In recent years, the equity capital markets have been plagued by uncertainty with many smaller companies trading below their net asset value. The UK equity markets, however, have been making an impressive recovery in the last few months. The UK economy is growing faster than expected. There is a growing momentum in the economy, with improving economic indicators and investors receiving better returns. This is boosting confidence in the UK equity markets.
This new confidence is having a positive effect on AIM, the London Stock Exchange’s junior market, which is beginning to look more promising again for smaller, young and fast-growing companies.
So what is AIM?
AIM (known originally as the Alternative Investment Market) was launched in 1995 and is one of the most successful growth markets in the world. AIM is open to organisations from all sectors; in the past it has been popular with oil, gas and mining and more recently with technology companies.
Although AIM is a junior market operated and regulated by the London Stock Exchange, over the years it has attracted an increasing number of institutional investors. AIM is arguably the most successful junior stock market.
AIM has proven to be particularly attractive to young fast-growing businesses, management buy-outs and buy-ins and family owned companies. AIM provides opportunities for raising capital from a broad range of private and institutional investors.
2013 was the biggest year for IPOs on AIM since 2007. An aggregate of £4 billion was raised, of which £680 million was raised in December 2013. 100 companies joined AIM in 2013.
Companies listed on AIM have a lot more flexibility as there is less regulation. AIM believes that self-regulation is crucial and it aims to facilitate the IPO process as much as possible. It is the ideal platform for businesses which want to access equity capital markets as part of their growth strategy but might have been deterred by costs and regulatory burdens of the fully regulated stock market.
AIM was not sparred by the global financial and credit crisis with the number of IPOs on AIM dramatically reducing since hitting its peak in 2007. However, now we are seeing an increase in the number of companies that are seeking to admit to trading on AIM – thus increasing market sentiment.
What does AIM mean for SME’S?
Having a rejuvenated junior market will be significant to the growth of both UK and International companies. In order for companies to continually grow and increase revenue in a recovering economy, they need funding. Lending from banks is limited and hard to come by, which makes equity fundraising on markets such as AIM a more appealing offer.
AIM provides the ideal platform for SMEs to raise significant capital for investment. AIM is well suited for SMEs as it simplifies the process of investor relations, providing access to the market place with limited regulatory burden. Companies with a market capitalisation of between £25 million to £200 million are ideal candidates for AIM.
A listing on AIM can increase a company’s credibility and status with potential investors, whilst simultaneously increasing the profile of the company amongst potential clients and suppliers. It also allows companies to use their equity as currency for growth and employee benefits incentivisation programmes.
How does a company prepare for an IPO?
The IPO process is by no means a quick one and can take anywhere from six to eight months. The main stages in these months are:
- Identifying and engaging key advisers
- Undertaking legal and financial due diligence on the group and its business affairs
- Preparing legal, regulatory and marketing documentation.
- Attending investor roadshows and meetings.
The process will not be identical for all businesses. Some will need to restructure their corporate structures to address any regulatory and tax concerns requiring shareholder approval. It is therefore critical that these issues are addressed early on in the process to avoid any delays in the IPO timetable.
The company team of senior executives supported by external advisers will manage the overall process. Appointing reputable and experienced external advisers is key. The external advisory team will usually consist of nominated advisers, brokers/investment banks, reporting accountants, legal advisers and a PR agency.
The IPO process will make huge demands on management time. All documentation will need to be complete and adhere to certain standards. Some of the external advisers will also have to visit the key business sites and conduct interviews with relevant management.
As part of the IPO process, investors will expect the company to have a strong management team and implement robust corporate governance structures, which will inspire the trust needed by all shareholders. The success of any IPO is dependent on raising the capital required by the company and a strong marketing strategy will play a critical part in this exercise. Marketing the IPO will involve meeting prospective investors during marketing roadshows, which can be highly demanding of management time.
The successful completion of an IPO is not the end of the process as life post IPO will present its own new challenges. Keeping the market and shareholders updated with the company’s developments and managing institutional investors’ expectations will be crucial in supporting the company’s share price following the listing.
Mehboob Dossa is a partner and Gabi Olson-Welsh is a senior associate at international law firm, McGuireWoods. They can be contacted on +44 20 7632 1600.
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