The Alternative Investment Market – almost 30 years old and still misunderstood

The Alternative Investment Market (AIM) is almost as old as its big sister the FTSE 100 which has just turned 40. Started in 1995, AIM has grown to more than 700 companies today.

How does the Alternative Investment Market work?

AIM 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 Fever-Tree (which remains AIM listed today).

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

You have to be selective in the companies you invest in as not all of them qualify. For example, a company that mainly deals with securities, stocks or shares, land or buildings, or in making or holding investments, does not qualify. Neither do not-for-profit organisations.

If the business is in the process of being sold at the time of death this also disqualifies it unless the estate will receive shares in the purchasing company. This is also true if the company is being wound up unless this is part of a restructuring that means its business activities will continue.

AIM helped the UK economy and businesses through the COVID-19 crisis. The pandemic emergency demonstrated the advantages of being a listed entity, as these companies were able to shore up their balance sheets rapidly by raising equity. This ability to mobilise capital quickly was key in a crisis where many companies saw a complete loss of revenue overnight.

So, what has put investors off AIM in the past?

Top AIM myths

Myth 1: Nobody makes money investing on AIM

The Alternative Investment 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 25% down from 1995.

This is only half the story. Recently Asset Risk Consultants (ARC) 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.

Myth 2: AIM is full of small risky businesses

AIM can be 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 currently around £75bn. Some businesses on AIM, such as Fever-Tree, are capitalised at around £1bn.

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. These businesses have often been around for decades and some still have significant family/founder involvement. These represent relatively stable businesses where the management’s interests are aligned with that of the 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. More recently, we have seen various high profile hydrogen energy companies fall in value significantly after failing to match growth expectations. We didn’t hold these stocks, as they were significantly loss making; however, unfortunately, these businesses attracted many retail investors as they were hotly tipped in the press.

AIM has also had some high-profile failures over the years, such as Patisserie Valerie. However, as the Wirecard fraud scandal taught us, there is always a chance of failure on any market. Even a major market like the German DAX is not immune.

Myth 3: People only invest in AIM for the tax benefits

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 historically been one of the best performing funds in the UK, are mostly AIM shares.

If you were to hold these AIM shares in your own name, rather than within the fund, they would qualify for inheritance tax relief.

Myth 4: AIM is UK-centric

Although most AIM companies are UK focused, many have operations and generate revenues abroad. According to a Grant Thornton report, 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 29 years, AIM has had its ups and downs, but it has evolved to become one of the most successful growth markets in the world in terms of capital raised. If you remain focused on quality businesses, that are generating cash today, then I believe AIM can be one of the world’s most interesting areas to invest in.

Here’s to the future!

Find out more about our AIM Inheritance Tax Portfolio service.