AIM sights set on luring more firms from Stock Exchange

Colefax is latest to be tempted by junior market's low costs and light-touch regulation
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The Independent Online

When Colefax brings down the curtain next month on its 16 years on the main market of the London Stock Exchange, it could be a curtain made from a sensational fabric of parrot tulips in large Delft tulipieres, or a chinoiserie fantasy pictorial scene of the most beautiful toile. But it will not be the final curtain.

When Colefax brings down the curtain next month on its 16 years on the main market of the London Stock Exchange, it could be a curtain made from a sensational fabric of parrot tulips in large Delft tulipieres, or a chinoiserie fantasy pictorial scene of the most beautiful toile. But it will not be the final curtain.

For Colefax, the upmarket home furnishings and wallpapers manufacturer, is joining the growing band of companies to desert the full list for what it hopes are the more dynamic surroundings of the junior AIM for small and growth companies.

Just as AIM is surging ahead - attracting 114 of the 132 companies to float this year and accounting for more than half the money raised by new issues - Colefax expects it will get a new lease of life, too.

"I can't see that there's anything we lose," says Robert Barker, finance director, as Colefax gave its shareholders 20 days' notice of the transfer yesterday. "On the main list, we were increasingly encountering situations where the costs of our continuing obligations were holding us back."

Fees to the exchange and to corporate advisers are lower for AIM companies, and the exodus from the main market was once dismissed as a bear market phenomenon, a pinching of pennies by cash-strapped firms. But it shows no signs of abating. In the past five years, 173 companies have transferred, and the switch is no longer being called "moving down" but "moving across" to AIM.

The reason is that the relative advantage of an AIM listing extends far beyond costs. Red tape on the main market is expensive, of course, but worse than that, it can disrupt management's efforts to do an opportunistic deal. A takeover worth more than 25 per cent of a company's turnover, profits or market value must get approval from the shareholders of a fully listed company; for AIM members, the threshold is much higher.

Mr Barker said: "In a small and fragmented industry like fabrics, sellers don't want to know that a deal is uncertain and dependent on shareholder approval, and they don't want to wait for the time it takes for us to put a circular together. There have been a number of occasions where those obligations could potentially have prevented us moving forward on a deal."

Colefax has been unable to bid for rivals which have collapsed into administration, for example, because the emphasis of the receivers is on getting a quick sale.

AIM jealousy guards its light-touch regulatory regime. It recently changed its legal status to escape European Union edicts that would have forced it to impose a higher regulatory burden on its companies.

It also enjoys a favoured tax status, with its companies treated as "unquoted" for tax purposes. That means capital gains tax tapers away more quickly, the longer shares are held. There are also inheritance tax and tax breaks under the Enterprise Investment Scheme.

Indirectly, recently improved tax breaks on investments in venture capital trusts have swelled VCT coffers. The trusts have an estimated £400m to invest, much of which can be put into AIM companies.

Dru Edmonstone, head of corporate finance at Seymour Pierce, said: "Companies which have struggled to raise money on the main market come on to AIM and find that a whole new door opens. Sick and tired of being a small fish in a big pond, they can come and be a big fish in a big pond."

Mr Barker of Colefax: "Our experience of being a small company on the official list is that over the years there has been a dwindling of institutional investment interest in companies of our sort of market capitalisation."

On AIM, though, the new VCT cash is adding to an already virtuous spiral, where greater liquidity is attracting larger numbers of institutional investors and creating even greater liquidity. AIM is demonstrably no longer a backwater for staid family-controlled companies and spivvy ventures, and there are few institutions now that have a ban on investing in AIM. As a consequence it has grown to accommodate a record 816 companies with an average market value of £26m.

Despite the growth of the market, some veteran AIM players say it is still undervalued by the Stock Exchange hierarchy. That is perhaps inevitable: although AIM accounts for a third of the UK's listed companies, they add up to less than 2 per cent of the total market capitalisation, and trading volumes in June were less than 1 per cent of the total by value across the whole market.

Many of the smaller stockbrokers and fund managers who used to be shareholders in the LSE in its mutual days are still smarting that AIM was to be closed down under the LSE's ill-fated plan to merge with Deutsche Borse. Yet the LSE turned down a bid for the market last year from a consortium of investors fronted by Simon Brickles, the former head of AIM who now works for its rival Ofex. There is a suspicion that AIM will be a nice sweetener if Deutsche Borse does come back to discuss a merger, since its own growth company market, the Neuer Markt, is defunct.

Colefax may say it sees nothing to lose from making the move to AIM - not even any kudos from having a main market listing - but some of its smaller shareholders could face a headache in the coming days. Those who hold their shares in a personal equity plan (PEP) or individual savings account (ISA) will have to sell. These tax-advantaged investment wrappers are forbidden from investing in "unquoted" companies, putting AIM off limits.

Ray Caley, a stockbroker at Cheviot Capital, says the loss of an investment because of its transfer to AIM is inevitably disappointing. "It's a double whammy for investors. Not only do they lose their PEP and ISA benefits, but these stocks are quite illiquid so on a day-to-day basis after the announcement there are going to be more sellers.

"A lot of these companies are family-owned and have a good little dividend. I am thinking of Nichols only a few weeks ago. Investors thought they were in a long-term situation and were counting on the income."

There is also the suspicion, says Mr Caley, that some companies move to AIM to take advantage of the more lax rules as regards corporate governance. There was a storm last year when Peter Simon, the founder of the fashion chain Monsoon, increased his family's stake to just above three-quarters and transferred its listing to AIM, with rebel shareholders protesting that their interests would not be adequately safeguarded. And in 2002, Thomas Locker, a Cheshire-based engineering company, delisted from AIM without informing its shareholders.

There is of course a trade-off between the rights of investors and management's flexibility to work fast on big deals and other important corporate moves. But that institutional investors now hold a third of the AIM market is testament to the fact that the majority of companies adhere to acceptable standards.

Colefax, for its part, insists it will continue with precisely the same corporate governance standards as before, and Mr Barker looks forward to curtain-up on its AIM listing next month.

"There's no good argument I can give for why we've not done it sooner," he says.