Celebrating 30 Years of Aim: The Wild West of Investments

What connects Fever-Tree, Domino’s Pizza, and Patisserie Valerie? All of these companies have been listed on the Alternative Investment Market (Aim).

Aim was introduced 30 years ago this summer to invigorate smaller UK companies by simplifying access to investment funds for emerging businesses.

Enterprises that did not meet the criteria for listing on the primary FTSE indices found an alternative on Aim, offering investors a chance to discover promising investments while enjoying significant inheritance tax breaks.

According to a report by the London Stock Exchange, Aim has injected tens of billions into the UK economy. Nevertheless, the market is currently facing significant challenges, partly owing to the recent halving of inheritance tax allowances introduced in the October budget.

Last year witnessed 89 companies leaving Aim, contrasted with only 18 new arrivals, as reported by Reuters. In 2021, the exchanges were less tumultuous with only 54 members departing while 66 joined.

Investor Risks

Susannah Streeter, an analyst at Hargreaves Lansdown, noted that Aim presents an opportunity for investors to partake in high-growth companies. However, she cautioned that “shares in Aim are often more unstable than those of larger firms due to lower liquidity, making it challenging for investors to sell shares at will, along with an elevated risk of company failures.”

This inherent risk has led some to label Aim as the “Wild West” of investing. While firms aiming for listing on the London Stock Exchange must possess a minimum market capitalization of £30 million, this requirement does not apply to Aim stocks. Furthermore, many stringent regulations enforced on the main market are absent on Aim. For instance, companies can list without having operated for a minimum of three years or maintaining a required public shareholding ratio.

Smaller companies can demonstrate remarkable profitability, making Aim a compelling option for investors seeking high-growth potential. However, stories of collapse and scandal exist as well.

One significant event occurred in October 2018 when shares of high street bakery Patisserie Valerie were suspended after auditors uncovered a £20 million discrepancy in their financial accounts. The discovery led to the company entering administration before a management buyout was arranged, and four individuals, including the former finance chief Chris Marsh, are facing trial for fraud.

Another notorious case involved Langbar International, which perpetrated a fraud costing investors up to £100 million. Initially listed on Aim as the shell company Crown Corporation in 2003, Langbar falsely claimed to hold cash in a Brazilian bank and to have secured various lucrative contracts. The venture turned out to be a large-scale “pump-and-dump” scheme, and hundreds of investors suffered losses as a result. Stuart Pearson, the company’s British director, was imprisoned for a year in 2011 for misleading investors.

In the aftermath of the Langbar scandal, regulations surrounding Aim tightened, and no similar frauds have been reported since.

Success Stories

Conversely, numerous success stories have emerged from Aim. Shares of the premium mixer brand Fever-Tree have seen a staggering rise of 438 percent since its listing in November 2014, hitting a peak valuation over 2,200 percent higher than the initial price in September 2018. Prominent companies that remain listed on Aim include airline Jet2, fashionable retailers Asos and Boohoo, and wine producer Chapel Down.

Additionally, several Aim-listed firms have successfully transitioned to the main market—the likes of Entain and Domino’s Pizza serve as prime examples of such successful ascents. Laith Khalaf from AJ Bell stated that 128 companies have graduated to the main market over the past two decades, indicating a solid track record of long-term success stories on Aim. “Companies such as Jet2 and Fever-Tree are sizable enough to be considered for inclusion in the FTSE 250, but they remain exceptions rather than common occurrences,” he elaborated.

Investment Potential

Recent data reveals that Aim stocks have decreased by approximately 20 percent over the last five years, while stocks on the main market have appreciated by 60 percent, according to Morningstar analysts.

Michael Field, Morningstar’s chief European strategist, remarked, “Aim has not been a favorable investment. This isn’t surprising; in a challenging economic climate with high-interest rates, micro-cap and growth-focused stocks typically struggle. On a structural level, Aim is encountering challenges as the UK government takes minimal measures to support start-ups, causing investors to gravitate towards the more substantial capital markets available in the US.”

Despite these challenges, he anticipates a recovering UK economy and declining interest rates could relieve some pressure on Aim stocks.

Khalaf mentioned that most average investors might opt to overlook Aim stocks and still see gains from broader market trends. However, for the more risk-tolerant investors, opportunities in smaller companies might be appealing, usually through funds, which can include Aim stocks. Those investing directly in Aim must remain cautious about the lower governance standards in place compared to the main market.

Exploring Investment Options

Investors can purchase individual Aim stocks, but diversifying through a fund that encompasses multiple Aim listings can mitigate risk. Some funds concentrate solely on this market, while others incorporate a percentage of Aim stocks into their portfolios.

AJ Bell features two funds heavily invested in this sector on its “Favourite Funds” list. Typically, 30-40 percent of the stocks in the Premier Miton Tellworth UK Smaller Companies fund are Aim-listed, while the Gresham House UK Smaller Companies fund often dedicates up to 45 percent to it, expanding portfolios that include Aim-listed businesses like Team17 Group, known for developing popular video games like Worms and Overcooked. Other significant holdings among Aim stocks include Gamma Communications, Fintel, and Franchise Brands.

Joseph Hill, a senior investment analyst at Hargreaves Lansdown, recommended the Artemis and Royal London UK Smaller Companies funds, both of which include Aim stocks such as the pharmaceutical companies Alliance Pharma and Advanced Medical Solutions, as well as Beeks Financial Cloud Group, a provider of trading software.

Changes to Inheritance Tax Benefits

One significant advantage of investing in individual Aim stocks is their favorable tax treatment, which was notably halved by Rachel Reeves during last year’s budget announcement.

Previously, qualifying Aim stocks held for a minimum of two years were excluded from an investor’s estate for inheritance tax purposes, rendering them attractive for tax planning. However, under the new regulations, only half the value of such stocks can be excluded from the estate for inheritance tax, imposing a 20 percent charge on these assets instead of the standard 40 percent rate.

Streeter remarked that this relief had been “incredibly valuable” throughout Aim’s history and cautioned that the reduction might hinder companies from raising capital since investors are less incentivized by reduced tax breaks. Khalaf confirmed that while Aim stocks still present some inheritance tax benefits compared to the main market, the reduction of these advantages has considerably altered the risk-reward balance for investors.

He further warned of the complexities surrounding the qualification of stocks for these relief benefits. Only businesses that do not primarily deal in shares or land are eligible, with HM Revenue & Customs providing no definitive list, resulting in uncertainty. Stocks also lose eligibility if they transition to the main market, thus maintaining vigilance is crucial for Aim investors to ensure their planned inheritance tax relief remains intact.