London Stock Exchange’s AIM is a zombie market not fit for purpose

The Alternative Investment Market (AIM) was meant to help smaller companies raise vital funds to grow. But in reality, it’s performing woefully: nearly two-thirds of companies on the market for more than 10 years are loss-making. It must get urgent reform, writes Chris Blackhurst

The London Stock Exchange’s Alternative Investment Market has come under fire for its performance (Kirsty O’Connor/ PA)

As the year draws to a close, it is safe to assume that 2023 would be one year the City would rather forget, certainly where the stock market is concerned.

The FTSE 100 has been flat and trading volumes have slumped. Worryingly, businesses choosing to go public have opted elsewhere overseas. In a bad year for floats worldwide generally, London was the worst-performing traditional IPO (initial public offering) market, seeing just 14 listings versus 22 in 2022. This, says the EY Global Trends IPO report for 2023, compares the New York Stock Exchange which notched up 132 IPOs in 2023, up from 90 in 2022.

“Persistent inflationary pressures and elevated interest rates also precipitated sharp declines in UK deal-making momentum,” says EY. As well as inflation and higher rates, it’s safe to assume scars have not healed from 2021 which saw some dismal UK flotations.

Another report, from Absolute Strategy Research, paints a devastating picture of the poor health of the junior AIM market.

Heading towards its 30th birthday, AIM or the Alternative Investment Market, was supposed to be the lifeline for smaller companies as they looked to raise capital, taking advantage of the more relaxed requirements than if they sought a London Stock Exchange main listing.

Down the decades there have been repeated grumbles from businesses on AIM that they wished they’d not bothered. There’s barely any trading activity in swathes of the market, investor interest is virtually non-existent and maintaining a listing is costly both in financial and management terms. The company must explain itself and be open to scrutiny from investment analysts who frequently don’t have a clue about the firm or the sector and are not that motivated.

Given small to medium-sized enterprises form the engine room of the UK economy, they must be encouraged to grow and to prosper, to seek funding, to invest and drive sales and exports, AIM fulfilled a vital need. It was a way of enabling private firms to go public, without enduring the hassle and expense of joining the “Big Board”.

How depressing it is then to read this, from Absolute Strategy Research’s Charles Cara: “The near halving of the FTSE AIM index has returned it to its pre-pandemic level. Investors have seen no gain over 20 years.”

Cara writes: “While the FTSE100 has returned 12.6 per cent over the last two years, investors in the more domestically orientated FTSE250 have lost 19 per cent. But the losses of the AIM All Share over the same period are even more stark: AIM investors have lost almost half of their money.”

AIM has generated no return for investors, even including dividends, for the last 20 years.

“This lack of return,” says Cara, “could be blamed on these stocks being small UK companies, but those two characteristics have not been such a hindrance to similar stocks with full listings on the London Stock Exchange: the FTSE Small Cap index has increased five-fold over the last 20 years while the FTSE250 has posted 680 per cent.”

The UK economy, as we know, is blighted by a lack of productivity. Nowhere is this more evident than among the SMEs. The small to medium-sized enterprises have struggled to raise their game. Shortage of suitably skilled manpower, too much red tape, a heavy tax burden, difficulties with the supply chain, lack of investment – they and other factors have come together to keep output down. Successive governments have yet to crack the issue.

Worryingly, the small to medium caps making it on to AIM have more than just a productivity problem, they also have a profitability problem.

“Backing out the index earnings growth over this period reveals the index earnings have fallen by 30 per cent over the last year and are below the level of two years ago,” says Cara. “In aggregate, AIM stocks are earning no more than they were just prior to the financial crisis in 2008.”

This reflects a wider issue for the UK: weak margins and hence a lack of profits growth among smaller companies. “The typical stock in the FTSE 250, FTSE Small Cap and AIM is earning less than it was 5 years ago. AIM’s profitability problem is so deep that not only are profits are declining, but for many stocks they are non-existent: 51 per cent of the stocks in the index are loss-making at the EBITDA level and 61 per cent are loss-making at the Net Income level.”

Some of the loss-making companies are start-ups while just one of the 13 stocks that listed since 2018 in the healthcare sector is profitable. In all, AIM is littered with the living dead, with “zombies”: a frightening 61 per cent of 436 companies that have been listed for more than 10 years are loss-making.

The bottom line, from Cara’s study: “AIM was launched as a market where young, small start-up companies could raise capital with light regulatory requirements, while investors were given tax breaks to persuade them to invest. There are few incentives for companies to become profitable and the market is now inhabited by zombies. Tighter regulation and removal of tax breaks might be needed to slay them.”

It is clear that AIM is no longer fit for purpose. Urgent action must be taken to remedy what is becoming a zombie market.