MICROSOFT MEDIA EMBLAZED

Sun 18 Dec 2005

Market's Aim must be higher to maintain its reputation

LUKE AHERN

THE Alternative Investment Market is now recognised as a truly international marketplace. Since it started in 1995, something like 1,900 companies have been admitted, raising £17bn. More and more companies are queuing up to join. So far this year, 451 new companies have joined Aim, of which 99 were foreign. In all, 200 companies are based overseas.

But there are questions over the quality of some of these businesses - and whether UK advisers are applying the same rigorous standards when vetting companies from abroad as they would to UK Aim applicants.

What lets them down, as far as potential UK investors are concerned, is their knowledge and understanding of the transparency necessary to be a public company. Many of these firms just do not have a culture of financial openness, and the directors are not familiar with what would be expected of them in terms of disclosure by the new shareholders.

There is a good reason why London and Aim in particular have become attractive for companies seeking fresh funds and a market for their shares. Aim offers a flexible regulatory regime, access to a wide pool of capital and appealing tax benefits. No trading record is required and there is no minimum amount of shares which need to be in public hands.

The market's attractions have been enhanced by the demise of the Neuer Markt in Germany and the Easdaq in Belgium, and the spectacular collapse of Enron and Worldcom. The backlash in the US led to the Sarbanes-Oxley Act imposing tough penalties and other strictures on rogue directors, which seems to have encouraged many cash-hungry US companies to give New York a miss and head for London.

On the face of it, Aim has had a good year, with shares showing a 20% rise - but that does disguise some disturbing features. The market has been strongly influenced by the rise in the price of resource stocks, particularly those from Australia and Canada, which now account for around 40% of the market. But look closer and you will see a lot of foreign companies have not done too well at all.

There has been a noticeable increase in the number of Israeli-based companies coming to the market. Aim offers entrepreneurs access to a market that has proved itself receptive to some of the new technology emerging from Israel.

There have been some notable successes. Leadcom Integrated Solutions, a provider of telecommunication solutions, raised £12m in April to help accelerate organic growth and support occasional acquisitions. Its shares are 62% ahead.

But that is not mirrored elsewhere. Israeli companies are showing a combined fall of 15.5% on the year - a pretty miserable performance seen against the overall improvement in the market.

While every company that is trading below its issue price can come up with justifications for the loss of value, a cynic might suspect that too many of these companies were not properly researched before selling their shares to the public. For example, did UK advisers dig deep enough to see if their technology was fully tested and proven? Had they analysed the quality and quantity of the competition? And most importantly, did they battle hard enough with the vendors who had far too ambitious assumptions of what their businesses were worth?

There is a risk in 2006 that Israel will become associated with losing people money in the London market. This could have painful repercussions for Aim and everyone involved in it.

So what should be happening? Too many companies have been allowed to breeze into London without meeting the vigorous standards you come to expect of the UK securities market.

This may have helped stuff some pretty hefty bonuses into the Christmas stockings of investment bankers and, after all, no one likes turning business down. But what about the people who put up the risk capital in the first place? Many are nursing painful losses and are likely to give a fairly rude response when asked to support the next foreign Aim float.

Most nominated advisers and sponsors have an in-house criteria which new companies must meet before they are accepted as clients. There is enough evidence in the market to suggest that some of those companies should never have been let loose on the London market in the first place - or at least not with the valuations attached to them.

So, when fund managers and other potential investors are asked to part with their cash, what sort of questions should they be asking about the companies before them? With an IPO a day at the moment there is a lot of choice - is there really compelling value? Are the nominated advisers, brokers, lawyers, accountants and financial PR firms the best in their field in the Aim market, or just the most expensive? Does the foreign management team really appreciate some of the cultural differences involved in running a UK public company?

Many of these questions could just as equally be applied to a UK firm as one from abroad. But these issues have much greater significance when a company is offshore, when its operations may be at the start-up stage and when its directors and management have had little direct involvement with running a business in the UK.

• Luke Ahern is director of broking at Aim-specialist stockbrokers Corporate Synergy