AIM: What you need to know about the Alternative Investment Market
On the morning of 19th June 1995, the London Stock Exchange’s new entry level platform was launched. The Alternative Investment Market, or AIM as it has become known, was established to help smaller companies that were seeking capital to fund growth and it expanded the scope of the Unlisted Securities Market (USM) that preceded it.
Ideal for companies unable to afford the costs associated with listing on the London Stock Exchange’s Main Market, AIM has offered exciting investment opportunities ever since for investors willing to invest in small, growing companies that are hungry for growth capital.
The key facts: AIM at a glance
If you’re considering investing in AIM stocks, then there are few high-level facts that you should familiarise yourself with.
Firstly, the AIM exchange should not necessarily be viewed as one homogenous entity due to the variety of companies listed. For example, market capitalisations of its participants range from just £1.3 million to over £4.5 billion, and nearly one-third of those companies are domiciled overseas.
Secondly, it’s a sizeable exchange. Take a look at how AIM has grown. On day one, the exchange launched with ten companies listing with a combined value of £82 million. Today, AIM lists over 850 companies with a combined market capitalisation of £104 billion. Since 1995, over 3,865 companies have raised over £115bn on AIM.
Not only does AIM have an ‘accelerator’ effect on growth-focused small businesses, but according to an analysis by Grant Thornton, has also had a ripple effect on the wider UK economy, with AIM companies contributing £33.5 billion GVA to UK GDP and directly supporting more than 430,000 jobs.
What kind of companies can float on AIM?
The types of companies that typically look to float on AIM are usually looking to raise between £1m and £50m via an IPO (Initial Public Offering). Whilst this may seem small compared to some of the enormous IPOs that we’ve seen in recent years, AIM has occasionally played host to larger raises that exceed £100m.
Companies listed on AIM are spread across 37 different sectors (90 different sub-sectors) and come from 26 different countries. With over 250 companies listed on AIM being from outside the UK, AIM is one of the most diverse exchanges in the world.
AIM, by its very nature is ‘lightly regulated’. Certainly when compared to the London Stock Exchange’s Main Market which requires companies seeking to float to have existed for three years, to have a market value of at least £700,000, to be willing to float a minimum of 25% of their share capital, and to have enough working capital for at least one years’ trading. Not having these requirements means that AIM can attract a much wider array of companies. It’s a formula which hasn’t changed since the launch of AIM and consistently allows companies to flourish.
That doesn’t mean there aren’t some outliers. Despite being home to a wealth of small-cap companies, AIM does still have a few companies with market capitalisation of over £1bn including ASOS, ABCAM and Fevertree. There are also many successful companies which got their start on AIM before moving on to bigger exchanges; Domino’s Pizza being one of the most prominent examples.
AIM provides investors with the opportunity to ‘get in early’ in new emerging sectors and help innovative companies secure capital and grow. For example, at present there are several companies listed on AIM that are pioneering AI and process automation; a sector which is expected to grow rapidly in the coming decades.
In general, though, AIM listed companies are typically small-cap and highly speculative in nature compared to their Main Market brethren. There’s a reason that AIM has gained a reputation as not being for the ‘faint-hearted’ investor. Yet, with an appropriate strategy in place, investors can still reap rewards from AIM.
How is AIM weighted?
AIM lists the top stocks on the market based on market capitalisation.
Whilst the top stocks are indeed huge e.g. ASOS and Fevertree are both worth billions, the rest of the AIM is actually more evenly weighted. Unlike the FTSE 100 which is dominated at the top by a few very large stocks such as Shell and HSBC, with a long tail of smaller stocks, the AIM 100 is much less concentrated.
Investment risks and incentives
AIM listed companies offer investors the opportunity to share in the results of rapid growth. But is there a downside? Well, as with any investment there is always the risk that the value of your investment will decrease. That’s the case for investment in FTSE companies as well as AIM listed companies. However, the shares of smaller companies can be more volatile (meaning their value goes up and down sharply) than the shares of larger companies listed on the London Stock Exchange’s Main Market. As we said earlier, investment in AIM listed companies is not always for the faint hearted.
Again, to put this risk into context, consider research from one trading firm which showed that around 10% of the companies listed on AIM are members of “the 90% club” meaning their shares are now worth just 10% of their peak value over the last five years. An unwise pick can be painful.
To make investment in AIM listed companies somewhat more attractive, the UK government has introduced several incentives in the form of tax relief. These incentives include:
- No stamp duty payable on investments in AIM shares.
- Certain AIM companies can qualify for Business Property Relief (BPR). When investing in BPR-qualifying shares, as long as the shares have been held for at least two years, and are held at the date of death, they may be free from inheritance tax.
- AIM-listed shares can be included in an investor’s stocks and shares ISA, with the opportunity to pay no Capital Gains Tax at disposal and paying no income tax on dividends.
- Some companies listed on AIM qualify to offer shares through the Enterprise Investment Scheme. Companies that qualify to offer shares through this scheme can offer generous income and Capital Gains Tax relief as well as loss relief in the event of the company ultimately failing and the shares becoming worthless.
(As with many forms of tax relief, tax treatment is dependent on personal circumstances, with tax rules subject to change. In addition, entitlement to claim relief is dependent on the companies invested in qualifying for BPR at the time a claim is made).
It’s also worth considering the fact that AIM companies usually have lower levels of liquidity, making it harder for investors to sell their shares whenever they want. The smaller, speculative nature of small AIM listed companies also makes it more difficult to conduct due diligence and find information about their operations; particularly when compared to the disclosure information provided by their Main Market equivalents.
To pick or not to pick
Trading on AIM accounts for up to a quarter of investment done by private investors. It’s an exchange which has particular appeal for younger investors, with a survey conducted by TD Direct Investing revealing that AIM has three times more investors aged 30-44 than those in the 45-75 age group.
Yet, how does one go about selecting which AIM listed companies to invest in?
Well, forget index trackers, it’s all about stock picking. Why? As data put together by Hargreaves Landsdown and Thomson Reuters for MoneyWeek show, the FTSE AIM Index, comprising all AIM stocks, has delivered a total return loss of 17% since its launch. Over the same period the FTSE All-Share Index returned a healthy 160%. The volatile nature of AIM shares means they’re not always well suited to investment vehicles like index trackers.
However, there are some fund managers that can make AIM investment work well. Effective investment in AIM-listed companies demands very careful analysis of companies, their balance sheets, quality of management and prospects, with regular reviews; plus, a healthy appetite for risk!
In short, effective AIM investment is about spotting the winners and knowing which companies to avoid.
AIM for financial success with Blankstone Sington
Blankstone Sington’s award-winning Inheritance Tax Portfolio comprises companies traded on AIM with the objective of securing Business Property Relief (BPR) against inheritance tax by investing in a range of qualifying companies. Find out how Blankstone Sington’s Inheritance Tax Portfolio could help you mitigate your exposure to inheritance tax here.
This document is for private circulation and is believed to be correct but cannot be guaranteed. The information contained herein does not constitute investment advice and the investment or investment services referred to may not be suitable for all investors; we strongly recommend you consult your professional adviser before taking any action. It should be noted that the benefits of the Inheritance Tax Portfolio are premised on current tax rules continuing for the duration of an investor’s portfolio. The rules on tax or their interpretation, as with the rates of tax applicable, may alter. The details and examples in this document are a simplified summary of the relevant tax rules. Blankstone Sington is not a tax adviser and potential investors are recommended to consult a professional tax adviser on all tax matters. The past performance of any investment is not a reliable indicator of future performance. The value of investments and any income from them may fluctuate and are not guaranteed. Investors may not get back the original amount invested.
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