Why we need to save AIM
Lousy liquidity, trying listing rules and low valuations are putting people off UK markets, and off our small cap markets in particular. But economies need healthy markets - it is time for action.
I wrote for Bloomberg earlier this week about how easy it is to let stock markets die. Anyone in any doubt need only visit a UK largish town or city. Almost all will have an old stock exchange building – once used as a hub for raising capital and supporting local companies, now used as a municipal building of some kind, a hotel or luxury apartment block. The UK market as a whole could eventually go the same way if our new government doesn’t make some small effort to support it. But there is one part of the UK market that might be in particular trouble – AIM. AIM was set up in the mid 1990s to effectively offer starter listings to smaller companies – think less regulation, no minimum market cap and some very nice tax incentives for investors and for founders wanting to float and take some profits. Most AIM shares are for example free of stamp duty and IHT (assuming they qualify for business property relief, are held at death and have been held for two years). You can also put AIM shares in an ISA - effectively making them IHT, CGT, stamp, dividend and income tax free.
The market started with a mere 10 companies and a total market cap of 82m. Tiny. Today it has 610 listed companies on the go and a market cap of not far off £70bn (an average of £110m). That sounds great – all that tax relief looks like it works! Not so fast. As Charles Hall of Peel Hunt notes, it is not as great as it was. In the last year the number of companies listed has fallen by 88 and the total market cap by 11%. It seems that while the regulatory and tax advantages of being listed on AIM are nice, they aren’t quite enough to combat the endless outflows from UK small and mid cap firms to global and passive portfolios. It is all about the flow of money – and for AIM that flow is in the wrong direction. Over £4bn has left UK smaller company funds in the last two years says Hall. At the same time many smaller companies are “questioning the value of being listed” given the low valuations on the UK market, the rubbish liquidity, the costs and the endless rise in the burden of regulation.
It gets worse. There is a new threat - rumours that IHT relief will be removed in first budget from the new Labour government. If true that would lead to yet more selling: anyone holding AIM stocks purely to avoid IHT (there is a good £6bn sitting funds set up to do exactly this) would surely head for the exits. All this matters. Being listed is good for companies – equity funding is permanent capital and being listed gives constant access to more of it. It is good for entrepreneurs – they can get their hands on cash without selling up completely. It is good for ordinary investors – it gives us access to growth. And finally it is good for the public finances and the economy as a whole. S
o what is to be done? There are plenty of ideas floating around for the reinvigoration of the main market. Hall has ideas for AIM, mainly based around improving flows into AIM listed stocks. We could use the remaining £5bn worth of NatWest shares held by the state to seed a genuine National Wealth Fund to invest in small companies. We could insist that pension funds have a allocation to AIM and increase e,mployer and employee contributions to those funds at the same time. We could go back to the idea of the Brit ISA (I’m very pro this!) or perhaps the Brit SIPP; we could slash the rate of CGT on AIM listed shares relative to those on other exchanges or even apply lower dividend taxes to AIM listed shares. Finally we could work to “improve the listed experience” – getting more companies to come to the market and to stay on it.
All these things sound good. However if you are watching the budget, the thing to watch for is any comment on IHT relief and its future. Removing it without immediately putting something pretty dramatic in to replace it – something that would create a minimum of £6bn of flows into AIM (the amount in AIM IHT funds) – would tell you all you need to know about how Rachel Reeves feels about stock markets and the smaller companies that are the lifeblood of the UK economy. And not in a good way.
My column for Bloomberg is here https://www.bloomberg.com/opinion/articles/2024-09-17/a-healthy-uk-stock-market-demands-economic-growth
And finally a podcast with Mark Slater in which we discuss some of these things (as well the favourite stocks he holds in his portfolios) https://www.bloomberg.com/merryn-talks-money-podcast
Thanks for the article. The peel hunt link doesn't work for me.