Why Aim is in danger of becoming a self-fulfilling doom loop

It has been a grisly few weeks for Aim, the lightly-regulated junior share market that is home to 700 listed companies in Britain. Overshadowing everything is the fear that, in the budget next week, Rachel Reeves could remove the inheritance tax exemption that makes owning Aim stocks so attractive.
Concerns about the market go much deeper than that, though. Aim is simply “not fit for purpose”, according to a damning report from the Tony Blair Institute for Global Change and Onward, the centre-right think tank, last week. They called for its axing because of its failure to attract and nurture the kinds of tech-driven small companies that could be the world beaters of tomorrow.
The missiles continued to rain down as N Brown, the fashion retailer for larger women, agreed to a £191 million take-private bid from the Alliance family which will result in it being delisted, and which explicitly stated that its unhappy experience of Aim was one reason for calling it a day.
Liquidity in its shares was low, it said, while fund managers were uninterested in smaller consumer stocks on Aim. It was “not benefiting from being listed on the Aim market, whilst having to bear significant costs associated with its listing”.
It is just one of more than 80 companies to delist from Aim in the past 15 months. MusicMagpie, the second-hand records retailer, was another to wave goodbye to the market this month, agreeing to be taken over by AO World, the online electricals retailer.
The ecosystem for smaller listed companies is now under threat, according to New Financial, the City think tank and lobbying company. Listed company numbers are sharply down, IPOs are rare, institutional investors are pulling back, as are analysts to cover the stocks. Specialist UK smaller company funds have just recorded their 36th successive month of outflows, it pointed out, while the number of council pension schemes with a dedicated allocation to UK smaller companies had fallen from 18 to one over the past decade.
“The danger is that smaller listed companies have fallen into a self-fulfilling ‘doom loop’ of lower demand, lower valuations, lower performance, higher governance and regulatory requirements and higher cost,” it concluded.
It called for fresh incentives and tax breaks to breathe new life into the sector and counter the culture of “safety-ism” infecting the market. There was nothing inevitable about the decline, it said, pointing to junior markets in other countries such as Sweden and Australia, where tiddlers were nurtured much more successfully.
Some investors say the real elephant in the room is the terrible investment returns produced by Aim in the past. Yes, adverse structural difficulties were not helping, reducing valuations, but this could not fully explain the abject average performance of the overall market. This was down to the poor operating performance of so many Aim constituents.
Tim Bush, a spokesman for Pirc, which advises institutional investors, said the overall investment performance had been poor. “The dog that hasn’t barked in the debate is why all of these growth aspirations aren’t being dealt with by Aim. That’s what Aim is supposed to be for.”
The dismal performance has been specific to Aim. Smaller companies listed on the main London market have done much better for shareholders. Research by Deutsche Numis, a major broker in the small companies space, found that returns from smaller companies on the main market were a world-beating 869 per cent over 25 years. That outpaced America’s S&P 500 at 602 per cent. Aim stocks delivered a lowly 177 per cent.
The more recent record was even worse. Over the past five years, smaller companies on the main market produced an annualised return of 2.8 per cent, while Aim stocks went backwards, delivering -0.5 per cent a year.
A casual glance at the share prices of so many Aim companies tells the story. Boohoo, a £4 billion giantkiller and Aim darling five years ago, is now valued at £371 million and is considering a break-up, it announced on Friday.
Marcus Stuttard, the London Stock Exchange executive who has run Aim for the past 15 years, denies that the operating performance of constituent companies is the problem. “No one is saying this is a quality-of-company issue,” he claims, dismissing high-profile collapses like Quindell and Purplebricks as “historic”.
While deeply concerned about the inheritance tax threat and other headwinds, he remains relatively confident, reeling out surprisingly positive statistics: “Over the last five years, 53 per cent of all capital raised across all of Europe’s growth markets has been raised on Aim.” Aim companies contribute £68 billion to UK gross domestic product and help sustain 778,000 jobs, he says.
Moreover, “Three of the six companies floating on Aim in the last year have been American ones,” giving the lie to the notion that all the IPO transatlantic traffic these days is going from east to west.
Even so, some brokers candidly accept that the poor average returns record has not helped. Charles Hall, head of research at Peel Hunt, says: “There have been a material number of companies that should never have been listed in the first place and should have been weeded out. I would love to say that we have been more discerning, but we have had our share of failures as well as great successes. The reality is that small companies are higher-risk.”
Supporters of Aim argue that the critics have to accept it is a stockpickers’ market where smart analysis can dodge the rubbish and pick winners. A good example is the popular Octopus AIM Inheritance Tax Service fund, which has risen by 177 per cent between its launch in June, 2005, and December, 2023. That compares with the more pedestrian total return from Aim over the same period of 6 per cent.
The inevitable wipeouts from some speculations are a price worth paying, argues Hall, who adds that the quality of Aim companies is “miles higher than ten years ago”. He says: “I strongly believe we should have these moonshots as these are the potential large companies of tomorrow. After all, AstraZeneca and Shell started as small companies. We should not be frightened of failure.”
Meanwhile, Aim’s immediate returns could turn even more negative if the chancellor withdraws that inheritance tax prop on October 30. Aim stocks have underperformed blue chips by 10 per cent since June but could lag further if Reeves pulls the tax plug. “It’s absolutely not fully priced in,” Stuttard warns.
Peaches:
Jet2: The Leeds-based airline and holidays group is a long-time occupier of junior share markets, originally floating on the Unlisted Securities Market, then taking a full listing in 1991 before transferring to Aim in 2005. Today it has grown to be Britain’s biggest package-holiday supplier with 7 million customers, 17,000 staff and a £3.1 billion valuation.
Gamma Communications: The Berkshire-based supplier of telecoms packages to large organisations, including Barclays and Lidl, is now expanding internationally. Investors have made eight times their money since the float on Aim in 2014. The company is now worth £1.6 billion, but sadly for Aim it announced last month it was contemplating moving to a full listing.
Fevertree Drinks: The upstart fizzy-mixers group outgunned the incumbent Schweppes for several years, but has struggled more recently, its shares reversing by 80 per cent from their 2018 high. Longer-time investors are still in the money even with the valuation shrinking to £897 million.
Warpaint London: The cosmetics company behind brands including W7 and Technic listed on Aim with a market value of £70 million in 2016. The business now weighs in at £431 million. Sales have been on a tear after marketing tie-ups with influencers such as the TikTok star Vickaboox.
James Halstead: The family-backed flooring company floated in 1948 before moving to Aim in 2002 to take advantage of the flexibility and lower costs of being listed on the junior market. It has raised its dividend every year since 1974, though the shares have retreated recently over worries about supply chain disruption.
Lemons:
Quindell: Boom-to-bust insurance services group that mushroomed through acquisitions financed through a blizzard of share issues amid impenetrable jargon. The music finally stopped after a Serious Fraud Office investigation was launched. The broker Cenkos and the auditor KPMG were both later fined for failings.
Purplebricks: The disruptive estate agency group that hoped to change the face of house-selling. At its peak in 2017, it was valued at more than £1.3 billion. A disastrous international expansion plan and doubts about its business model culminated in it being sold for a peppercorn £1 last year.
UK Oil & Gas: The company behind the “Gatwick gusher”, an optimistic claim that it was well positioned to tap potentially fabulous reserves near to London’s second airport. More realistic expectations have returned and the shares have now lost 99.996 per cent of their value since the peak in 2005.
Conviviality: The drinks retailer behind Wine Rack and Bargain Booze imploded one week in 2018 after admitting errors in a spreadsheet and the failure to notice an imminent tax bill. Investors lost £500 million.
WANdisco: The software company was once valued at close to £1 billion but was brought low by an accounting scandal last year. The company, renamed Cirata, survives but with a price tag of just £32 million.