London’s Alternative Investment Market (AIM) is a sub-market of the London Stock Exchange which provides small companies with access to expansion capital from the investing public. The market provides a relatively low-cost, low-regulation alternative to the larger exchanges, and has traditionally represented a stepping stone for companies that go on to meet the requirements for listing on the London Stock Exchange.
AIM has attracted a number of Israeli firms over the years. The frequency of AIM listings by Israeli companies accelerated rapidly following the introduction of the Sarbanes-Oxley Act in 2002 – the Act virtually eliminated IPOs as an exit route for venture-backed companies seeking a listing in the US. The number of AIM listings reached a zenith in late 2007 when approximately 45 Israeli firms listed on the market.
However, this trend has radically reversed since the onset of the global financial crisis, and many companies have elected to de-list from AIM altogether. As Globes reports, only 30 Israeli firms remain listed on the exchange today, down from 50 at the peak. The de-listing phenomenon is not limited to Israeli firms, however, with a total of 239 companies being de-listed so far in 2009. New listings are down as well, with companies in aggregate raising only £256m so far this year compared to £6.2bn in 2007.
There are a several forces behind the high incidence of de-listings. First, companies that list on AIM often have market capitalizations of less than £20 million and, in some cases, market capitalizations are worth less than the value of companies’ balance sheets. This effect has been exacerbated by the challenging conditions which have characterized global financial markets over the past 18 months.
Second, and related to the previous point, the market is notoriously illiquid and shares consequently trade at an illiquidity discount. For some companies this partially defeats the purpose of being publicly listed.
Third, while still orders of magnitude lower than the expenses associated with meeting the listing requirements of larger stock exchanges, companies are typically required to spend approximately £250,000 per year to sustain their AIM listings. In difficult times these expenses are hard to justify as companies are under immense pressure to cut costs in order to sustain commercial viability.
Fourth, companies listed on AIM are required to have a nominated adviser (Nomad). There is a high degree of perceived reputational and legal risk among current and would-be nomads due to concerns they have about what would happen should their advisees go under. Consequently, the number of available Nomads has declined.
Finally, for young companies operating in an emerging industry, as is generally the case with Israeli technology companies, making financials and company presentations publicly available for the public, an AIM requirement, can make the public route less compelling. This is due to the fact that competing companies are able to gain competitive intelligence that would not be available if privately funded.
While AIM represents a relatively easy route to public listings for small companies, particularly in the wake of Sarbanes-Oxley legislation which has almost eliminated the IPO route for venture-backed companies in the US, listing on AIM is still relatively costly and presents a number of challenges due to the requirement of operating under the constant scrutiny of the public. Of course every company is unique and should therefore pursue a unique financing strategy – just as venture capital is not a suitable source of capital for all startups, a public listing is not a suitable source of capital for all companies seeking expansion capital. Despite these clearly downbeat signals, however, we can expect to see an increase in AIM listings as the world economy continues on its path to recovery.
