When the drills start up in a tin mine in the Democratic Republic of the Congo this week, it will be thanks to millions of pounds raised from investors in London.
Rome Resources is based in Canada, but on July 26, it listed on the London Stock Exchange’s junior market, Aim. Paul Barrett, the chief executive, explained that one of the reasons for the move is that investors in London were more likely to give the company the backing it needed. “In London, investors are much more comfortable with African projects and African risk,” he said.
While investing in nascent mining businesses is not for the faint-hearted, the £14 million Rome Resources is the type of firm that Aim was created to serve.
Formerly known as the Alternative Investment Market, Aim was set up in 1995 to allow companies at an early stage of development to raise money under less onerous rules than those set by the main market on the London Stock Exchange.
But with its 30th anniversary approaching, some are fearful that the market has lost its way. The number of companies listed on Aim has more than halved from its peak in 2007 to 718, the lowest level since the early 2000s. This raises concerns that the index is no longer doing its core job: helping new businesses thrive, and driving growth in the City and Britain itself.
Some of the Aim exodus is due to big names being taken over — such as Keyword Studios, which has agreed a £2 billion takeover offer from Swedish equity firm EQT, and Hotel Chocolat, which was bought by Mars last year. Other companies leaving reckon they can raise money more easily if they are private — such as the pharmaceutical business Redx. Still others are delisting because they have failed to achieve their goals, such as Active Energy Group, a company intent on developing a biomass fuel operation in the US.
This might not matter if new companies were racing to list on Aim — but they are not.
The situation could become worse if, as feared, chancellor Rachel Reeves ends a lucrative tax break for Aim companies. The Treasury said any decisions on taxes would be taken at the budget. Investors on the junior stock market are, in most instances, able to avoid landing beneficiaries of their wills with an inheritance tax bill if they have held their shares for two years or more by the time they die. This makes it attractive for businesses owned by families, and for investors looking for ways to reduce their tax bills.
Julian Morse, co-chief executive of Cavendish, the biggest broker for Aim companies, said: “If they took away inheritance tax relief on Aim, that would destroy the market, which effectively would take away proper funding for all these companies — and it would go against the government’s growth agenda.”
For some, the market has a performance problem: the Aim All-Share index has produced a negative return of 21 per cent since it was created in 1996, compared with a 385 per cent return from the FTSE 250 index over the same period.
While its old reputation for being the “wild west” of stock trading has abated in recent years, scandals at Patisserie Valerie, hit by an accounting fraud, and Quindell, a software business that was subject to a Serious Fraud Office inquiry (later dropped), have done little to foster confidence.
Tim Service, head of mid and small-caps investment at fund manager Jupiter, said: “Aim has had this perception problem for a while. Some great companies have been listed on there and have been able to grow, but the tail of ones that haven’t delivered is quite substantial.”
This is borne out by the value of companies on the market: tour operator Jet2 is the largest, worth £3 billion. More typical is Young’s & Co’s Brewery, at just under £550 million. Among the smallest is Active Energy Group, which is trying to leave the market and is worth just £90,000.
To Marcus Stuttard, head of Aim at the London Stock Exchange, the gloom is overdone. He noted that it was not just the junior market losing companies, but also the main market on the London Stock Exchange, while the slow inflow of new businesses through initial public offerings was a global problem.
Suttard pointed out that the average value of Aim firms has risen from £24 million in 2003 to £105 million now. He also argued that it was unfair to measure Aim’s performance as a whole because — unlike the FTSE 100, say — investors do not tend to invest in it via tracker funds, which passively follow the market. “You invest as a stock picker; you don’t invest on a passive index-tracking basis,” he said.
However, the legacy of the most famous stockpicker of all, Neil Woodford, casts a shadow. The fund manager’s firm imploded in part because he found it difficult to sell some smaller stocks he was holding when investors demanded their money back. This resulted in new rules from the Financial Conduct Authority requiring funds to hold shares they can sell easily.
Stuttard said these “blunt” rules could be deterring some fund managers from buying smaller companies — and not just on Aim — which, by their nature, don’t trade a lot of shares and are therefore less “liquid”. He said this risked making it difficult for small companies to win investment from a wide range of potential investors and said policy makers were discussing it for longer-term consideration.
Despite the gloom, there are plenty of companies keen to laud the merits of Aim. One is car dealership Vertu. It started out in 2006 as a cash shell seeking acquisitions in the sector, and went on to become the fourth-largest car seller in the UK. Robert Forrester, chief executive, said he had considered using debt or private equity but alighted on Aim instead.
“That’s what Aim is there for and should be still there for — to provide early-stage capital to allow management teams to develop businesses,” said Forrester.