There are no easy answers to the decline of UK’s AIM

The Alternative Investment Market (AIM), London’s junior stock exchange, is facing a prolonged crisis that threatens its very existence. The number of companies listed on AIM has dropped significantly to just over 700, down from a peak of 1,694 in 2007. This decline, which reflects deeper challenges in the UK’s equity markets, stems from a combination of structural, economic, and competitive issues.

Key Drivers of AIM's Decline

One of the major issues affecting AIM is the shift in institutional investor preferences. UK pension funds have increasingly turned towards global equities, reducing their allocation to domestic small-caps. This move has led to reduced liquidity in the AIM market, which in turn makes it less attractive for companies seeking to raise capital. The global shift towards larger and more liquid exchanges, such as the US Nasdaq, has drawn significant attention away from AIM, highlighting the valuation gap between UK-listed and US-listed companies.

Moreover, AIM-listed firms suffer from a lack of analyst coverage compared to their US counterparts, as highlighted by reports from New Financial and the Tony Blair Institute. On average, mid-sized AIM companies receive only a quarter of the coverage that similar US firms enjoy, which negatively impacts their visibility and ability to attract investment.

Impact on Smaller Companies

Smaller companies on AIM, already facing issues of low valuations and weak liquidity, have found themselves questioning the value of remaining listed. The costs of compliance, corporate governance, and the high expenses associated with maintaining a public listing exacerbate this issue. Furthermore, AIM's performance has been starkly poor, with the index down 40% over the past three years, compared to a rise of 21% for the FTSE All-Share Index.

Proposed Solutions: Is There Hope?

Various think tanks and analysts have proposed potential solutions, but none offer an easy fix. Among the suggestions are tax incentives for investors, such as expanding schemes like the Enterprise Investment Scheme (EIS) or the Venture Capital Trust (VCT) to include more AIM stocks. These measures, however, may be difficult to implement given the government's need to plug a £40bn funding gap. Additionally, there are calls to include AIM stocks in major pension fund allocations, potentially mandating that a portion of pension assets be invested in UK growth companies.

The concept of creating a government-backed "Growth Capital Fund" of £1bn to invest in tech and high-growth sectors, inspired by France's Bpifrance model, is another proposal. However, these initiatives will take time to bear fruit and may not reverse AIM’s fortunes fast enough to stop its decline.

MY ANALYSIS

The decline of AIM reflects a broader issue with the UK's equity markets. In my view, without bold and swift reforms, AIM may not survive in its current form. The increasing gap between AIM and other global markets, particularly in terms of liquidity and company valuation, is a concern that cannot be ignored. The future of AIM may lie in merging with the main London market or developing a specialised listing platform aimed at emerging sectors such as technology and biotech.

Furthermore, while tax breaks and regulatory reforms may provide short-term relief, the UK needs to address the fundamental challenges of investor appetite and liquidity for small-cap firms. Encouraging long-term domestic investment, especially from pension funds and institutional investors, is critical to reversing AIM’s fortunes.

The conversation around AIM's future should move quickly to execution rather than soul-searching. Otherwise, AIM risks becoming a relic of a once-thriving market for growth companies.