Can AIM reach the stars despite IHT threat and sluggish IPOs?

The Alternative Investment Market (AIM) has been under a bit of shade since the end of the Coronavirus lockdown in 2021. Last week another member of the index, fashion retailer N Brown LON:BWNG, said that it was going to delist from the market having agreed to a GBP191m takeover approach from shareholder, Joshua Alliance.

N Brown owns the brands Jacamo, JD William and Simply Bee, and was approached by Alliance with a 40p a share offer.  Alliance already owned 6.6% of the group, with other members of his family also shareholders.  The Alliance family originally built up the N Brown group in the 1960s.

Strategic shareholder and FTSE 100 fashion retailer Fraser Group LON:FRAS, owned by serial entrepreneur Mike Ashley, said that it agreed to the offer and would sell its 20.3% stockholding in N Brown to Alliance. N Brown was one of the best performing shares on AIM, with a 103% return (as at 18th October) over one-year. Obviously, the takeover talk created a stir for the stock and saw a significant ramp-up in its share price. Even before talk of takeovers was released publicly, N Brown’s shares were up 31.5% over one-year to the beginning of October.

• Could EngageXR be a good option for investors in 2025?
• TruFin rebounds from Lloyds Bank contract loss
• Quadrise shares up over 300% in two-months

As previously reported, Pulsar Helium [LON:PLSR] replaced N Brown; IPO-ing on AIM last Friday (18th October). That said, the general direction of travel has not been great for AIM. Nine IPOs in a year is behind the dozen from 2023 and the lowest since the Global Financial Crisis of 2008, where there were just five IPOs. As a marker, there were 241 AIM IPOs in 2006/07, 85 in 2013/4 and pre-Covid, 62 in 2020/21.

IPOs on AIM 2024

Source: London Stock Exchange

The market has had a lot of negative press, with commentators and analysts saying AIM is doomed. Arguably the market has had by its own standards a poor year, with just nine IPOs, but then again, globally (apart from the US) markets have been disappointing, with EY reporting to end of 3Q24 a 14% dip in year-over-year global IPO volumes and a 35% drop in proceeds.

Should I stay, or should I go?

With a lower number of IPOs, AIM is also seeing more companies beat a path to the door. Executives who are choosing to delist their companies have a common set of grumbles. They often say that investors shun the AIM market and its hard to raise money. Liquidity constraints and mis-valuations of the company are common complaints. Moreover, many say the cost of an AIM listing doesn’t justify the returns they get. An IPO on AIM will cost a company about GBP500,000, and fees for RNS announcement, legal costs, and other expenses add around GBP200,000 a year to that. Many companies that could have and should have gone public, but weren’t big enough to list on the Main Market, are remaining private, turning to private equity, or challenger markets like the Aquis Stock Exchange.

The recent hikes in interest rates also hurt smaller companies as debt funding became more expensive, exacerbated by the fact that smaller companies often get a worse deal from the banks than largecap companies.

Another potential nail in AIM’s coffin, say the doomsayers, is the upcoming UK budget. Chancellor, Rachel Reeves. is scrabbling down the back of the sofa to find GBP40bn in cuts and taxes – GBP22bn of ‘black hole’ money the government said was a hangover from its predecessor, and an additional GBP18bn contingency. One of the areas that has come under Reeves’ laser gaze is Inheritance Tax, and rumours abound that the chancellor is threatening to cancel the IHT relief that AIM shares currently hold. At the moment, AIM shares that have been held for more than two years at the time of a person’s death currently qualify for IHT relief and this has always been a sell-point for AIM companies. However, according to the Institute of Fiscal Studies, if Reeves were to remove this loophole, the Treasury could pull in at least GBP1bn a year.

AIM market ‘put at risk’ by IHT plans

This has alarmed the London Stock Exchange, and its CEO Julia Hoggett said last month that the ongoing viability of the market would be “put at risk” if the IHT relief is removed, which she reckons could see share prices drop 20% to 30% across the AIM index as smaller private investors sell-out and avoid the market. The IHT relief was originally introduced to encourage private companies to take the step-up to public listing, and a reversal of it could reverse that appeal.

If you take Hoggett’s words to heart, things do look shaky for AIM. However, it’s not all bleak. One tends to forget that Reeves has a number of assets to hand that she could realise to help plug the black hole she refers to, not least the almost 20% holding in Nat West Group LON:NWG which could raise GBP5bn if the government wanted to sell this off. And this money could then be used to invest in what the government says has been lacking for decades – growth – and a way to put the UK economy back on a firm footing through potentially setting-up a fund for smaller companies, or even a cornerstone facility to help smaller companies bridge the costs of IPO. Such an arrangement might be tempered by the government by getting the stock exchange to  agree to more circumspect regulation, the ‘light touch’ self-regulation AIM enjoys at the moment has often been a criticism of the market and would also loosen the chokehold that institutional investors have over the market.

One of AIM’s attractions since it was launched in 1995 has been the ability of its constituents to keep raising money after IPO. Although that has declined somewhat, due to the prevailing market conditions, that is still a selling point. Usually when markets decline, investors retreat from the market and in the early stages of stock market recovery, remain cautious, and if they are going to invest will opt for the bigger companies. However, when markets return and prices start rising, investors pile-in and it’s at this point that the number of IPOs spike; this happened in 2009/10 and 2021/22 which should give AIM a shot in the arm, just in time to celebrate its 30th birthday next year. AIM also helped the UK economy immensely during the COVID pandemic, allowing its constituents to quickly shore up their balance sheets through issuing new equity, and keeping its operations running through the lockdown. Many private companies had a much harder time, having to deal with a complete loss of revenue overnight and were forced to rely on government – and by association taxpayer – support.

Despite facing challenges such as a declining number of IPOs and negative press, AIM remains a valuable platform for smaller companies seeking growth and investment. With its potential for future recovery and the possibility of government support, AIM could still play a significant role in the UK economy. Don’t give up on AIM yet. The market is going through a tough season, but if the UK is going to prosper as an economy it is going to need growth companies to do the heavy lifting.