for eight years. This is still not a crowded marketplace - with only three other managers having worked in this space and just two other offers currently open. The first of these offers opened in April 2011 with annual offerings until 2014 and then changed to an evergreen service until closing. It was followed by another manager’s launch of an evergreen offer in October 2011 and a third manager has had annual offerings since September 2013. The total number of offerings to date stands at seven. This was a period that saw several enhancements to the EIS rules with an increase in the rate of income tax relief available through EIS from 20% to 30% in April 2011. Higher levels of investment into larger companies were allowed from April 2012, after which the number of full time equivalent employees allowed went up from 50 to 250 and gross assets allowable at the time of the share issue went up to £15 million before the share issue, or £16 million immediately after (up from £7 million before and £8 million after). The annual amount raised by an individual company was also raised to £5 million (up from £2 million.) Since then, the field of EIS-qualifying companies has narrowed with subsidised electricity generation added to the list of excluded trades in April 2015 and then all energy generation from April 2016. However, AIM is home to many of the genuinely entrepreneurial companies that the risk to capital conditions, implemented in December 2017, are designed to focus funding on. These conditions aim to exclude tax-motivated investments, where the tax relief provides most of the investors’ return with limited risk to the original investment thanks to capital preservation strategies. Of course, AIM represents a finite universe of companies, but, in terms of size, there could be several hundred AIM constituents that sit within the gross asset value restrictions that apply to EIS-qualifying companies: A company is allowed to have gross assets of up to £15 million before an EIS fundrase. A company can have a market cap of way in excess of £15 million and still be eligible for EIS, as market cap and assets on balance sheet are unconnected, with market cap including items such as intangible assets including management expertise, growth prospects, market share, the company's reputation and the psychology of the market itself. Looking just at AIM-listed firms with market caps of up to £15 million, the count already exceeds 200. Whether they, and the others with up to £15 million in gross assets, meet the restrictions on company age and number of employees, and avoid EIS’ excluded trades will take a bit more digging. For a start, over 10% of AIM listed companies with a market cap below £15 million have main activities in banking/investments which don’t qualify for EIS status. Nevertheless, the strong demand for UK equities and impressive performance of innovative, younger companies during the pandemic outbreak may be an enticing prospect for more EIS investment managers. They may also be tempted by the development of the knowledge-intensive companies (KICs) market (HMRC statistics show the number of KICs raising funds hit 385 in 2019/20, more than double the number in the first year of the classification’s existence in 2018/19), which typically includes the types of technology and pharmaceutical firms currently popular on AIM.
As we’ve seen in section four of this Update, the regulator continues to place a focus on client outcomes. The further segmentation of certain client groups to ensure their suitability for investments as a method of protecting them from those whose risks they may not fully understand, is high on the FCA’s agenda. But that does not mean the FCA is anti investment by individuals, despite all investment carrying risks. Far from it. In September, FCA’s 'Consumer Investments: Strategy and Feedback Statement' was published. The aims, among others are, by 2025, to: Sarah Pritchard, Executive Director of Markets at the FCA, said, “Investors have never had more freedom - technology has democratised the market, new products have become available, and people have better access to their life savings than before. But that freedom comes with risk. We want to give consumers greater confidence to invest and to help them do so safely.”
FCA driving investment over holding cash
Reduce by 20% the number of consumers who could benefit from investment earnings but are missing out. There are nearly 8.6 million consumers holding more than £10,000 of investible assets in cash.
It is worth remembering though, that EIS and VCT investee eligibility criteria are almost identical and that means there is likely to be competition from VCT managers when it comes to investing in the newly-issued shares of any attractive qualifying company, not to mention from other AIM investors. It is also likely that VCT investment managers, like their EIS counterparts, will recognise the current drivers that make AIM such a fertile hunting ground for their offers. In fact, VCT investment managers have proved much more prolific in the number of offers they make including AIM constituents as part of their target investments - MICAP lists a total of 49 open and closed offers at the date of publication. Having said that, only five VCT managers have a sole focus on AIM investees. When asked why so many more VCT fundraisings have focused on AIM than EIS fundraisings, when the eligibility criteria for qualifying companies are very similar, Neil Pearson, partner and head of ESG and social value and Mills & Reeve, said, “unlike EIS funds, VCTs do not have to hold their investments for any set period of time. So liquidity would be much more relevant to a VCT fund manager who can sell an under-performing stock at any point (whereas an EIS fund must hold the shares for at least three years).” Another consideration is that the sale proceeds from EIS holdings go back to the investors – whereas in a VCT the money goes back to the VCT to be reinvested. As a result, liquidity (particularly the ability to sell shares when other investors in the same company are not selling) is more important. The tendency of VCTs to hold a larger number of underlying companies than EIS funds may also be a factor here that influences busy fund managers. According to Pearson, “the process for making investments in AIM shares is in some ways easier than making an investment in a private limited company – less due diligence, no investment agreement and warranties to negotiate, no seat on the Board, no bespoke terms for the investment etc. Which makes it easier for a VCT to make more investments more quickly.” He added that, “unlike EIS investors, VCTs are able to invest in portfolio companies by way of debt as well as equity. But every VCT must maintain a high proportion of its fund in ordinary shares. So if a VCT invests a proportion of its fund in AIM shares, that allows it to invest more, by way of debt, in the unquoted side of its portfolio.” Whatever your tax-advantaged investment colours, there is no denying that the daily market pricing, visibility, availability of analysis, regulatory news flow and liquidity associated with public companies are positives when weighing up AIM or unlisted companies.
In the mainstream investments market, of the 8.6 million consumers who are missing out on potential financial gains, the FCA states that half could potentially benefit from investing. That means the number of those entering investment markets could actually increase by well over the 1.7 million being targeted by the regulator’s actions. If 1.7m people invested £10,000 each in the stock market, that represents a £17 billion influx of money to the investment market. One of the actions the FCA will take over the next three years is to, “explore regulatory changes to enable firms to provide more sales and support services to mass market consumers investing in straightforward products like stocks and shares ISA wrappers." Given AIM shares can be held within stocks and shares ISAs, how the combination of the BR-qualifying companies that can be found on AIM with a stocks and shares ISA can offer cgt, income tax and IHT efficiency, and the existing boom in stocks and shares ISAs (see section two of this Update), this must be good news for AIM investment. One area to improve, according to the FCA, is the reach of financial advice. There has long been a recognised advice gap in the UK, but the regulator’s research lays it bare, finding that only 8% of UK adults have received financial advice. The majority (54%) have received no support in making investment decisions. While transactional advice is an important service for consumers investing, smaller amounts of money” only a quarter (26%) of adviser’s revenue is attributed to one-off advice. It seems that there is work ongoing regarding the possible lifting of some of the administrative burden from advisers in relation to advice to new consumers to invest in products that suit their simple investment goals. The commercial viability of this is, however, still being analysed but the plan is to consult on the proposals early in 2022, so that they can be implemented at the start of 2023.
- FCA, Consumer Investments: Strategy and Feedback Statement, September 2021
There are 15.6 million UK adults with investible assets of £10,000 or more. Of these, 37% hold their assets entirely in cash, and a further 18% hold more than 75% in cash. Over time, these consumers are at risk of having the purchasing power of their money eroded by inflation.
Reminder: Current EIS and VCT investment eligibility criteria
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.
Enabling access to advice or other support for consumers to make the decision to invest
To support the development of an environment where consumers can invest confidently, it must be clear to consumers what happens if things go wrong and the cost of redress must be met in a fair and sustainable way.
Encouraging firms to help consumers identify and access investments that suit their circumstances and attitude to risk
Ensuring consumers only access higher risk investments knowingly
Protecting consumers from scams, to maintain trust and confidence
Cash deposits
Mainstream investments
Higher risk investments
Scams and fraud
Reminder: Knowledge intensive companies
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
Source:Consumer Investments: Strategy and Feedback Statement, FCA, September 2021
Sam Barton, Investment Director, Close Brothers Asset Management
Much as we are seeing some larger businesses list on AIM thanks to the ease of raising capital and improving governance regime, the market still offers an excellent environment for smaller companies to thrive.
Creating the right environment for consumers to invest
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FUTURE MARKET CHANGES CONSIDERED
The UK Secondary Capital Raising Review, led by Mark Austin, was launched on 12 October 2021 to look into improving further capital raising processes for publicly traded companies in the UK. This is in response to the publication of Lord Hill’s independent UK Listings Review in March 2021, an independent review commissioned by the Chancellor in November 2020 to take account of potential changes that could encourage more high-quality UK equity listings and public offers now that the UK has regained responsibility for its own financial services rulebook. While the UK Listings Review focused on the main markets, there were some takeaways for AIM, including the possibility that the implementation of its recommendations could make those markets more attractive and therefore have an impact on AIM listings. This was examined in our last AIM Update and you can read the full article here. The UK Secondary Capital Raising Review comes about because much of the £30 billion new equity capital raised during the pandemic in 2020 was raised via private placings which involve the sale of shares to pre-selected (generally large) investors and institutions rather than on the open market. The speed and ease of private placements versus open market offers has been identified as the key driver here and one of Lord Hill’s recommendations was to seek methods to improve the capital raising process as well as for more to be done to empower retail investors. The UK Secondary Capital Raising Review will focus primarily on ways to speed up the secondary capital raising process, consider whether new technology can be helpful here and look at what other countries do that might be worth implementing in the UK. In the Terms of Reference of the review, there is no specification of which public markets will be encompassed by it, but there is reason to suspect that there will be at least some read across from recommendations for the main markets to AIM as, in 2020, of the 1882 further funding issues that took place on AIM, 469 were placings for cash. Recommendations are expected by Spring 2022.
Secondary capital raising review and AIM
In its July 2021, ‘Primary markets effectiveness review consultation consultation (CP21/21)’ the FCA proposed to increase the minimum market capitalisation required for new listings on the premium and standard listing segments from £700,000 to £50 million. The intention is to prohibit new listings of firms with a market cap below £50 million because, “we consider that smaller companies may benefit from the sort of support given by the regulatory regime in place at alternative venues such as AIM or AQSE Growth Market. This support can include use of nominated advisers (NOMADs) or corporate advisers. … This recognises that these companies may need additional guidance due to their smaller size… Admission to AIM or AQSE Growth Market may also be preferable as the investor base of companies admitted to these venues also tend to be more aware of the risks of investing in companies of smaller size. Admission there may provide clearer signals to investors and lead to better pricing.” The view is that this is likely to mean that the number of companies listing on AIM could increase as some smaller companies which would previously have been admitted to the Official list will instead choose to be admitted to trading on other markets such as AIM. An increasing spread of companies available for investment is of course of great benefit to AIM and its investors. In addition, the change will cut down on wasted resources spent by the regulator when engaging with applicants with lower market capitalisation that ultimately prove unable to meet eligibility requirements for the main markets. But the main goals are to give investors greater trust and clarity about the types of company with securities admitted to different markets, in turn improving confidence in public markets. The consultation paper closed for comment on 14 September and subject to its feedback the regulator will seek to make relevant rules by late 2021.
FCA seeks to drive smaller companies to AIM
Source: Primary markets effectiveness review consultation (CP21/21), FCA, July 2021
THE CAUSAL CHAIN SHOWING THE IMPACT OF THE FCA's PROPOSAL IS SET OUT BELOW
FCA requires a MMMC of £50m for new standard and premium listings
Regulation better aligned with investors expectations around listed companies and setting more positive incentives for smaller companies
Reduce number of smaller companies admitted to the Official list with low liquidity and high share price volatility
More smaller companies admitted to trading on AIM and AQSE where they can get better support
Harm reduced
Reduced potential for investment detriment
Increased confidence in listed markets
- Stephen English, Investment Director, Stellar Asset Management
We believe “tomorrow’s winners” will OVERWHELMINGLY come from the smaller end of the AIM market (sub £250m market cap).
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Q2 saw AIM’s biggest ever listing in Victorian Plumbing Group, with a market capitalisation of £850 million. What does that say to you about the future direction of AIM?
DP21/1 primarily covers investments in private companies made on crowd funding websites or peer-to-peer loans issued through websites, and by extension unregulated funds making similar investments. In terms of the quoted markets the papers refers to the mini-bonds scandal. We don’t think that this has implications for investments in AIM quoted companies, which meet the definition of Readily Realisable Securities.
As readily realisable securities, AIM shares fall into the FCA’s Discussion Paper DP21/1, considering,’ Strengthening our financial promotion rules for high-risk investments and firms approving financial promotions.’ What are your thoughts on how AIM could be impacted?
AIM is no longer seen as a ‘stepping stone’ to a main market listing, and larger companies are happy to list and then stay on AIM. There are well over 30 companies of over £1bn. There is a significant pipeline of flotations to come, with overseas companies also expressing an interest in listing here, sometimes as a dual-listing alongside Nasdaq.
Paul Jourdan
CEO Amati Global Investors
So how are the managers feeling about the BR market and overall investment market conditions? Here's what they have to say.
Given the changes the government is already making to UK legislation, such as PRIIPs, previously constrained by the EU, what other changes would you like to see made in the realm of AIM, now that UK financial services are somewhat freed from EU regulation?
We welcome the changes to the listing rules and the broad set of recommendations in Lord Hill’s review, particularly those relating to Prospectus requirements. In areas relating to State Aid legislation, we would very much like to see an extension put in place soon for the VCT and EIS schemes, which are currently due to end in 2025.
Van Hoang
Investment Manager Blackfinch Investments
We do not anticipate any changes to the promotion rules discussed in the paper to materially impact our portfolio offerings. Our portfolios are open to investment for advised clients only, meaning there is an extra layer of due diligence which the adviser undertakes for the client. However, we remain ready to adapt to any legislative changes if needed.
It is great to see AIM breaking new records. Large listings such as this boost the reputation of AIM, and highlight the breadth of companies it can accommodate. As larger companies continue to list successfully, any lingering doubts of liquidity issues dissipate. We can see this record being beaten in the future.
We welcome regulatory changes that improve the clarity of the existing legislation and further protect capital markets. While we would not want to see differentiation from EU legislation pursued for its own sake, finding specific areas to enhance – such as the UK MAR insider list amendment – will give investors further confidence when deploying their funds in UK markets, including AIM.
This could have a particular ramification for introducer led investors into AIM based Investment Services seeking to capture the benefit of Business Relief. It is likely that requirements will become even more onerous with, for example, firms having to take even greater steps to independently verify that a retail investor is either high net worth, sophisticated, or that they are not investing more than a certain percentage.
The Victoria Plumbing IPO does not, in itself, signal higher value companies seeking to take advantage of the lighter touch requirements of an AIM listing as compared to a Full Listing. There has been a sizeable increase in the use of public (and private) markets in the last year, more a reflection of events as we ease out of COVID pandemic. The jury is out as to whether AIM will see more larger Market Cap companies “listing”.
The biggest change I would like to see as a Manager of an AIM based investment service is clarification as to what constitutes a company that qualifies for Business Relief. A tightening of the criteria and removal of uncertainty, with a consistent way to identify and demonstrate performance, would be beneficial for all. AIM investing has “grown up” markedly in the over 21 years it has been around…the rules need to grow up with it.
Although investment in AIM securities should be viewed as high risk (hence our requirement that all investors in the Close Inheritance Tax Service receive ongoing advice), I am of the view that the underlying holdings in portfolios are unlikely to be seen as “Speculative Illiquid Securities” per the FCA’s description, although shares in some unlisted BPR services may fall under this description.
Much as we are seeing some larger businesses list on AIM thanks to the ease of raising capital and improving governance regime, the market still offers an excellent environment for smaller companies to thrive. The importance of tax reliefs such as VCT, EIS and BPR in allowing these businesses to prosper cannot be overstated.
A relaxation of the rules for VCT and EIS funding would be a good place to start. The smaller companies are the lifeblood of AIM and it is instructive that Abcam, Ideagen and Learning Technologies Group all benefitted from this tax-advantaged funding. Unfortunately, it is a little late to undo some of the consequences that MIFID II had on smaller companies.
AIM is, and always will be, a higher-risk investment arena given the nature of smaller company equity. It is essential that AIM Portfolios are marketed only to those individuals for whom it is suitable and who understand the risks. I think the vast majority of providers and financial advisers understand this; AIM Portfolios will remain a useful tool in the estate planning tool shed.
AIM today is home to some very large companies. I think its reputation has massively improved in recent years; it is no longer seen as merely a steppingstone to a full main market listing, but a viable long-term home for growing businesses. It’s a market that is working well, for both company and investor. Despite fewer companies, the aggregate market capitalization of AIM is at a new record high. Tighter listing rules, especially around the responsibilities of the NOMADs, have resulted in fewer but, we believe, far higher quality businesses. It is a case of quality over quantity.
It has taken several decades to get there, but I think AIM today strikes a good balance between sufficient regulation to protect investors, whilst not introducing an overly costly and bureaucratic regime on what are often small, young, entrepreneurial organizations. The financial industry has seen no shortage of regulatory change – I wouldn’t be adding anything to the wish list for further tinkering!
The discussion paper in question seeks to improve marketing restrictions and protect retail customers from inappropriate high-risk investments. The paper is primarily focussed on investments other than readily realisable securities, and it appears unlikely that AIM will be significantly affected given the existing adherence to transparency and disclosure rules, as well as a governance code.
The cadence of UK IPOs this year has significantly increased. To the end of September there were 80, compared to 39 and 33 in each of 2020 and 2019. The average market capitalisation of companies listing on AIM has also moved forward significantly, and is 12% higher than 2019 levels. This and the landmark IPO of Victorian Plumbing Group are signs that the market is considered a strong place to raise capital.
Our preference would be for the UK government to maintain the existing AIM structures, and signal continued support for the role of the AIM market in feeding capital to small and growing UK businesses.
Small cap investing carries risks. We firmly believe investors should seek professional investment advice when considering AIM investments. Professionals promoting investment in the AIM market must be balanced in highlighting the risk/reward, as it may not be a suitable investment for everyone. Diversification is also a key factor and the promotion of an AIM portfolio service of 25-35 stocks should be very different to the promotion of a single AIM-listed company. AIM is, however, an established and liquid stock market with oversight and governance and in that sense, it should not be considered in the same category as unregulated investments such as crypto-currency or peer-to-peer loans.
It has been a busy time for the AIM market, with raising and M&A activity on course for a record year. 2021 to date has seen a positive trend of companies joining AIM, raising £1,889m of new money across 61 new issues in multiple sectors. The Victoria Plumbing IPO is an exciting example of the type of companies coming to AIM. Therefore, for true stockpickers like ourselves, AIM remains highly attractive as it boasts founder-led businesses (tax incentives), which is exactly the type that we like to target.
It remains relatively early days since the UK left the EU and therefore difficult to predict how the government may make changes in the context of UK financial regulations. However, AIM remains a highly attractive market on which smaller and fast-growing businesses can gain a public listing and raise equity capital to support their future growth plans. We remain firmly of the view that any regulatory changes that are made should further enhance AIM’s reputation as an attractive stock market on which to pursue a public listing; both for the founders and entrepreneurs of UK companies and for minority investors in AIM shares.
It is our responsibility, along with peers, to make sure that the risks of AIM are communicated effectively, such as the higher risk nature of investing in smaller companies and the lower market liquidity. These and other significant risks are communicated by us and we would abide with any additional disclosure requirements.
AIM is a maturing market that provides good access to capital to smaller companies. It is popular amongst owner-managers that include many high-profile companies such as Fever-Tree, Boohoo, RWS as well as Victorian Plumbing. This is in part due to the Business Relief benefits which would be foregone by owner-managers if they were to list on the Main Market. Owner-managed businesses can offer a strong alignment of long-term interests with minority shareholders.
The FCA is currently consulting on changes to allow research to be written that is free to access for AIM’s smallest companies. Smaller AIM businesses can find it frustrating generating interest in their business, so to allow research to be available free of charge on their company increases their prospects of attracting capital and enabling them to grow into much larger businesses in the years to come.
We remain supportive of proposals that seek to highlight the risks of investing, so long as they do not unnecessarily restrict the ability of certain individuals to do so. We do not believe that any changes brought about by this review to strengthen financial promotion rules are likely to meaningfully impact the AIM market.
For a while now the AIM market has seen a trend towards fewer but larger and more established businesses listing. The fact that Victorian Plumbing Group is the biggest company to have listed simply reflects this. Over time, we would imagine that more and more companies will list their shares on AIM as there are a wide range of benefits in doing so such as the provision of liquidity to founders and other shareholders.
A relaxation of the rules to allow large AIM companies to qualify for inclusion in the portfolios of VCTs and EISs would be welcome.
We welcome anything that views AIMs risk more holistically. The paper’s thrust, we believe, is more at the DIY investor trading in highly speculative, leveraged, binary in nature and/or crypto who, crucially, are not advised. A highly diversified portfolio of up to 40 AIM stocks, advised by an IFA, should see no impact.
It reinforces an already established trend of generally larger and higher quality businesses choosing to list on AIM rather than the main market. For the company, the benefits are myriad, especially for those looking to use capital markets to grow, while the downsides versus the main market are vanishingly small, such is the deep pool of capital now on AIM.
Hopefully continued democratisation in terms of retail access to AIM listed companies, which was accelerated during Covid. Broad retail support is crucial in terms of daily liquidity and marginal price setting. Related to that we expect to see more done on reducing the barriers Mifid2 put up, particularly in terms of access to well written equity research.
Max Ormiston
Fund Manager Unicorn Asset Management
7. Further Reading
Learning objectives CPD and Feedback About Intelligent Partnership Disclaimer
learning objectives
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HOW DID YOU DO?
Covered in section 2, Market Update
Benchmark products and providers in the market against one another
Identify the main developments and news in the AIM market
Covered in section 5, Managers in Focus
Describe how AIM fits into the FCA’s current regulatory focus
Covered in sections 4 Industry Analysis and 6 What’s on the Horizon
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
Intelligent Partnership has achieved accredited status from the CII and PFS. Members of these professional organisations represent the majority of the insurance, investment and financial services industry.
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eaders of the AIM Quarterly Update can claim up to two structured CPD hours towards their CII or PFS member CPD scheme for the time spent reading this Update (excluding breaks). The review process included an assessment of the technical accuracy and quality of the material against CPD Accreditation standards. Achieving the recognised industry standard afforded by these organisations for this Update, and our training, demonstrates our commitment to delivering only balanced, informative and high quality content to the financial services and investment community. In order to obtain CPD and meet accreditation standards, readers must complete a short questionnaire and provide feedback on the report. This includes 10 multiple choice questions to demonstrate learning and a feedback form to assist in the compilation and improvement of future reports. To claim your CPD please visit: intelligent-partnership.com/cpd
Intelligent Partnership actively welcomes feedback, thoughts and comments to help shape the development of these Quarterly Industry Updates. Greater participation, transparency and fuller disclosure from industry participants should help foster best practice and drive out poor practice. To give your feedback please email: publications@intelligent-partnership.com
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