Has an AIM revival finally begun?

The months following the budget have been a particularly difficult period for AIM shares. However, over the past few weeks we have seen a revival for many of our stocks. This doesn’t come as a huge surprise as leading up to and following Presidents Trump’s tariff announcements, we saw unjustified capitulation from many AIM shares. The falls happened very quickly, with almost no buyers supporting share prices. This has now rapidly reversed.

What is driving the change in sentiment?

One of the driving forces behind the recent rise has been bid interest from private equity firms who are looking to take advantage of the marked discounts on the AIM market. However, we continue to believe there are a number of reasons for a significant medium-term recovery for AIM.

Despite the recent rally, AIM shares remain at a significant discount to both their historic valuations and those of international and larger peers. Given their potential growth prospects, this discount doesn’t make sense. We continue to hold several stocks we feel can double their profitability in the next five years.

One reason often cited for UK smaller company share price weakness is the UK economy itself. Investors fear the UK economy will under perform international peers and therefore look to minimise exposure. While an uncertain trading environment and rising tax burdens might pose downside risks to economic growth this year, recent data shows the UK economy performing better than expected. We continue to believe UK consumers are in a much stronger position than media headlines suggest.

UK consumers have been saving more in recent years and we therefore expect consumer spending to be robust. This, alongside continued public spending, should drive UK economic growth.

There are a number of other levers that should provide support to smaller company share prices. The Monetary Policy Committee (MPC) look set to continue cutting interest rates in 2025, although they are likely to be cautiously watching the effect of tariffs on UK inflation.

As discussed in previous updates, the largest short-term driver of share prices on AIM are capital flows. As these companies trade less frequently, any buying or selling can affect them far more significantly than larger peers. The last three years have seen a period of unprecedented outflows from AIM shares, and this has significantly impacted share prices. Going forward, we feel that there are signs that this trend could reverse.

One key driver can be the government, which has finally stepped up its support for private capital markets and AIM. Under the new Mansion House Accord, 17 of the largest pension funds have committed to invest at least 10% of their main default funds in private markets by 2030 – half of which should be invested in the UK. Reports estimate that this could mobilise £50bn of UK pension fund capital over the next five years. AIM shares will count towards these targets.

President Trump’s extraordinary trade policies might have ended the US’s complete domination of capital markets. There is likely to be more uncertainty as the 90-day tariff pause comes to an end in July. The US will remain the main economic force for decades to come, but UK investors’ flight from domestic stocks to mega cap technology companies over the past decade has been extraordinary. Any modest redeployment of this capital to other areas, such as UK smaller companies, could have a large impact on share prices.

How are our AIM portfolios positioned?

Despite the recent rally, many of our AIM investments still trade on low valuation multiples. The exceptions are primarily companies operating in defence, cybersecurity, or those with innovative intellectual property that is being rapidly adopted by their customers.

As discussed in previous reports, our companies are not overleveraged. In fact, 70% of our holdings still have net cash on their balance sheets. This gives them flexibility in challenging market conditions to alter their business model or take advantage of weakness from a competitor.

Very few of our stocks are cyclical and rely on a customer’s capital expenditure – our investments that do are extremely well capitalised i.e. they own significant freehold property and have net cash on the balance sheet.

Over the past two years, we have notably increased our exposure to defence companies. Considering global geopolitical tensions, we can only see worldwide expenditure on this sector increasing. UK defence manufacturing currently represents around 36% of total European arms manufacturing and should materially benefit from increased defence spending in the region.

The cyber security stocks we are invested in are currently highly valued. However, we are happy to pay up to be part of the potential growth on offer. Cyber security has been a growing sector for several years – that said, the reality is that companies don’t want to pay for security unless they feel the need to do so. This will either be driven by regulation, which is coming, or by threat proximity. It is the equivalent of someone buying a burglar alarm after their neighbour has been robbed.

The recent attack on M&S is likely to cost the firm over £300m. The Co-Op and Victoria Secret are currently desperately trying to recover from their respective attacks. We expect more of the same. More than half of UK businesses suffered at least one cyber-attack in the five years to 2024 according to one study. Considering the geopolitical instability, firms must build defences and expect trouble.

We have a few concerns over some of our faster growing tech businesses as we feel that the short-term uncertainty created by President Trump’s tariffs will continue to mean slower corporate decision making over the next six months. This could mean a slowdown in growth for some of these companies, but it should not impact their long-term growth outlook as they are providing services that will ultimately make their customers more productive and profitable. Their offerings are often unique, and these companies have the balance sheet strength to see them through any period of uncertainty.

Company updates and changes to our portfolios

We made the decision to sell out of CVS Group. The provider of veterinary services in the UK and Australia. We have held a position in the company since 2012 and it has been a key player in the consolidation of veterinary practices in the UK over the past 20 years. We felt that the share price of £8 was too low, even when considering the current Competition and Markets Authority’s investigation into the vet industry. Since then, the share price has risen by 50% which we think is sufficient to let the shares go. We still believe the impact from the CMA investigation will be relatively limited. Though, we are more concerned with current trading. Growth in the first half of the year was very slow and we aren’t inclined to believe management’s views that there will be a reacceleration in the second half. Vets feel under pressure to help customers following the CMA scrutiny and we think this will result in lower sales growth. This comes at a time when CVS has invested heavily in equipment to do more complex procedures. The depreciation from this equipment along with the lack of sales growth and the increases in national insurance could mean a profit warning is on the cards.

Science Group strategically deployed its cash on the balance sheet to acquire a significant stake in Ricardo plc, a fellow consultancy business. Through a series of purchases, Science Group became Ricardo’s largest shareholder, securing approximately 21.8% of the voting rights at an average acquisition price of £2.39 per share. On 11 June 2025, Ricardo announced it had received a takeover offer from the Canadian consultancy firm WSP Global Inc. at a price of £4.30 per share. Ricardo’s board has accepted the offer. This development represents a highly successful outcome for Science Group, unlocking £53.5 million in cash proceeds, enhancing Science Group’s financial flexibility and providing substantial capital for future strategic investments and corporate initiatives.

Big Technologies has been one of our most frustrating holdings over the past two years. Big Technologies is a specialist in electronic monitoring (tagging) in the criminal justice sector. The company has developed a leading platform alongside market leading tags that it sells around the world on a software as a service model. As prisons around the world struggle with overcrowding, a rapidly growing market is emerging. Although we feel the company has the best technology in the sector, it has struggled to grow as rapidly as we initially anticipated. In April, it became completely clear why. The, now, ex-CEO and founder Sara Murray has been accused of misleading shareholders prior to and at the IPO. We were aware of these allegations; however, the extent of the deception caught all stakeholders off-guard. Sara has now been removed from the company and her shares have been frozen as Big Technologies will be asking her to co-defend against claims from disgruntled shareholders.

Following multiple discussions with the legal counsel representing Big and the Chairman, we are confident any potential redress will not be borne by the company, and that its position in this matter remains well protected. In addition, the new CEO of Big is Ian Johnson – a manager we know well from his days with Niox – one of our largest and most successful holdings. Ian will look to professionalise and install accountability across the business - which should result in a return to rapid sales growth. Considering the £100m of net cash on the company’s balance sheet and their best-in-class software, we think the share price is well set for significant recovery over the coming years. We have therefore bought more shares over the last quarter.

We are pleased with the bounce back over the past few months. Our companies are still lowly rated and over the medium term and we feel confident that share prices will eventually reflect the fundamental growth prospects of our businesses. Over the short-term, we think that there will be more volatility as the world deals with the consequences of Trump’s constantly changing tariffs. Our companies remain extremely cash generative, with the majority having significant net cash on the balance sheet and are therefore very well placed to ride out any short-term uncertainty.

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