Small Talk: AIM feels the pinch as small firms stay away from market

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The Independent Online

As City types took some time off to celebrate Christmas and usher in the new year, there was little small talk around. The peace and quiet gave us time to reflect on the year gone by, and we looked to AIM (the alternative investment market) for inspiration. Unfortunately, there was little forthcoming.

According to Grant Thornton Corporate Finance, the value of new companies opting to list on the London Stock Exchange's junior market fell for the first time in five years. AIM hosted 6.5bn in new issues this year, or 35 per cent less than last year. The slump blighted the growth in secondary issues, which increased by at least 50 per cent to 8.6bn, and the total amount raised on the market was almost flat compared with last year.

The volume of new companies fell to 275 this year compared with 462 in 2006 there are 1,689 companies on AIM at the end of last week, showing a net year-on-year gain of only 55 companies.

"This is the first time in five years that the value of IPOs on AIM has not grown by at least 50 per cent year-on-year, and so despite seeing several records broken in 2007, including the most funds raised in a month this June, overall it has proved to be a disappointing year in terms of growth," said Philip Secrett, Grant Thornton's international director of capital markets.

The growth in secondary issues means fewer companies are raising more money than before on a market which was meant to cater for growing companies.

The largest contribution to the IPO pool came from property and private equity funds.

"Property and private equity funds, under the sub sectors of real estate and equity investment instruments, continue to represent [around] half of all new issue cash raised, allowing real estate to retain its place as one of the largest constituents on AIM," said Mr Secrett.

Grant Thornton reckons that the first half of the new year is likely to mirror the final quarter of 2007, showing limited growth in fundraising levels as companies shy from making an initial public offering until the market improves.

Competition from emerging markets may also be a problem in 2008.

Mr Secrett said: "Domestic markets within the countries that have been particularly active on AIM, such as India and China, will be making a stronger case for their own fast-growing businesses to raise finance at home."

Fountains of wealth in a public park near you

We've also been thinking about Fountains. The company has come a long way since its inception in the 1950s as a forestry management business. Although the "provider" moniker it adopted in the 1990s makes it sound like a glorified lawnmower man, the business has since expanded into the managed services field, specialising in environmental support services.

It now offers its clients which include railway companies, utilities and local authorities many services on top of pruning and grass cutting, including waste collection, street cleaning, booking sports sessions in parks and removing graffiti. It all adds up to an addressable market of around 12bn according to Fountains, which sounds like one hell of a mess.

Yet two years ago, Fountains was itself in a bit of a mess as it struggled to get to grips with some contracts to remove vegetation around railway lines. The company issued a series of profit warnings, was leaking cash and needed tidying up. Richard Haddon came in as chief executive and has quickly turned around the company, reversing losses and restoring its dividend.

Two key local authority-managed services contracts in London have since been won and the firm's bidding pipeline nearly doubled in the space of six months to 900m at the end of September. With new products planned and more cost cuts to come, Fountains looks to be in the best shape it has been for some time. It has just turned down an approach, probably from a rival service provider, but bid speculation will undoubtedly continue to support the stock price, which trades at only around 10 times 2008 forecasts, despite growth expectations of around 125 per cent for next year. With no sign that the forecasts need pruning, look to Fountains to progress toward 200p.