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In the wake of drying liquidity and non-beneficial tax legislations, small cap companies listed on the Alternative Investments Market [AIM] and their investors should receive greater tax reliefs, advisors and the exchange told mergermarket. The breadth of shareholders allowed to invest in AIM companies should also be widened, they agreed.

“We are working towards a number of different ways in an attempt of improving liquidity on the exchange,” new Chief Executive Officer of AIM Marcus Stuttard told mergermarket. “This includes our focus on VCTs [venture capital trusts], which are natural buyers in the secondary market and should therefore be given greater freedom to operate in them. We are also in continued discussions regarding ISAs [individual savings account] and are also working with the market making community to try and harness any natural liquidity they could add.”

AIM, which is owned by the London Stock Exchange [LSE], has seen a steady drop in the number of participants over the past months as the number of new admission decreased, lowering levels of liquidity. According to LSE’s statistics, for the first five months of 2009, AIM had a total market value of GBP 47.54bn (EUR 55.5bn), up from GBP 37.7bn in 2008 but lower than the GBP 97.56bn recorded in 2007.

The exchange is lobbying for changes to be made to the existing tax legislation in the 2009 Finance Bill. It is also looking to convince those existing listed firms to remain while also looking to lure new participants.

At present, VCTs are allowed to invest in qualifying businesses with gross assets of under GBP 7m, while a VCT itself is restricted to 50 staff and a restriction of new funds to invest a maximum of GBP 2m in a single venture. Such restrictions have meant there is less money being invested in AIM small to medium-sized enterprises by VCTs. The AIM is currently lobbying to get these rules amended so that VCTs can participate in secondary trading. This, AIM said, will increase much-needed liquidity on the exchange. The exchange is also in continuing talks with policy makers over the ruling that means ISAs cannot invest in AIM-listed companies. At present, ISAs cannot invest in AIM-listed companies as AIM is not considered a recognized investment exchange by the Financial Services Authority or HM Revenue & Customs. As a result of this, AIM companies are not entitled to the 20% tax relief that ISA-invested shares receive.

While these are changes that are being lobbied for, John Pierce, the outgoing chief executive of the Quoted Companies Alliance - a lobby group for small caps - said they will not be easily implemented. “This is probably the worst possible time to expect some cohesion,” Pierce said, adding the recent economic downfall will work against any short-term tax reduction initiatives. Capital Gain Tax perks were also lost on AIM shares in 2008.

Stewart Dick, at UK stockbroker Daniel Stewart, agreed that there should be more tax breaks available for AIM-listed companies. He added that the economic turnaround of the country was more likely to come about through the investment in such small cap companies, and they should therefore be given investor encouragement.

“I would like to see wider tax benefits given to AIM investors. It needs to be more tax efficient and the government must reward the investor for taking that risk.,” he said.

An improvement in the way that private to public transactions are undertaken and a reduction in the costs involved is another issue the new management should tackle, Pierce said.

Stuttard agreed that changes should be made, but cautiously: “There is a range of ways that delisting could be made easier, but these could have severe repercussions on investors if they’re not communicated to properly by the companies,” he said.

Philipp Prince, a partner with BDO Stoy Hayward, said that, according to their recent survey on public to private transactions, many smaller quoted businesses with a market capitalisation below GBP 100m “can not fully take advantage of the public market.” According to the survey, far below half of the respondents believed that companies with market capitalisation lower than GBP 100m were fairly valued (board directors of profitable quoted companies, fund managers and private equity providers were respondents to the survey).

Companies that recently attempted to be taken private include: Carluccios, a UK restaurant chain (valued at roughly GBP 52.53m); UK cake company, Finsbury Food, (valued at roughly GBP 10.80m) and Tepnel Life Sciences, a molecular diagnostics and pharmaceutical (acquired by NASDAQ-listed Gen-Probe in April for GBP 93m).

Separately, the AIM has seen increasing competition from the likes of Plus Market and even its parent company LSE.

However, between January to May 2009 out of 121 companies that delisted from AIM, only three have moved to the LSE, according to the exchange’s website. These companies included Peter Hambro Mining, a mining and exploration company; Lancashire Holdings, a specialty property insurancer; and IRF European Finance Investments Ltd, which moved from the Specialist Fund Market, and American Leisure Group, a leisure company which transfered to the LSE in January.

Bookers Group, the UK wholesaler and retailer has also expressed an interested switching to the LSE in the coming weeks.

Companies that have switched to Plus from AIM include Secora, a UK investment company.

London-based Plus Markets currently lists and quotes over 600 companies and is privately-owned.

“If you have a small free float then maybe Plus is more attractive [for the company]”, said John Pierce.

Secora, for example, claimed it chose to transfer between exchanges because “Plus Markets offers an appropriate capital market for companies of Secora’s size and will also offer a suitable trading platform for shareholders.”

Companies moving to Plus from AIM save between 30% to 50% of costs, according to Dru Edmonstone, Head of Corporate Broking at Rivington Street Corporate Finance. With AIM expenses billing around GBP 300,000, “you can half your cost” on Plus, Edmonstone said. Plus-listed companies, for example, do not pay a nominated advisor, brokerage fees, IFRS auditing fees and neither do they need as many non-executives as AIM-listed businesses.

However, Pierce notes that although Plus has lower fees and may be more attractive for smaller caps, is not a perfect solution if the investors are not there in the wake of the overall economic climate.

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