AIM is owned by the London Stock Exchange and is the market for smaller, growing companies, as opposed to the Stock Exchange’s Main Market for larger, more established companies, such as BP, Vodafone etc. AIM was established in 1995 and in the 2000s attracted a large number of companies, not only from the UK, but also from around the world, who wanted access to capital to fund their growth. The number of companies on AIM peaked at 1,694 at the end of 2007, since when the number has declined as many companies delisted and fewer floated. At the end of September 2013, there were 1,090 companies on AIM. The number of admissions to AIM peaked at 519 in 2005 but in recent years have been below 100.
As economic sentiment has improved in recent months, there has been an increase in the number of companies floating, and this looks set to continue
So how does an AIM float work? First, a company must appoint the following advisers:
- a nominated adviser (or “nomad”), usually a smaller merchant bank or stockbroker. The role of nomad is similar to that of sponsor on the main market of the London Stock Exchange in that it is responsible for project managing the flotation process. However, because a company being floated on AIM is not pre-vetted in the same way as a company being floated on the main market, the onus falls on the nomad to ensure that a company is suitable for flotation. Furthermore, the company must retain a nominated adviser at all times subsequent to the flotation (if an AIM company’s nomad resigns, the shares are suspended. If it has not replaced the nomad within 30 days, the shares are delisted);
- a broker who will be responsible for raising the money from new investors and who will subsequently act as a conduit for the company’s relations with its shareholders. It is usual for the same firm to be both nominated adviser and broker, although there are still some independent nomads;
- a reporting accountant which will be responsible for the accountancy work on the flotation. This will include the preparation of a long form report on the company (this reviews all aspects of the company’s business and financial history), an accountant’s report that is included in the admission document (basically a summary of the audited accounts for up to the last three years) and a working capital report on the company’s projections which support the directors’ statement on the sufficiency of working capital in the admission document. This statement is designed to reassure investors that the company will not run out of funds in the year to 18 months following the flotation. If a company has not been subject to an audit, time must be allocated in the process for the audit of up to three years’ accounts;
- lawyers for the company who will be responsible for undertaking legal due diligence on the company and for drafting the statutory part of the admission document;
- lawyers for the nomad who will draft the placing agreement; and
- others, such as public relations advisers and printers to print the admission document. Companies appoint public relations advisers to provide publicity for the flotation by, for example, placing stories on the company in newspapers.
The flotation process starts with the reporting accountant and the company’s lawyers commencing their due diligence work. Throughout the flotation process, weekly progress meetings or conference calls are held between the company and its various advisers to discuss any issues arising. These meetings are also used to draft the admission document. Towards the end of the process, the broker starts to market the company to fund managers to assess whether they will be interested in buying shares in the flotation. To the extent that they are, shares are “placed” with them. Most AIM flotations tend to be placings rather than offers to the public at large and hence the company should know by the date of completion how much money has been raised. At the end of the three or so months that this process typically takes, a completion meeting is held at which all the documentation is signed off. Because the suitability of the company for AIM is the responsibility of the nomad, the actual admission to AIM is usually a foregone conclusion.
The broker will give an indicative valuation of the company floating during the course of the process and will issue a research note to its institutional clients several weeks in advance of completion of the admission document. However, in the end, the valuation of the company will be the price at which investors are prepared to invest, and this is likely to be affected by factors such as demand for the company’s shares and general market conditions at the time of the fund raising.
What companies need to be aware of is that their flotation can fail at the last minute, usually because of general market conditions. These cannot be foreseen three to four months in advance and it can happen that the investor roadshow is undertaken in turbulent market conditions. Shareholders and directors may then have a difficult decision to make as to whether to accept a lower valuation of their company and possibly a lower fund raising, or even whether to abandon the flotation altogether. If the latter decision is taken, another attempt at flotation is unlikely to be feasible for several months.
Typically, the cost involved in a successful AIM flotation could be of the order of 8% to 12% of the proceeds raised. If the flotation is unsuccessful, the cost will fall because the broker’s and part of the nomad’s fee will only be payable if the flotation is successful. However, a company should budget to pay the costs of the other advisers in the event of an unsuccessful flotation. If the flotation is successful, all the advisers’ fees will be met from the funds raised. If it is not, the company will have to pay the other advisers from its existing resources.
This is a short summary of what is a very intense process for the management team of the company floating and it should not be commenced lightly.
Chris Searle
Chris Searle is partner in the Transaction Services team of accountancy and business advisory firm BDO, specialising in advising companies seeking to list on the Main Market or AIM. Chris has worked on over 80 IPOs. He also leads the firm’s corporate finance technical and prospectus committees and is chairman of the technical committee of the ICAEW’s Corporate Finance Faculty.
