The Alternative Investment Market (AIM) turned 21 in June and with its parent, the London Stock Exchange, looking to shack up with Deutsche Börse, it’s time to think about its future; City Grump has an opinion – natch!

No small-cap exchange comes close to AIM’s success, bringing more than 1,000 small businesses to market; by outsourcing regulation to nominated advisers or NomAds the bourse has kept costs down and attracted new entrants.
It’s not all been plain sailing – notable bumps in the road have been the succession of failures in the mid noughties of companies that were too small to survive as quoted companies and then a run of Chinese companies dogged by scandals over governance and financial controls.

‘investment performance on AIM has often been what could be described as sub-optimal’

Recent entrants are bigger, better and more sustainable, with the average size of new companies £76m against £17m in 2006; confidence in AIM is high and the LSE believes this will remain under German ownership who may seek to replicate the model.

However, investment performance on AIM has often been what could be described as sub-optimal and liquidity can be poor; fears remain following the failure of Germany’s Neuer Markt and France’s Nouveau Marché fifteen years ago and there is a suspicion that AIM’s low barriers to entry may be a double edged sword as NomAds reduce standards in order to keep down costs.
Much of the required improvement is within the LSE’s gift – it can take back the burden of regulation and be more proactive in vetting the scale and quality of companies it allows to list; however, by doing so AIM can be a mature and vigorous adult exchange.

However, City Grump believes that it is time for AIM to be set free:

 

AIM Must be set Free From any LSE Mega-merger

By City Grump

 

With ‘exchanges’ clearly seeing providing the facilities to list and trade equities as of ever diminishing importance, it doesn’t take much of a mental leap to realise at the monthly board meetings of the directors of MegaExchange, AIM will never be given any agenda airtime at all.
At 21, valued at £75bn, AIM has supported more than 3,650 companies from 90 countries and across 40 sectors, raising nearly £100bn for these companies to invest and grow.
At a conference in December 2009, Paul Volcker, ex Federal Reserve chairman, said: ‘I wish that somebody would give me some shred of neutral evidence about the relationship between financial innovation recently and the growth of the economy, just one shred of information.’

A few years ago I happened to be at a conference of business people, not financial people, and I was making a presentation. The conference was being addressed by a very vigorous young investment banker from London who was explaining to all these older executives how their companies would be dust if they did not realise the joys of financial innovation and financial engineering, and that they had better get with it.
I was listening to this and I found myself sitting next to one of the inventors of financial engineering who I did not know, but I knew who he was and that he had won a Nobel Prize, and I nudged him and asked what all the financial engineering does for the economy and what it does for productivity.

Much to my surprise he leaned over and whispered in my ear that it does nothing. I asked him what it did do and he said that it moves around the rents in the financial system and besides that it was a lot of intellectual fun.
When the London Stock Exchange (LSE) falls into the arms of Deutsche Borse, approaching three quarters of the merged business’ revenue will come from serving the derivative markets that Volcker refers to above. Only one quarter will come from cash equity markets, meaning equities bought and sold through their exchanges and of this AIM will provide an almost microscopic amount of revenue.

‘it won’t be long before that whole market withers on the vine’

I make no comment on the efficacy of the LSE deciding to annoy the inestimable Volcker even further but only to note it is a business and like any business it will go where it believes it can make the most profit. This being the case, you cannot get away from the fact that these ‘exchanges’ clearly see providing the facilities to list and trade equities as of ever diminishing importance.

It doesn’t take much of a mental leap to realise at the monthly board meetings of the directors of MegaExchange, AIM will never be given any agenda airtime at all.
It is not difficult to work out how this will make the, by then, almost invisible AIM staff feel – in a word, lousy. The capable staff will leave and then it won’t be long before that whole market withers on the vine.
AIM is of no consequence to this brave new world of global exchanges but it is of significance and importance to small company capital formation; raising g£100bn is a fantastic achievement and one that must not be ignored by those charged with the task of examining proposed tie ups.
I would bet a pound to a pinch of salt that right now 95% of companies on AIM have not thought about the consequences of what is written here and most of AIM’s advisor community hasn’t yet woken up either it is extremely unlikely it has come to the attention of the relevant government ministries, meaning the Treasury and the BIS. This state of affairs cannot be allowed to continue.

‘I have found very little evidence that vast amounts of innovation in financial markets in recent years has had a visible effect on the productivity of the economy, maybe you can show me that I am wrong’

The solution is obvious. AIM must be set free and this can of course be achieved by our Government making it a condition of any LSE mega merger that AIM is carved out as an independent entity.

Then it can attract the right calibre of staff to ensure a flourishing future for that vital small company equity capital raising in the UK.

Then it can be at the forefront of new developments such as the possibility of bringing crowdfunding into AIM stock issues. In reality the MegaExchange alternative will result in the closure of AIM.
What can you do?

You should write to your MP, Sajid Javid minister of state at the BIS, and to Harriet Baldwin at the Treasury (she is the minister responsible for the City) and tell them that unless AIM is set free this country will lose a much needed, well established, smaller company resource.

The City Grump will do his best but he needs your help!

Let me leave the last word to Paul Volcker, the wise head who served five US Presidents: “The most important financial innovation that I have seen the past 20 years is the automatic teller machine, that really helps people and prevents visits to the bank and it is a real convenience. How many other innovations can you tell me of that have been as important to the individual as the automatic teller machine, which is more of a mechanical innovation than a financial one?
‘I have found very little evidence that vast amounts of innovation in financial markets in recent years has had a visible effect on the productivity of the economy, maybe you can show me that I am wrong’.





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