Alternative Investment Market (AIM)
It was created to help smaller businesses that needed capital to grow.
What is the Alternative Investment Market (AIM)?
The AIM (Alternative Investment Market) is a London Stock Exchange sub-market founded on June 19, 1995, to replace the Unlisted Securities Market (USM), which had been operating since 1980.
It enables more small, less developed companies looking for a more flexible approach to governance to float shares under a more flexible regulatory system than the Main Market.
AIM is the growth market of the London Stock Exchange, designed to help small businesses raise the capital they need to scale. Also known as London's junior market, AIM began its operations with ten companies listed and a combined market cap of £82.2m.
In just over 20 years, the exchange has grown to include around 1,000 companies with a combined market cap of more than £90 billion. As a result, it is widely regarded as the world's most successful growth market.
Understanding the Alternative Investment Market (AIM)
It was created to help smaller businesses that needed capital to grow but couldn't afford the costs of listing on the London Stock Exchange's Main Market or meet the stringent requirements to float.
Companies seeking to float on the Main Market must have been in operation for three years, have a market value of at least £700,000, be willing to swim a minimum of 25% of their share capital, and have enough working capital for at least one year of trading.
Because AIM does not have these requirements, smaller, more entrepreneurial companies are less likely to be put off from listing on this market.
Companies seeking to float on the Alternative Investment Market typically seek to raise between £1 million and £50 million through an IPO. However, despite appearing as a small amount, there have been some notable, more significant raises that exceed £100 million.
And while many companies use it as a stepping stone to the Main Market (over 150 have done so), there are still a few companies listed on it with market capitalizations of more than £1 billion.
This list includes ASOS, ABCAM, and Fever Tree, which have provided significant returns to early investors.
Insights into AIM
Alternative Investment Market companies are from 26 countries and represent 37 sectors (90 different sub-sectors).
It began with only ten companies worth a total of £82.2 million. However, as of May 2021, the sub-market had 821 companies with an average market cap of £80 million per listing.
Due to its low regulatory burden, particularly the US Sarbanes-Oxley Act, AIM has also begun to become an international exchange. By December 2005, it had admitted over 270 foreign companies.
Private shareholders execute up to a quarter of all trading on AIM accounts. While there are obvious risks to investing in growth companies, the excitement and volatility of this market attract many younger investors.
According to a recent TD Direct Investing survey, the AIM index has more than three times as many 30 to 44-year-old investors as those in the 45 to 75 age group.
While AIM investments are considered riskier than those on the primary LSE stock market, the tax benefits can make them more appealing. We will touch on this below.
The FTSE Group (a British provider of stock market indices) maintains three indices: the FTSE AIM UK 50 Index, the FTSE AIM 100 Index, and the FTSE AIM All-Share Index.
AIM essentially allows small businesses with an idea and a dream to seek funding, grow, bet on the market, and, on occasion, fail.
As mentioned above, because of lax regulation and the small size of listed companies, AIM shares are riskier investments than those on the Main Market.
During the bubble burst of dot-com in 2000, it lost nearly half its value between 2000 and 2005. (In comparison, the FTSE All Share Index fell only 16 percent during the same period.)
In 2008 when the credit crunch hit, dozens of companies abandoned this market or were forced to leave due to factors such as a takeover, insolvency, or financial stress caused by a drying up of the pool of capital.
Compared to previous years, market delistings more than doubled in 2008/09. In 2008, only 34 companies joined AIM, raising £537.14 million, compared to 77 in 2007, which raised £2.1 billion in new capital.
In 2009, companies continued to leave the stock exchange, and despite a slight improvement in 2010, the UK government felt the need to stimulate AIM in its 2010 budget.
To fill a funding gap for small and medium-sized enterprises (SMEs) that typically trade in this market, the UK government allowed ISAs (Individual Savings Accounts offering easy access to tax-free savings) to be invested in their shares.
AIM currently lists over 1,100 companies and has seen hundreds more come and go since its inception, as it is a fast-paced market.
AIM Facilitating Global Growth
Since its inception in 1995, it has attracted over 3,600 companies from all over the world. These companies have raised more than £60 billion in new and additional capital fundraisings.
Many companies that list on this market leave within a year. Either taking the money and delisting or graduating to the primary market of the LSE. Some companies switch from the Main Market to AIM because of the less stringent regulations and favorable tax rules.
AIM, like the FTSE 100, is not limited to British companies and is open to international companies. Over 220 companies are listed outside the UK, including Kea Petroleum, a New Zealand oil and gas prospector.
Nonetheless, AIM is considered the "mid-market," and the amounts at stake are generally slightly lower than on the LSE Main Market. Most SMEs that list on it expect to raise between £1 and £50 million.
It competes with angel investors and venture capital funds, particularly at the lower end of the scale. The relatively expensive listing cost and the low valuations of companies caused by the depressed market mean that many want to hold on to their Equity.
AIM is a prime example of the market deregulation that has defined the UK economy over the last 25 years.
It allows more companies to enter the market, which means more entrepreneurship and risk. Which brings the question: Is this a system that allows for a dynamic, open, and rapidly growing economy, or is the risk too significant to take with a nation's wealth? Only time will tell.
Types of Companies Listed on the Alternative Investment Market
Companies that have decided to list on the market must first identify and appoint a "NOMAD" to assist them in reaching the market. NOMAD is an abbreviation for "Nominated Advisor."
NOMADs have extensive experience guiding new companies through the flotation process and thoroughly understand the needs of companies seeking market admission.
They assure shareholders that the company's operations will be reasonable during the initial share flotation process (the IPO) and subsequent periods.
To become a NOMAD on the market, a company must first meet the eligibility criteria outlined in the AIM rules and then submit the necessary application documents.
The market regulation team reviews the firm's application and holds detailed discussions with the firm. Before the approval of a NOMAD, the firm and its executive officers will be subject to a gazetting period.
Accounting firms, law firms, brokers, and public affairs and investment management firms are the other advisors involved in the admissions process. Rather than an individual, the advisors must be a firm or company.
The AIM Rules for Nominated Advisers advise NOMADs on their ongoing responsibilities and review and disciplinary procedures if they are accused of misbehaving in their role as NOMADs.
Private Equity
Private Equity is a broad term for capital investments in private firms that are not publicly traded on a stock market, for instance, on the New York Stock Exchange.
Private Equity is divided into several categories:
- Venture capital focuses on startup and early-stage businesses.
- Growth capital enables more mature firms to expand or restructure.
- Finally, buyouts are transactions in which a company or one of its divisions is purchased outright.
A private-equity manager uses investor funds to fund acquisitions. Investors include hedge funds, pension funds, wealthy individuals, and university endowments.
It reorganizes the acquired firm (or firms) and tries to resell at a higher value, intending to achieve a high return on Equity. Cost-cutting is frequently used in restructuring, which results in higher profits in the short term.
Private Equity makes full use of debt financing to acquire businesses using leverage.
A slight increase in the firm's value, such as a 20% increase in asset price, can result in a 100% return on Equity if the private-equity fund's initial investment was only 20% equity and 80% debt.
A crucial component of Private Equity is the relationship between the investment company and the company receiving capital.
Private equity investors frequently provide much more than capital to the businesses in which they invest; they provide knowledgeable information such as industry expertise, assistance with talent sourcing, and mentorship to founders.
Private Debt
Private debt refers to investments that are not bank-financed (e.g., a bank loan) or traded on an open market. The term "private debt" is important because it refers to the investment instrument rather than the borrower, as both public and private companies can borrow through personal debt.
Private debt is leveraged when a company needs additional capital to expand.
Private debt funds are the companies that issue capital. They generally make a profit in two ways: interest costs and loan repayment.
Long-term consumer debt is frequently regarded as fiscally inefficient. While some consumer goods, such as automobiles, are marketed as having high utility levels that justify incurring short-term debt, most consumer goods are not.
In most cases, incurring high-interest consumer debt to purchase a large-screen television "now" rather than saving for it cannot be justified financially by the personal benefits of having the television sooner.
However, the ease with which people can accumulate personal debt beyond their ability to repay has resulted in a growing debt settlement and credit counseling industry in many countries.
As more debt accumulates, it is more difficult to repay these incurrences, resulting in a lower credit score and exacerbating mental health problems.
Hedge Funds
Hedge funds are financial instruments that trade comparatively liquid assets and use various investment strategies to achieve a high return on investment.
To execute their strategies, hedge fund managers can specialize in various areas, including volatility arbitrage, market neutrality, quantitative methods, and long-short Equity.
Institutional investors like endowments, pension funds, and mutual funds, in addition to high-net-worth individuals, are not permitted to invest in hedge funds.
Hedge funds are considered alternative investments. Their capacity to use leverage and more sophisticated investment techniques differentiates them from the retail market's regulated investment funds, commonly known as mutual funds and ETFs.
Hedge Funds are also distinguished from private equity funds and other similar closed-end funds in that hedge funds generally invest in liquid assets and are typically open-ended.
They typically allow investors to regularly put in and withdraw capital based on the fund's net asset value. In contrast, private-equity funds usually invest in illiquid assets and only recover money after some time.
Although most modern hedge funds can use various financial instruments and risk management techniques, they differ significantly in their strategies, risks, volatility, and expected return profile.
Hedge fund investment strategies frequently aim for a positive return on investment irrespective of whether markets are going up or down ("absolute return").
Although hedge funds are risky investments, the expected returns of some hedge fund techniques are less complex than those of retail funds with significant exposure to stock markets.
Real Estate
Real estate is the world's most common and significant asset class.
Aside from its size, real estate is an intriguing category as it shares characteristics with bonds (because property owners receive current cash flow from tenants paying rent). Likewise, in Equity (because the goal is to increase the asset's long-term value, known as capital appreciation).
Like other tangible assets, real estate investment is complicated with valuation issues. Real estate valuation methods include income capitalization, discounted cash flow, and comparable sales, each with perks and drawbacks.
To become a successful property investor, it is essential to acquire strong valuation skills and know when and how to use various methods.
Real estate includes land and buildings and immovable natural resources such as crops, minerals, or water.
In law, real estate refers to land property distinct from personal property, whereas estate refers to a person's "interest" in that property.
Personal property, which is not physically connected to the land, such as automobiles, boats, jewelry, furniture, tools, and farm rolling stock, is not considered real estate.
Commodities
Commodities are tangible assets primarily consisting of natural resources such as agricultural products, oil, natural gas, and precious and industrial metals.
Commodities are considered an inflation hedge because they are not affected by public equity markets.
Furthermore, the value of commodities fluctuates in response to supply and demand—increased demand for commodities results in increased prices and, as a result, increased investor profit.
Commodities have been traded for thousands of years and are not new to the investing scene.
Amsterdam, the Netherlands, and Osaka, Japan, had the first known formal commodities exchanges in the 16th and 17th centuries. The Chicago Board of Trade pioneered commodity futures trading in the mid-19th century.
Most commodities are raw materials, primary resources, farmland, or mining products like iron ore, sugar, or grains like rice and wheat. Chemicals and computer knowledge are examples of commodities.
Natural Gas, crude oil, corn, soybeans, and gold are among the most popular commodities.
Other meanings of commodity include helpful, anything, or valuable and a substitute term for a marketable economic good or service.
Collectibles
Collectibles are a wide variety of items, including but not limited to:
- Rare Wines
- Vintage Cars
- Fine Arts
- Stamps
- Coins
- Baseball Memorabilia
Investing in collectibles entails purchasing and maintaining physical items in the hope that the assets' value will increase over time.
These investments may sound more exciting and fun. Still, they can be risky due to high acquisition costs, a lack of dividends or other income until they're sold, and the potential destruction of the assets if not stored or cared for properly.
Experience is the most critical skill required in collectibles investment; you must be an expert to expect a return on your investment.
Manufacturers and retailers have used collectibles to increase sales in various ways.
One application is the creation of licensed collectibles based on intellectual property, such as images, characters, and logos from literary works, music, movies, radio, television, and video games. In addition, marketing, brand name, and personality collectibles are a large subset of licensing.
Memorabilia is another critical area of collecting that is also big business. It includes collectibles relating to a person, organization, event, or media, such as T-shirts, posters, and other collectibles marketed to fans.
It can also encompass memorabilia from historical, media, or amusement events, which were meant to be tossed aside but were saved by fans and managed to accumulate by collectors.
Structured Products
Structured products typically involve fixed-income markets that pay dividend payments to investors, such as government or corporate bonds, as well as derivatives or securities whose value is derived from an underlying asset or asset class.
Structured products take traditional security and replace its usual payment features with a non-traditional payoff derived from an underlying asset's performance. Essentially, structured products provide easy access to derivatives for individual investors.
Structured products can be complex and risky investments, but they provide investors with a customized product mix to meet their specific needs. They are typically created by investment banks and made available to hedge funds, organizations, or retail investors.
Structured products are new to the investing scene, but you've probably heard of them because of the 2007- 08 financial crisis.
Products such as collateralized debt obligations (CDOs) and mortgage-backed securities (MBS) became popular during the housing boom preceding the crisis. However, when housing prices fell, those who had decided to invest in these products suffered significant losses.
Alternative Investment Market Advantages
AIM shares allow investors to benefit from government-sponsored tax breaks such as inheritance tax relief, capital gains tax relief, and various other types of loss relief on eligible claims for the Enterprise.
Investment Schemes (EIS) are held by a Venture Capital Trust (VCT).
The most popular way to get tax relief on AIM shares is to put them in stocks and shares ISA, a savings account that lets investors invest without paying tax on any income or capital gains they make.
1. Individual Savings Account (ISA) holdings of AIM shares
Since 2014, investors have indeed been able to include AIM-listed shares in their equities and shares ISAs. The appeal of not paying Capital Gains Tax on discretion and no income dividend tax has resulted in a steady rise in the number of AIM shares held in ISA portfolios.
2. Relief from Inheritance Tax (IHT)
Many AIM companies qualify for Business Property Relief, which provides inheritance tax relief of up to 100% on 'Transfers of Value.'
Transfers of Value occur when a family member dies or the shares are transferred as a lifetime gift within the previous seven years. Only certain unquoted companies are eligible for complete relief.
You must have actively invested in the shares to qualify for Business Property Relief, as funds are typically unavailable. However, some exceptional cases and discretionary portfolios created by wealth managers on the investor's behalf may be eligible.
3. Enterprise Investment Scheme (EIS)
Some AIM-listed companies may be eligible to offer shares through the Enterprise Investment Scheme. Qualified companies can receive generous income and capital gains tax relief and loss relief if the company fails and its shares become worthless.
While the shares are listed on this market, investors must hold the shares for a minimum of three years, or the tax benefits will be reclaimed by Her Majesty's Revenue and Customs (HMRC).
4. Trusts for Venture Capital
A Venture Capital Trust (VCT) is a fund-like instrument that provides tax benefits to investors. VCTs invest the funds raised in early-stage businesses, providing investors with income tax and capital gains tax breaks similar to those available through the EIS.
Dividends that companies invest in a VCT are not subject to income tax. However, unlike EIS, VCTs do not provide IHT relief.
Alternative Investment Market Disadvantages
Because companies listed on the Alternative Investment Market are typically small, early-stage businesses, they face common risks, including low liquidity in trading their stock, unforeseen problems with the unconfirmed business model, and cash flow issues.
While many companies listed on AIM have thrived and eventually crossed over to the London Stock Exchange, others do not. As a result, companies trading on this market are delisted significantly more than those trading on the LSE.
However, for investors with the necessary risk tolerance, investing in alternative market stocks provides a once-in-a-lifetime opportunity to get in on the ground floor at a low stock price with a newly-established company.
And then, the investor can reap massive rewards when the company becomes a success and its stock price increases tenfold.
AIM-listed companies are primarily in their early stages. Hence, some of the risks associated with investing in startups apply here.
While many listed companies make it to the Main Market, the rate of delistings on AIM significantly outnumbered those on the London Stock Exchange.
Alternative Investment Market companies, on average, have lower levels of liquidity, making it more difficult for investors to sell shares whenever they want. Moreover, it could also be more challenging to obtain data about AIM-listed companies.
Research and authored by Khadeeja C Abbas | LinkedIn
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