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The AIM market – 25 years old and still misunderstood

Last month London’s junior market, AIM, celebrated its 25th birthday; but do investors understand the market and how many are celebrating happy returns?

AIM header graphics

by
James Rae

in Features

22.07.2020

The Alternative Investment Market (AIM) started in 1995 and has grown to more than 800 companies today. It was launched to provide a platform for smaller growth companies to raise capital without having to jump through the same regulatory hoops as a company listing on the main exchange. It has been home to many well-known UK businesses such as Domino’s Pizza, Mears Group and FeverTree (which remains AIM listed today).

To further encourage the growth of these companies, the government offers an inheritance tax break to AIM investors. If qualifying AIM shares are held for two years, then when the owner dies, there is no tax to pay under current rules.

AIM has helped the UK economy and businesses through the recent crisis. The Covid-19 emergency has demonstrated the advantages of being a listed entity, as these companies have been able to shore up their balance sheets rapidly by raising further equity. This ability to mobilise capital quickly has been key in a crisis where many companies have seen a complete loss of revenue overnight. Many more companies may have fallen due to Covid-19 if this access to cash was not available – this includes businesses listed on AIM, which may have remained privately owned if AIM did not exist.

There are tax breaks and investing in AIM supports UK businesses and jobs; so, what has put investors off AIM in the past? Here are some of the top AIM myths that are regularly regurgitated by the press:

Myth 1: “Nobody makes money investing on AIM”

The AIM market had turbulent beginnings, particularly in the dotcom bubble, and if you had invested in the AIM index from
the beginning you would currently be about break even.

This is only half the story. Recently ARC (Asset Risk Consultants) has put together an index to show how AIM investment managers, who are investing on behalf of clients to mitigate inheritance tax, have performed, on average, since 2013. The data shows actual client returns and the outperformance relative to the AIM index (and the FTSE All-Share) has been significant. The reasons for this are covered below.

AIM Chart

Myth 2: “AIM is full of small risky businesses”

AIM remains a minefield, but the market has matured significantly in recent years. Historically, AIM has been regarded as a market full of high risk, loss-making technology and resource companies that were caught out in the dotcom bubble and the financial crisis. However, over the course of the past decade, the number of stocks listed on AIM has reduced dramatically, while the total market capitalisation of the index is now almost £100bn. AIM, therefore, does not have to be like making an Enterprise Investment Scheme (EIS) investment. Some businesses on AIM, such as Fever-Tree, are capitalised at over £1bn. 

AIM table

This leads back to why there has been such outperformance from AIM investment managers relative to the AIM index. Most AIM managers are picking profitable, cash-generative businesses for their clients. Often these businesses have been around for decades and
some still have significant family/founder involvement. This means that they are often investing in relatively stable businesses where the management’s interests are aligned with shareholders.

This doesn’t mean that there aren’t still AIM-listed businesses that are high risk and are likely to fail at some stage. In my view, the latest pending disasters are some of the companies in the hydrogen energy space which have recently
been hotly tipped in the press. Many of these businesses are currently valued at several hundred times revenues, are haemorrhaging cash and have management who are selling stock on the back of the recent surge in the company’s share price. 

AIM has had some high-profile failures over the years, such as Patisserie Valerie. However, as Wirecard shows, there is always a chance of failure on any market.

Myth 3: “People only invest in AIM for the tax breaks”

There’s a chance that you already have AIM investments and are not benefitting from the tax breaks. If you currently own a UK smaller companies fund in your portfolio, then there’s a possibility that the
fund manager is investing in AIM shares. For example, at the time of going to press, the top ten holdings in the Liontrust UK Smaller Companies fund, which has recently been one of the best performing funds in the UK, are all AIM shares. If you were to hold these ten AIM shares in your own name, rather than within the fund, they would qualify for inheritance tax relief.

Office for National Statistics (ONS) data shows that almost half of the holdings in AIM companies are driven by investors from around the world. These investors are unlikely to be benefitting from the tax breaks on AIM.

Myth 4: “AIM is UK-centric “

Although most AIM companies are UK focused, many have operations and generate revenues abroad. In 2019, AIM businesses generated £12.4bn of revenues overseas, providing a significant contribution to the UK economy. One example is Edinburgh based Craneware, which generates all its revenues in America. It is the market-leading supplier of computer software to US hospitals.

Over its first 25 years, AIM has had its ups and downs, but it has evolved to become the most successful growth market in the world in terms of capital raised. If you remain focused on quality businesses, that are generating cash today, then I believe that AIM can be one of the world’s most interesting areas to invest in. Here’s to another 25 years!

Find out more about Charles Stanley’s Inheritance Tax Portfolio service:

For private clients

For intermediaries

Charles Stanley is not a tax adviser. Information contained in this article is based on our understanding of current HMRC legislation. Tax reliefs are those currently applying and the levels and bases of taxation can change. Tax treatment depends on the individual circumstances of each person or entity and may be subject to change in the future. If you are in any doubt, you should seek professional tax advice.

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