The Coalition Government has repeatedly expressed its commitment to increasing the funding capacity in this country for entrepreneurship and we await with great interest the forthcoming Budget. One would hope that, in determining measure to increases funding capacity for SMEs, the Government is reflecting carefully upon the role of public equity markets. The UK has a limited venture capital sector willing to take real risk on early stage businesses. It is predominantly a development capital industry. The PLUS and AIM markets are the de facto suppliers of venture capital in the UK, so any effort to increase SME funding options must look seriously at the issues in these two markets.
Why the SME Market is under pressure
While there is much to be proud of, the London markets have suffered from a worrying lack of liquidity for smaller companies in recent times that has deterred new listings. We speak frequently with small cap company managers who are frustrated by the lack of liquidity, visibility and recognition that they are afforded on the London market and who are actively considering either delisting altogether or shifting to markets that they perceive to be more suited to their needs, such as the TSX (Canada) or ASX (Australia). Clearly, the LSE move to merge with TSX may help to limit the potential damage here in the near term, but the underlying issue remains.
From the beginning of Q4 2008 to Q2 2010, 427 companies have delisted from the AIM market. [1] While this wave of delistings was partly cyclical and driven by the recession, it also seems to have been structural. A rising market covers a multitude of problems, but when the tide goes out, the underlying issues become apparent.
According to research by Trowers & Hamlins, 90 of those companies that have delisted have explicitly stated that AIM was too expensive/ burdensome or have chosen to move to another exchange without retaining their AIM listing. Looking through a sample of these delistings announcements, the releases frequently cite the following issues:
- Valuation – “the relatively small total market capitalisation”
- Liquidity – “the limited trading volumes in the Company's shares”
- Compliance Costs – “the significant direct and indirect costs of compliance with the AIM Rules” [2]
While compliance costs are often cited, we do not believe that the AIM listing requirements are themselves onerous.…
