London's Small-Stock-Market Blues

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The London Stock Exchange

Recessions are supposed to be a good time for small companies to grab competitors' business and grow — but if Britain's small cap market is anything to go by, many of those firms are struggling. The Alternative Investment Market (AIM), the London Stock Exchange's junior market for dynamic and fast growing smaller firms, has been hammered over the past year. The main index of its shares has slumped by 50% since the same time last year, far more than the losses on the FTSE 100, an index of Britain's leading shares. In the opening quarter of 2009, AIM listed just five new firms, raising a meager $4.5 million in the process. In the same period last year, 32 new companies pocketed 100 times that amount. "To all intents and purposes," Richard Thornhill, capital markets director at Deloitte, said in the firm's quarterly analysis of AIM last month, "the fundraising market for new companies on AIM does not exist."

The mood among those already listed on AIM has soured, too. For the first time in its 14-year history, more companies left the exchange than listed on it last year. The reasons aren't hard to come by. In a survey of the businesses delisting in the year to April by law firm Trowers & Hamlins and accountants UHY Hacker Young, financial pressures or insolvency, as well as the cost of maintaining an AIM listing — paying for non-exec directors and other services can add up to $300,000 a year — accounted for a large chunk of those leaving. Others had been dumped by their Nominated Adviser (Nomad), the accountants or financial management companies that act as quality control for AIM, scrutinizing a firm before deciding whether it ought to list. The Nomads' worry: should a firm they're advising go under during the recession, their own reputation sinks with it. (See pictures of the Top 10 scared traders.)

It's a blow to a market that was one of the world's most dynamic in recent years. Offering businesses a dip into London's deep investor pool, but with a light regulatory burden, AIM had lured 1,700 companies from more than 30 countries at its peak in late 2007. That figure now stands at 1,500 and shrinking. Among firms valued at less than $7.5 million — almost 40% of all companies listed on AIM — "there's quite a strong feeling that if things aren't going to improve in the near future, they're minded to look at coming off AIM," says John Cowie, head of AIM at British accountancy group Smith & Williamson, one of the market's appointed Nomads.

Can AIM rebound? Its owner, the London Stock Exchange (LSE), is currently lobbying the government against rules that forbid Venture Capital Trusts (VCTs) from investing in AIM firms above a certain size. The limits have virtually wiped out funding from that source. The Exchange also wants VCTs to be able to pick up shares in the secondary market — something they're currently prevented from doing — not solely through new listings. The LSE also recently launched a service providing research on AIM companies which lack the kind of independent analysis wavering investors are after. (See pictures of the global financial crisis.)

But while the LSE predicts the market for new listings will recover next year, expect "a wholesale change in the way AIM looks," says Cowie. U.K.-based firms have quit the market at more than twice the rate of overseas businesses in the last 18 months, he says, and the dwindling presence of smaller companies means the firms that remain will be bigger, forcing up the exchange's average market cap. Investors already look set to buy in. The AIM index is still down year-on-year but it's up 30% so far this year, far more than its bigger brother.

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