Britain’s Alternative Investment Market (AIM) is struggling. The number of new companies listing on the London Stock Exchange’s junior growth market has fallen to its lowest level since the Great Financial Crash of 2008.
Only £88.6 million was raised through new IPOs last year compared to £8.8 billion during AIM’s peak year of 2006, just ahead of the crash. How extraordinary. We know times are tough – and risk has become something of a no-go area for even the bravest of investors.
But for the number of new companies seeking new capital on one of the world’s most highly rated markets devoted to high-growth and innovative companies to have sunk this low is devastating.
Over the last year alone, the number of AIM-listed companies dropped by 70 to 738 at the end of March, a fall of nearly 10 per cent. In 2007, there were 1,700 companies.
There is nothing new here. It’s been known for months that AIM is suffering from a lack of demand – along with the main LSE public market – but what’s deeply worrying is that it’s getting worse by the month. According to new research from UHY Hacker Young, there were only eight IPOs this year up until September, compared to 12 last year which itself is also the lowest number since five companies floated in the year before the 2008 crash.
By any measure, this is a disaster, and a national one. Once considered one of the most dynamic and successful growth markets in the world, AIM has lost its way. Or maybe worse, one that doesn’t know which way to go.
The stories and anecdotes are endless: company bosses who have been looking at listing on AIM to raise new capital for the next stage of their development claim that the market’s regulations are too arduous and too expensive, and simply not worth the effort. Several have delisted because of the regulatory burden.
What’s even more astonishing is that our tin-eared Chancellor is said to be looking at scrapping the inheritance tax exemption that exists on UK companies that are listed AIM shares. In the understatement of the year, accountancy firm UHY Hacker Young warns that this has made private investors even more cautious about investing in AIM shares.
For a Chancellor who has made such a big thing about growth, it’s self-defeating to be even considering such a move to penalise those who do invest in the UK’s youngest companies, many of which show such potential for growth. You might say perverse if not downright bonkers.
But then Reeves, and her Treasury team, haven’t got a clue about what really drives the economy. It won’t just be the wealthy owners of AIM shares they would feel the impact of such a tax, but the entire eco-system of those involved in the market.
Research by the Wealth Club shows that some £8.3 billion is invested in AIM by UK funds, accounting for around 16.5 per cent. Most of those funds own at least one AIM stock while a big chunk have more than a quarter of their fund invested in AIM shares.
Around 17% of the AIM All Share owned by UK investment funds do not qualify for inheritance tax (IHT )relief, and they are particularly popular with smaller company funds.
The fear, therefore, is that if IHT relief were pulled, it would cause serious volatility in the market, leading to falls in valuations making it even more expensive to raise capital from the public markets. It’s pretty tough already for young UK companies to find investment support from British investors, so pulling the plug on IHT would make that even more difficult. As WC’s investment manager, Nicholas Hyatt, put it: “For a government that has set out to deliver a ‘growth agenda’, that is not a good look.”
Hyett is being kind. It’s a catastrophic look. So catastrophic that even the head of the LSE, Dame Julia Hoggett, has been forced to send rockets over to Westminster warning ministers that such a tax would have dire consequences for AIM.
Hoggett doesn’t mess around in her letter to Tulip Siddiq, the City minister. The LSE chief warns that removing what’s known as business relief from AIM shares “would remove a core source of capital undermining the market’s capital base and bringing its viability into question over the short to medium term”.”
More pertinently, Hoggett warns that “removing BR in the budget is likely to result in significant market volatility as individual investors and IHT funds seek to liquidate holdings in companies that have been long-term beneficiaries of BR investment.” What’s more, she added: “Given the illiquid nature of smaller companies, we are concerned that this volatility would have a disproportionate impact on share prices across the market.”
She is also honest, admitting that “the current fragility of the market and this concern is shared by companies and fund managers across the market”. Indeed, the LSE chief warns the Treasury that the market has already contracted from 819 companies with a combined value of £131bn at the end of 2020 to 704 companies now valued at approximately £76bn.
It’s estimated that around 660 AIM-listed companies with a combined market capitalisation of about £73bn are eligible for business relief. And the availability of BR has been a constant and fundamental part of the market, providing a base for its appeal. Around £6.3bn of capital is managed by the largest AIM IHT funds while the total amount of capital allocated to AIM companies, where BR is a factor in the investment decision, will be much greater.
As Hoggett wrote, “Around 75% of these companies are smaller companies in the £0-£100m market capitalisation range – the category of companies regularly identified as otherwise being more susceptible to capital constraints.”
What’s also well-known is that AIM companies show much higher growth and are more productive than most privately-owned companies. In 2023, AIM contributed £35.7bn gross value added to UK GDP and directly supported more than 410,000 jobs in 2023. If you take into account the supply chain, these companies support a further 212,000 jobs and £18.6bn of Gross Value Added and are estimated to contribute £5.4bn in corporation tax.
So why, you have to ask, are Reeves and her Treasury wonks even considering such a move? After everything that the Chancellor has said – and all the guff she has been doling out to business leaders over the last year – would you want to damage the UK’s growth market?
Rather than penalising investors who invest in AIM, the Chancellor should be hot-footing it over to Paternoster Square to take tea with Hoggett. She should be asking her what more can be done to improve the functioning market alongside existing measures such as business relief EIS and VCT rather than introducing higher taxes which may weaken it further. Even looking at such a move defies logic, and sadly reveals the depths of bitterness, if not stupidity, of this government.
