What a difference a year makes. While the Alternative Investment Market’s (AIM) been lauded in many circles, the accolades should be tempered by a healthy dose of reality.
That’s the view of those who should know a thing or two as they’re living life under the glare of arguably the world’s most thriving market for entrepreneurs.
What’s changed in the last year? For starters there are concerns over the sheer volume of – some would say weaker – entrants who have been encouraged to share in the boom. As Alex Connock, chief executive of Ten Alps Communications, puts it: “The market has all the economic characteristics of a gold rush; people piling in, often in a slightly irrational way.”
The number and activity of investors has also increased, but at a proportionally slower rate. David Mann, founding chairman of Charteris, argues that an off-shoot of this is an increasingly large pool of companies fighting for the attention of a smaller group of “serious investors”.
Mark Mills of Cardpoint agrees that the snags are increased by recent IPO activity. “The man in the street has been told that AIM is a credible market, but at the same time lots of highly speculative companies have joined,” he says.
The perceived risk is amplified by a high ratio of mining companies listed, Ringo Francis, chief executive of Zenith Hygiene Group, argues. These are speculative in nature, and companies’ fortunes rely heavily on informed guesswork.
Oil, for example, is either there or it’s not, and resource companies spend millions every year speculating on the location of oil deposits; it means smaller companies are only ever a few wrong decisions away from collapse.
Recent examples from Europe show that these fears are not without foundation. Germany’s small cap technology bourse Neuer Markt collapsed in 2003 after a blip in the high tech sector caused its top companies’ share value to plummet 95%.
And Nouveau Marche, France’s junior market for predominantly hi-tech firms, ended up merging with the main market after it reached critical mass.
Francis says he plans to move up to the main FTSE market as soon as possible and warns that AIM could become the victim of its own popularity. He goes as far as saying it could be the next dotcom bubble.
SHARE AND SHARE ALIKE
But in terms of their own companies’ fortunes, the GB lunchers remain unshaken by these developments. Many recognised the need to separate the roles of AIM director and running the business itself.
“At the end of the day, we all have to produce a profit, whether we are on AIM or not – there comes a point where you have to stop trading the business and start actually growing it,” says Francis.
The panel members agree that this is a healthy way to approach life on AIM. None take their share price too seriously and in general the consensus is that it bears little relation to the fortunes of the business.
Paul Freedman, joint chief executive of Timestrip and the most recent of our guests to float, says he learnt quickly that market price is not the be-all and end-all of being listed.
“We tried to play the PR game and put out two statements in three weeks, hoping it would generate interest in the product,” he says. “But our share price dropped 10%. It was a baptism of fire and since then I haven’t looked at the price; there’s no real equation.”
Connock, who listed Ten Alps in 2001 and has experience of AIM’s doldrums and high times, argues that understanding the market’s capricious winds is a prerequisite for any hopeful.
“There’s an element of short-termism, which is at times good and bad for the business. Emotionally you have to get used to the possibility, for example, that you might do a really good job but lose an investor.”
Jonathan Newth, managing director of gaming technology group Kuju, said his share price took a big hit immediately after joining in 2002 because rival companies went out of business just three days after he floated the business.
Newth added that his company’s share price falls every time it releases good news. Mann sympathised, claiming that Charteris’ share price had been known to fluctuate wildly on no trading at all. “You’re never on the money,” Mills agreed. “It’s invariably over or undervalued. You’re either very happy or frustrated.”
PAPER TRAIL
When it comes to the reasons behind floating on AIM, all our guests say they needed a currency to make acquisitions and that the AIM market provided the most practical and cost-effective route.
They agree that in general the market has matured sufficiently to be classed as a good place to make share-only acquisitions. This, of course, relies on the company, its market cap and the broker’s expertise.
While all of our guests joined AIM to snap up growth capital, only a few have sold shares personally since listing. Alex Connock is one: “It was a Friday in July at 4.30pm,” he remembers. “You have to do it just after announcing your results when the price goes up. Even then there’s a bit of flack.
“I sold about 2% of the business, but our competitors have been more active. There’s a company in my sector called Shed Productions who sold about half of their stock and made about £22m.”
Mills sold stock when the company’s share price reached a peak. But the price came tumbling down immediately, as other investors followed suit. “It’s a double-edged sword,” he cautions.
But buying and selling is not for everyone. Jonathan Newth says he is preoccupied with taking his software business forward in a tough market. As an AIM director he has taken a back seat of late, ignoring the share price until the company produced good results.
For our guests there are two sides to being listed on AIM: one where responsibilities include going to lunches, talking to papers and industry magazines and being a spokesperson; and another where you actually run the business.
PLAYING IT SAFE
Arriving on AIM can be a culture shock. You are suddenly answerable to shareholders and the public at large. You must announce profits, losses and intentions to buy or sell.
One of the biggest changes is the formalising of corporate governance. The transition represents a big increase in form filling, which they agree needs thorough reading, even though it’s a slog. They believe it could be the difference between getting investment or not.
“The problem with corporate governance,” begins Mann, “is that it rapidly comes down to whether you can tick the right boxes or not.”
Mills agrees: “We found that it goes through to compliance departments and if you don’t tick the right boxes then the fund manager might want the stock but he won’t get it through.”
The separation of senior duties between more than one executive could be thought of as one such box to tick, but Francis, who performs the functions of both chairman and chief executive at Zenith, says he came up against little resistance to his dual role.
Presenting the company’s services to money men in a specially planned road show, only one objected to the set up.
“Given the size of the company at the time it was difficult to split the roles,” remembers Francis, “and after we’d explained our case the guy who’d asked us the question said it was a load of bollocks anyway.”
One guest says he encountered resistance from investors when he offered a non-executive director shares instead of a salary. Some, however, say the City welcomes shares for nonexecs’ remuneration packages, because it brings them into line with the requirements of the business. But others say gaps in corporate governance like this would be brought out if the company fell on hard times.
Still others take a more pragmatic view: “We’re not FTSE 100 companies and there will always be issues that have to be addressed,” says John Waites, chief executive of Ventura Capital Limited.
“In my experience there is no perfect AIM-listed company. Investors have to ask themselves: do I feel this is a good company to invest in?”
Going around the table, companies have, on average, two non-execs commanding salaries of £15,000 to £20,000 a year each. Exceptions include high-profile non-execs who attracted media attention and are therefore given more. Bob Geldof, non-exec chairman of Ten Alps, is an example of this.
The guests conclude that non-execs are rarely in it for the money. Some do it for their CVs and some for the sake of variety, but there is a question mark over whether it will be hard to get good people in future because of the increasing transparency and risks.
“I wouldn’t want a non-exec role at that sort of level because the responsibilities you take on are not worth the remuneration,” says Waites.
A STEP WORTH TAKING?
Despite the extra pressure, paperwork and the questionable direction of AIM, the attendees are unanimous that listing on the market has been the right move.
The guests say they don’t lose too much sleep over being accountable to shareholders, or forking out for liability insurance and non-exec pay; they conclude that risk was something they took on when launching, not floating the business.
When asked ‘what if you get sued?’ Jonathan Newth says: “You can’t be too risk-averse. As an AIM director you are a juicy target. They will know that as a listed company, you won’t want the publicity.”
Francis agrees: “There’s a chance that someone could sue me but at the same time there was also a chance when I started the business that someone would take my house away.”
Mills views it in equally optimistic terms: “You have two options, you either start up a business with all the associated risks or go and work for someone – and I think most entrepreneurs are unemployable.”
