AIM, the alternative investment market, has made a name for itself as the platform for small and mid-size businesses looking to fund growth.
An AIM listing can also enhance your business’ credibility with potential investors, customers and suppliers.
There is little doubt that, 11 years after its launch, AIM is bigger and better than ever and has the numbers to back up claims of being the world’s most successful growth market. Funds raised in 2005 almost matched the combined total raised in the past five years.
According to Phil Adams, managing director of investment bank Altium Capital, 514 companies were admitted to AIM during 2005, an increase of almost 45% on the previous year. New listings raised more than £6.3bn, an increase of 133% on 2004 figures.
AIM also remains less regulated than the Full List of the London Stock Exchange. Its flexibility and cost-effectiveness over foreign stock exchanges has also helped it attract an increasing amount of interest from overseas firms in the past couple of years, and its popularity is such that the majority of all UK listings now take place on AIM, rather than any other stock market.
WHEN AIM MAKES SENSE
AIM was designed primarily for smaller companies with serious and long-term growth ambitions. The right time to list is either when your company is profitable or if the market is very keen for your kind of business.
You’ll have to demonstrate a degree of stable earnings and growth in your company’s history, and if it’s in its early growth stages, you must provide evidence of the management team’s track record. Concerns that AIM has now grown to the extent where it is no longer suitable for the very promising, younger companies have not been borne out. In March, Servocell, a pre-revenue, pre-profit technology company raised £5.5m, and the market has seen a flurry of smaller fundraisings this year in sectors as diverse as software, internet advertising and sports management.
“There isn’t a minimum market capitalisation requirement, but most companies fall within the £25m to £500m bracket, with a further 40% posting turnover of £10m or less,” says James Benson, assoPhotograph: ciate at FDUK, a fi rm specialising in sourcing FDs.
There are always exceptions to the rule, though. In March this year, gambling software provider Playtech pulled off a £548.3m initial public offering (IPO) – the largest in 2006 so far, which it’s worth noting inevitably skews fi gures on average fundraisings.
Companies listing on AIM usually look to raise at least £1.5m and, more often than not, £3m. Less than that and the costs involved in obtaining a listing can start to bite. And if it’s uneconomical, what’s the point? “To make the process cost-effective you should look at raising upwards of £5m,” says Adam Fenner, corporate partner at law fi rm Halliwells LLP. The golden rule, says John Cowie, head of AIM at accountancy and fi nancial advisory group Smith & Williamson, is not to raise more money than you might sensibly need, as this will unnecessarily dilute existing shareholders.
The average amount raised by an IPO in 2004 was £8.5m, and in 2005 it reached £14.2m. AIM is not sector-specifi c and continues to see admissions across many strata, but it does have a cyclical nature and certain industries go in and out of fashion. Richard Feigen, managing director at nominated advisors and brokers Seymour Pierce, says there are few sectors that AIM does not favour. Last year was particularly good for companies in the natural resources, property and fi nancial services sectors, and there is increased interest in areas such as internet gaming.
THE PROCESS OF GOING PUBLIC
There are four main ways to obtain a listing – a placing, public offer, introduction, or a reverse takeover. Here’s an outline of what each method means:
PLACING
The most common method of raising equity share capital and involves your company’s shares being placed with individuals and/or institutional investors.
PUBLIC OFFER
Shares are offered to the public for subscription.
INTRODUCTION
Existing shares become quoted on AIM so they can be traded in the future. No fundraising and no new shares are issued. “This route is only appropriate where the company already has a wide shareholder base,” says Jeremy Swift, partner at law fi rm Dickinson Dees. Not as common as they have been in the past.
REVERSE TAKEOVER
This occurs when a business is acquired by a company already listed on AIM. The process may involve using a cash shell or a shell company. “This can be the most suitable path to take if the composition of the company board has shifted, the business strategy has altered or the quoted company is seeking to acquire a company larger than itself,” says Swift.
Once you’re clear about how you plan to utilise AIM, you’ll go through something like this:
STEP ONE
ASSESS YOUR SUITABILITY
Admission to AIM requires time and financial commitment. “Be under no illusions,” says David Smith, corporate partner at law fi rm Stringer Saul, “the fl otation process is time-consuming, occasionally very stressful and can involve extremely long meetings.”
STEP TWO
APPOINT ADVISORS
You will need to gather a team of advisers. They are the nominated advisors (Nomads), brokers, lawyers, accountants and financial PRs.
STEP THREE
AGREE A REALISTIC TIME TABLE
Whichever route you choose, the flotation will usually take three to four months, but this is dependent upon the type of company you are, the speed and accuracy of the information provided for the admission document and the amount of due diligence required.
STEP FOUR
DUE DILIGENCE AND PREPARING THE AIM ADMISSION DOCUMENT
Under AIM rules, all companies must produce an admission document that includes information about the company’s directors, their promoters, business activities and financial position. Financial due diligence will be carried out by the accountants, who prepare a Long Form Report (LFR).
“This is a ‘warts and all’ investigation into the company’s trading history, constitution, management, strategic positioning and financial well being. Much of the information gathered in the LFR is used to prepare the front section of the admission document,” says Mark Dowding, client partner at business advisers Vantis.
STEP FIVE
DEVELOP A PRESENTATION FOR POTENTIAL INVESTORS
If you are seeking to raise funds, presentations are made to potential investors who are invited to roadshows. “The brokers then begin a process called ‘book building’ in which potential investors are asked for a commitment to acquire a number of shares at a pre-agreed price,” says Mark Fecher, partner at accountants Kingston Smith LLP.
STEP SIX
COMPLETE THE TRANSACTION AND ISSUE SHARES
The pricing of an issue is the most important stage when preparing for a flotation. As Fecher outlines, this is set by discussions between the nominated advisor, who acts on behalf of the company to set as high a price as possible, and the nominated broker is acting on behalf of future shareholders and therefore trying to set as low a price as possible. The key tool used for the pricing is the P/E ratio.
THE ADVISERS
“People automatically assume that the biggest firms are the best and, although size does matter, this is not always the case,” says Rob Cotton, chief executive of security services provider NCC Group, which raised more than £38m in 2004. “Go with advisers who have a strong reputation and market knowledge and give you confidence in their capabilities.”
NOMADS(NOMINATED ADVISORS):
The Nomad’s role is to act as corporate financier, guiding companies through regulatory responsibilities and structuring the transaction. They recommend the company for admission and will need to be retained once you have floated. Nomads include accounting firms, investment banks, corporate finance firms and stockbrokers and must be retained at all times.
“As well as liaising between the Exchange and your company, the Nomad will also regularly review your trading performance against any profit forecasts or projections to help determine whether an announcement is necessary,” says Andrew Wright, head of the public markets team at law firm Cobbetts.
Choose someone experienced in your sector and in raising the money you need. The LSE website has a list of Nomads, but often it’s best to ask other AIM-listed companies for recommendations. Above all, it’s important to choose the Nomad you feel comfortable with.
“If the Nomad resigns or is sacked, your company’s shares will be suspended, and if a new Nomad is not found within a month, then the shares are cancelled,” says Wright. Nomads and brokers charge a proportion of their fees based on time spent and another contingent upon the admission going ahead.
“Rates can vary substantially, and it’s worth enquiring what the basis of fee-charging is before meeting them and taking matters further,” advises Smith & Williamson’s Cowie.
ACCOUNTANTS:
Accountancy firms act as reporting accountants, a role in which they are required to produce short and long form reports, working capital reports and offer tax advice. “We can also project manage and give advice in relation to the entire transaction,” says Kingston Smith’s Fecher.
Accountants should have the experience and resources to carry out the work and a knowledge of the market and other advisors. It is also wise to choose one with an understanding of your business. Their fees will depend on the size of your company and will be time-related. Once listing has taken place, the accountant’s role generally reverts to performing an annual audit.
BROKERS:
Brokers are securities houses, and while they may be part of the same organisation as your Nomad, procedures will be put in place to avoid any potential conflicts of interest. The role of the broker is to bring buyers and sellers of your shares together, to prepare and accompany you on roadshows to promote your shares to investors and to co-ordinate all external research. They assess appetite for your shares and agree the price at which they should be issued.
Once your company has listed, the broker will continue to make a market in your shares and is responsible for finding investors when you look to raise additional funds and create share liquidity.
LAWYERS:
Your lawyers produce the ‘general information’ section of the admission document, outlining the constitution of the company, its capital history and other directorships held by the directors. It’s also the lawyer’s role to check the accuracy of statements and to prepare a legal review report on the company, addressing matters such as title to key assets, key contracts and compliance with laws.
The key factors that should feature in your choice of lawyer are experience, resources and expertise. So says Mark Taylor, partner in the corporate practice division of law firm DLA Piper. “Prices quoted for the legal work vary considerably, but going for the lowest quote can be a false economy since an inexperienced lawyer can make the process unduly convoluted, taking up time,” he says.
So what should you expect to pay? Fees are generally fi xed but can range considerably and do not necessarily refl ect the amount of work required. “A key feature in determining lawyer fees is the size and complexity of your company. No two fl otations are the same, and legal fees would typically cost from £75,000 to £200,000,” adds Taylor.
FINANCIAL PRS:
There are now more than a thousand companies on AIM, and it’s easy to get lost.
From the moment you announce your company’s intention to float, the financial PRs are promoting the business to the media, as well as taking advantage of set-piece media opportunities. Financial PRs play a supportive role in generating interest for investors, helping to target a diverse shareholder base and playing a fundamental part in shareholder structure.
“Financial PRs ensure that your story sounds right, that you avoid any potential pitfalls and introduce you to the press,” says James Ormondroyd, financial director at speech recognition and computer telephony business Telephonetics, which listed on AIM through a reverse takeover of cash shell Leptis Magna last July.
Most work on an annual retainer basis. Expect to pay anything from £20,000 to cover all activity through the IPO process.
THE PROS AND CONS
An AIM listing can add credibility and visibility that are likely to attract customers, the opportunity to realise value when you decide to exit and employees can be incentivised through share option schemes. Be aware of the downsides, too.
“AIM turned out to be very good – compared with the alternative of raising further funding from venture capitalists and the discpline involved ensures we have no skeletons in the closet. But there are issues to consider,” says Ray Anderson, CEO and founder of Bango, which helps companies to sell content via mobile phones. It listed on AIM in July 2005.
He pointed to added costs, the pressure of public scrutiny, the fact that your competition can fi nd out more about you and a public valuation can set an expectation that is possibly too low in the minds of potential acquirers.
Richard Metcalfe, transactions services partner at accountancy firm Mazars, which acts for a number of AIM companies, concurs. “While there are a great many positives, you should also be aware of some of the drawbacks. Not everyone wants the limelight. As a leader, you’ll be scrutinised by institutional investors and the decisions you make will be challenged more readily. You’ll have to interact with the press and advisers regularly, taking you away from growing and developing the business.”
In terms of costs, he says:"It's important to bear in mind the ongoing expenses. You may need to deal with questions and queries to do with the market. There's a requirement to publish financial statements online so you can add some web costs, plus non-execs fees. Some are small increments across a number of cost centres, so you should build ongoing costs into your accounts"
Charles Simpson, partner and head of corporate finance at accountants Saffery Champness, adds that market volatility is another negative.
"The shares you place on the market can be bought or sold on the wishes of others, and their value may be subject to fluctuation both downwards and upwards"
THE COST OF GOING TO AIM
The costs involved in a flotation can be prohibitive. For starters, an initial fee of £4,340 is payable by all companies seeking admission to AIM. Each company must then pay an annual fee of the same amount.
The floatation itself is unlikely to be completed for less than £250,000 and the average cost can be nearer the £500,000 mark, plus between 3-6% of funds raised. "We probably paid towards the high end for our legal and accounting advisers, but we wanted an excellent job done at high speed," says Bango's Anderson.
The total fees vary depending on how much money is being raised and the level of assistance you will need from advisors.
"If you are raising, for example, £10m, expect to pay between £800,000 and £1.2m," says Frank Moxon, head of corporate finance at Williams de Broe.
As a guide, companies with a 'typical' AIM market capitalisation (between £20m - £30m) can expect to pay the following says Philip lamb, corporate finance partner at law frim Lewis Silkin:
Nomads: They will charge a corporate finance fee of between £10,000 - £200,000
Broking commission: This will vary depending on how difficult the brokers believe it will be to raise funds. As a guide, brokers typically charge 4-6% of funds raised.
Accountants: A mid-size firm will charge between £100,000-£200,000 to cover the process of producing the long and short form reports and working capital review.
Lawyers for Nomads: £30,000-£40,000
Lawyer for your company: £70,000-£100,000
PR Consultants: £20,00-£50,000
Printing fees: (for the admission documents) £20,000
Companies should expect to pay in the region of £50,000-£60,000 per annum on an ongoing basis to thier advisers. This is broken down into Nomad fees of between £20,000 - £40,000 and broker fees of between £10,000-£25,000. These are typical figures for a company with a market cap of between £20m - £30m. You will also need to take into account annual audit fees.
AIM is now a global success story. While it faces challenges - such as staving off any additional regulation, managing its growth and ensuring it stays true to its roots - if the number of companies joining AIM and the number of institutions investing on it in the last year is a measure, the market is set to be more popular than it has ever been.
Case study: Good advice is key
Company: Servocell
Owner: Steven Weaver, CFO
“We listed in April 2006, raising £5.5m to fund expansion. We are a pre-revenue, pre-profi t technology business, and the AIM market has been more diffi cult for businesses like us recently. The pool of money for such businesses is getting smaller and the attitude of fund managers is very risk averse. Only a select few are really looking at technology businesses that don’t have a track record.
One of the main reasons for our successful fl otation was getting the right advisers on board. The key ones are the Nomad and the broker. When we spoke to the press and to private clients without brokers present, they all said that the reputation of the advisers was very important.
Our nominated adviser and broker Bell Lawrie built a shareholder list that exceeded our expectations, and ran a very tightly targeted marketing campaign, so that we saw very few people who weren’t genuinely interested in investing. We only had two bad meetings out of around 30. If you do prove yourself to the investors, there is plenty of finance available for AIM companies to continue to invest in growth. My guess is that this will make funding growth aspirations easier than working with a VC.”
Case study: Life before and after flotation
Company: Qonnectis
Owner: Mike Tapia, MD
“We listed in February 2005, raising £1.2m to fund expansion. It helps to remember that floating is just a means to an end, not an end in itself. The greatest challenge was co-ordinating the flotation while making sure the business continued to grow and develop at the same time. The process of getting listed is time consuming and can be distracting. We were very conscious about ensuring the business was not affected.
We solved this problem by creating a small, dedicated flotation team and made sure that the rest of the management team were allowed to get on with the day-to-day management of Qonnectis.
Since listing we’ve found that investor relations is crucial. We have a lot of contact with shareholders, who often call or email us directly asking for information. But we’ve realised it’s important to be proactive, too, and we’re currently in the process of updating our website to add a number of features specifically designed for investors.”
