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AIM’s existential crisis – Will more firms fail as funding evaporates?

The future of London’s AIM market is looking increasingly troubling, with global macroeconomic events taking their toll on smaller businesses. 

Companies listed on the junior stock exchange that have been holding off from major fundraising have seen the bottom fall out of the market in recent weeks.

Those that had been holding off from major share issues to wait for the uncertainty of Brexit to pan out have not had enough time to refinance. Without a solution, businesses will fail and jobs will be lost. A fundamental shift is taking place, right here and right now.

Perfect storm hits

Brexit is not even close to being fully resolved. But faced with an unprecedented collapse in asset prices in March 2020, traders and investors are harking back to the uncertainty of the UK leaving the EU as a period of relative calm. That was before the perfect storm of rocketing debt, inflated asset prices, coronavirus panic and an oil price war ripped through stock markets with the force of a merciless hurricane. 

AIM companies cannot just batten down the hatches and wait for the storm to pass. Many only have a few months of working capital. Rules for the Alternative Investment Market allow companies to suspend trading “pending financial clarification”. With everything else that is going on in world markets, this clarification could take months to resolve. In that time, businesses will likely go under.

Sofa so good

One of the first of a new wave of AIM suspensions is video analytics firm Big Sofa (LSE:BST). Directors told the market first thing on Monday 16 March that they had “taken the difficult decision to request a suspension in the trading of its shares on AIM.” The company has enough working capital to stay afloat until May 2020, it said, but had been in the process of finalising an equity raise for its next stage of growth. 

“That fundraising was expected to close last week but due to current market turbulence, it could not be concluded,” it said.

Big Sofa had 185.26 million shares in issue with a market cap that, pre-suspension, had cratered to just £4.25 million. Now the board is seeking a buyer. It is a fire sale out there. We are not just talking bargains. If they cannot find anyone to take over their rapidly depreciating assets, companies are going to hit zero. 

We expect more AIM suspensions to come thick and fast. 

AIM low

The Alternative Investment Market was opened in 1995 as a place for smaller early stage growth firms that wanted to raise capital to fund their expansion. At its opening, the ten companies listed on AIM had a combined market cap of £82 million.

At its 2005 peak, more than 40 companies a month were listing on AIM, hungry for the sharp rise in liquidity and keen private investors with capital to spare. International companies, too, saw the value in listing in London, with 120 overseas companies taking the plunge that year.

Just before the 2008 financial crisis, the market was home to more than 1,650 smaller businesses. However, those numbers have been in severe decline in recent years. 

Even as new listings have declined, the market cap of AIM companies has been ever rising, driven in particular by an 11-year bull run that has now come to a sudden and gut-wrenching stop. 

Take these numbers for example. 284 companies listed on AIM in 2007, boosting its combined market cap to a high of more than £97 billion. 10 years later, with only 80 new companies joining AIM — 69 domestic and 11 international — the total market cap reached £106 billion.

Brokers that have relied on bringing new AIM companies to market have seen their pipelines dry up. 

Shore Capital, one such corporate finance adviser, delisted from AIM in October 2019 just six months after a multi-million-pound takeover of rival Stockdale Securities. It had seen liquidity evaporate and its share price plummet throughout the year, later reporting profits were 50% down for the year. 

By December 2019, the number of companies listed on AIM had fallen to a 10-year low. Around 750 firms were listed on the public stock market.

No safe havens

Investors are fleeing not just from perceived riskier investments into safer havens, but out of the market altogether. Cash is king again. Companies and private investors alike are desperately trying to preserve capital as it appears the global markets are in the midst of a crash of epic proportions. 

AIM investors will need to interrogate balance sheets like never before. Gone are the times of simply taking company director or board statements at face value and enjoying the rocket ride up.

It is a brave new world that has such investors in it. 

Valuethemarkets.com, Digitonic Ltd (and our owners, directors, officers, managers, employees, affiliates, agents and assigns) are not responsible for the content or accuracy of this article. The information included in this article is based solely on information provided by the company or companies mentioned above.

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

  • Tom Rodgers does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.
  • Digitonic Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.

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