Small Talk: London's junior market is nearly 20 years old – but it's been a bumpy road

The market may be attracting more investors, but they’re being more circumspect

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The Independent Online

Happy birthday to the Alternative Investment Market, which turns 20 in 10 days’ time. While other markets aimed at smaller companies have fallen by the wayside – who remembers Germany’s Neuer Markt? – Aim is still going strong. Some 1,100 companies from all around the world call it home.

There have been times when it looked as if the writing might be on the wall for London’s junior market. The collapse of Aim after the bursting of the technology bubble in 2000, for example, looked potentially fatal. The credit crisis also rocked the market – in 2007, there were almost 1,700 companies listed on Aim, but within six years, that had fallen by almost 700. Scandals over lax governance standards have also threatened to deal a killer blow.

However, Aim has discovered a new lease of life in recent years. The credit crisis also did the market a favour: as policymakers pondered how to get support to businesses deprived of funding by the banks’ withdrawal from the debt market, they alighted on Aim. Investors now benefit from tax perks including the right to hold their shares in tax-free individual savings accounts.

There are those who wonder whether such support is deserved. For one thing, around 30 per cent of Aim’s constituents are incorporated outside the UK, while 43 per cent have their main operations overseas. Tax breaks paid for by British taxpayers aren’t necessarily flowing through into backing for domestic companies.

Moreover, for all Aim’s success in attracting companies to list with it, this is a market that has consistently failed to deliver attractive returns. A study by the London Business School revealed that Aim’s average annual total return during its first 19 years was minus 1.6 per cent. By contrast, the Numis Smaller Companies Index, which includes the bottom 10 per cent of companies on the main London market by size, delivered 8.9 per cent a year over the same period.

There are explanations for this lacklustre performance. Aim has tended to be a market of boom and bust, where investment bandwagons have been leapt upon, only to crash. IPOs, in particular, have tended to disappoint. And the market has often tended to be weighted towards sectors that have suffered disproportionate gains – technology 15 years ago, and resources more recently, for example.

The lesson is not necessarily that investors should avoid Aim. But this is a stock pickers market – while anyone investing in a passive fund tracking the market as a whole will feel badly let down by the returns, a number of specialist Aim funds have made good gains from picking winners and avoiding the dross.

In any case, one reason Aim gets support from HM Treasury is that investors need incentives to put money into small companies that have the potential for volatility in the short term. Those tax breaks were designed to offer some padding during the roller-coaster ride that Aim has often delivered.

Investors have responded. By the end of 2012, the number of transactions on Aim each day had slumped to below 14,000 – in April, when the broker Allenby Capital last published data on volumes, it found that transaction levels had almost doubled to an average of 26,700 a day.

Will that support persist if Aim continues to disappoint? Well, it’s interesting to note that while volumes have recovered, transaction sizes remain much lower than in the past – the average trade on Aim is worth around £5,000, according to Allenby, when 10 years ago it was above £20,000. The market may be attracting more investors, but they’re being more circumspect.

The recovery and the continued tax support represent generous gifts to the junior market, but as Aim turns 20, stability is the present it needs most.

Fewer companies showing classic signs of distress

Distress levels in companies are falling faster among small and medium-sized enterprises than among larger businesses, statistics from R3, the insolvency trade body, appear to show.

R3’s data, based on tracking how many companies are exhibiting one of five potential distress signals for businesses – lower profits, lower sales, regular use of maximum overdraft, falling market share, and redundancies – shows that businesses are less likely to be in trouble than at any time since the Business Distress Index began in 2010. Small businesses are seeing distress levels come down particularly quickly – for example, just one in five sole traders is now exhibiting one or more signs of distress, compared to one in two last November, when the research was last published.

“Although the largest businesses continue to experience the fewest signs of distress, it is encouraging to see difficulties for smaller businesses easing,” said Phillip Sykes, the president of R3. “It’s been a particularly difficult few years for many sole traders and they’re only now beginning to see recovery.” 

Tax deadline looms – and no forgiveness for firms

While HM Revenue & Customs has begun waiving penalties for individuals who file self-assessment tax returns late, fines still apply to businesses that don’t comply with deadlines. And businesses with employees have less than a month to file returns detailing expenses and benefits paid to staff.

The penalties for missing the 6 July deadline start at £100 for every 50 employees that a business has, but HMRC has discretion over how it escalates the fines.

Small Business Person of the Week: Andrew Dang, Managing director, Manfood

“Our business began with a conversation around my kitchen table. My now business partner Jonathan Honeyball was complaining that he couldn’t find a decent piccalilli sauce anywhere, so I made him one – he liked it so much he suggested I make more to sell.

“That’s how we started – making piccalilli and other chutneys and sauces in our own kitchens, and  selling at farmers’ markets in Cambridgeshire, where I live. They are fantastic for products like these because you get continual feedback.

“After a year or so, we decided to take our products to the Speciality and Fine Foods Fair, where we got talking to a buyer from Fortnum & Mason. They became our first retail customer and we moved into supplying other retailers and farm shops.

“I worked as a buyer in the food sector with shops such as Harrods and Selfridges, so I did have an understanding of what retailers are looking for in terms of both the financials – margins, prices and so on – but also with packaging, marketing and PR.

“We’ve just found out we’ve won a competition by Ocado, the online grocer, to find the best innovative small producer.

“In our first year we sold 100,000 jars of sauces, and in year two, sales have doubled. It was tough for a while – to cope with the volumes we borrowed the local pub kitchen, but eventually we had to move into our own premises. We now employ five people.”

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