Small Talk: Funds dried up as caution replaced speculation

There are few companies that can say that 2008 has been a fun year on the Alternative Investment Market (Aim). For most, the last 12 months has been a period to rein in spending and cut costs wherever possible. Small cap IPOs, the lifeblood of Aim, have all but ceased.

The reasons why this year has been so disastrous are obvious. As investors saw their funds shrinking from the record highs of the previous few years, they cut their losses and headed for the perceived safer havens of bigger main-listed groups – who can get into trouble when they follow the herd, instead of losing their shirt on a speculative Aim punt?

The DNA of the Aim market over the last few years of easy liquidity has started to unravel, with a fatal effect for some. The Queen's tailor, Hardy Amies, for example, went into administration in October after being starved of investor support. Sectors such as the biotech industry, and oil and gas exploration – predicated on the business plan of burning through investors' money in the hope of hitting on the latest blockbuster drug, or finding vast quantities of oil – have fallen foul of increased investor caution.

"It has been a very bad year for the Aim: since June especially it has been pretty bloody and the market has fallen off a cliff," says David Snell, Aim leader at the advisory group PricewaterhouseCooper. "After an explosion of growth on Aim between 2003 and 2007, this year has been the worst for new admissions since 1998."

But with the majority of Aim-listed chief executives no doubt pleased to see the back of 2008, what does next year hold in store?

With the Office of National Statistics expected to confirm soon that the UK economy is in recession, the news for small-cap companies is getting no better. Investor confidence will only return with an improvement in the macroeconomic situation, and by that time it could be too late for many Aim-listed groups. "The financial crisis will continue next year and for the Aim market, this is a particular issue," Mr Snell says. "More than 50 per cent of the market now have a market capitalisation of less than £10m, and that is really too small for a public listing. Some will be consolidated and some will be forced to issue emergency rights; if the market will take them. For other struggling groups the prospects are bad and some will not survive."

The worst-hit sectors next year are likely to remain the same as those that have struggled through 2008. Ernst & Young's index of Aim's top 20 miners makes depressing reading, with a fall of 77 per cent over the last 12 months. Tim Williams, the firm's director of mining and metals, says: "Aim's junior exploration companies were hit particularly hard, as routes to capital became closed, and as share prices and market valuations were punished by the extreme market turbulence."

Just £973m was raised over the course of the year, compared with a record £2.4bn in 2007. The result will almost certainly be a year of penury for many of the 181 small-cap miners that remain on Aim, down from 197 at the start of the year.

There have been those that have offered solutions to the stilted market. Clive Garston, a solicitor and Aim specialist at the law firm Halliwells, believes that the ban on ISAs being invested in Aim-listed companies should be lifted. Mr Garston's argument is that, with investors turned off the idea of putting money directly into nearly every Aim company, the shortfall can be partly made up by relaxing the restrictions on ISA investments. "There are a number of big companies on Aim that ISAs do not have access to," says Mr Garston, who argues that these companies are no riskier than some of the smaller outfits on the main list.

Whether that is the solution to Aim's current quandary remains to be seen. It seems unlikely that private investors currently shunning the Aim market as too risky would be pleased to learn that their investments are being used to plug the gap left by risk-averse professional fund managers.

Either way, Mr Garston reckons on a grim outlook for Aim. "You can't be terribly optimistic about 2009," he says. "There is no appetite for equity funding at the moment, and certainly none for start-ups, hi-tech and generally riskier companies. Hopefully this will start to change in 2009, but frankly, it is more likely to be 2010."

A story of 2008: plenty of good news but share price slumps

communications Software Radio Technology embodies all that has gone wrong with Aim companies in 2008. The makers of the tetra radios used by police forces, and the AIS marine systems, used to alert ships of the presence of others close by, has offered the market plenty of cheer over the last 12 months. The group had hoped that its latest bit of good news in September – that the US Federal Communications Commission had approved the group's marine devices for use in the American market – would prove to be the catalyst the group was hoping for. In practice, sadly not. Despite the efforts of the managing director, Simon Tucker, who bought the group after overhearing a conversation about it on a train, the company has seen its share price continue to drift. It eventually finished last week at 550p,88 per cent down on the year.

Red faces after Phytopharmis hit by Unilever pull-out

pharmaceuticals Another small-cap group that would rather forget 2008, while at the same time having plenty of reasons to worry about what 2009 might bring, is the biotech group Phytopharm. Analysts at the house broker, KBC Peel Hunt, spent the better part of the year saying that the company, which makes an appetite suppressant from the Hoodia plant, had a 75 per cent chance of getting its product through third and final phase testing before watching the money roll in. The 75 per cent chance was conditional on the group's alliance with the consumer goods group Unilever, which had designs on using the Hoodia product in its Slimfast milkshakes. Except that Unilever was never quite as keen as Phytopharm would have liked it to be, and it withdrew from the agreement last month. Phytopharm's share price dropped by half – no doubt leaving a few red faces at KBC, which had been encouraging investors to buy the stock.

Healthy outlook for surgical technology supplier

biotech The outlook for most small-cap biotech firms is bleak in 2009, with being bought on the cheap by the bigger groups the best some of the most cash-starved can hope for. But there are success stories out there. Cheshire-based Advanced Medical Solutions, which produces dressings and the technology to close wounds during surgery, may have about the dullest name on Aim, but it became one of the market's pin-ups last year. The usually cautious chief executive, Don Evans, above, is upbeat on getting approval for new surgical technology in January, and unlike nearly every peer, AMS's share price is up by more than 34 per cent in the last year. The key, says Mr Evans, is to have "multiple products in multiple markets," which helped the group to become profitable two years ago.

Edmonds branches into the African healthcare field

healthcare Phil Edmonds, the former cricketer, is one of the Aim market's great survivors, so do not expect the small matter of a global economic slump to get in the way of his growing African empire. In June, he raised £5m listing his latest wheeze, African Medical Investments (AMI), a move away from his usual areas of mining and oil exploration. AMI seeks to invest in businesses in the healthcare sector in Africa, "particularly those providing services to the continent's emerging middle classes and overseas businesses". While Mr Edmonds is a gifted businessman, the move into medical provision comes as some of his resources groups have come under pressure from the collapse in commodities prices. White Nile Group – which is about to switch focus to the agricultural sector, having decided that oil and gas exploration in southern Sudan just is not bringing in the readies – has lost more than 90 per cent of its value in the last 12 months. Another group listed by Mr Edmonds in August, BioEnergy Africa, has lost half its value since coming to market, while CAMEC, one of the stable's bigger companies, is down nearly 95 per cent on a year ago.