Is AIM a viable alternative?

A mix of events are coming together to bring the London Stock Exchange's junior index, the Alternative Investment Market (AIM), onto the radar screen of venture capitalists looking for the initial public offering (IPO) window to reopen. They include the recent IPO of Oxonica in the UK, as well as the expensive and restrictive accounting regulations placed on US public companies by the Sarbanes-Oxley Act of 2002.

"The new regulations affected securities analysts in all ways," said John Adams of Boston-based investment banking firm Adams Harkness. "US companies are starting to go public on AIM. I think the trickle will turn to a gusher in no time."

Already, AIM accounts for about 80 per cent of the total number of IPOs on the London Stock Exchange, which unlike the US NASDAQ and New York Stock Exchange, has seen a strong rebound in IPOs since 2004, according to Adams. He cited figures from the exchanges that showed the London Stock Exchange with 293 IPOs in 2004, and 332 as of 30 September, 2005. The New York Stock Exchange saw 131 IPOs in 2004, and the NASDAQ, 166 (see Chart).

The reason: US markets remain more cautious, largely because of Sarbanes-Oxley. "I think AIM advertises this," said Adams. "Its principle attraction is its ease of use. The disattraction of the US market is the increasing difficulty of use." And expense. It can cost US companies millions of dollars per year to be a public company.

AIM also tends to be more forgiving when it comes to new companies whose technologies are many years out and who come to AIM to raise money as an alternative to venture capitalists. While that gives more companies growth capital, an opportunity to try to push their technologies forward with new money, it also has raised criticism that some of the companies are too risky.

"There's a different willingness to accept different risk," said Douglas Jamison, vice president of venture capital group Harris & Harris, of New York City. "It appears now that AIM is willing to take more risk than NASDAQ." In the end, however, the best companies will want to go to the exchange with a tremendous amount of liquidity and trading, and AIM still has to prove itself on that front.

The average market capitalisation of a company on AIM between $60 million and70 million, whereas it is $250 million for an institutional-quality IPO on the NASDAQ, said Dan Coyne, a principal at Adams Harkness. "I'd be surprised if a great percentage of the IPOs on aim were secondary shares. Most are sold to insiders," he said.

AIM still is at an early stage, and there is a general lack of awareness of it on the part of the US venture capital community, he said. US companies still are looking to mergers and acquisitions as the primary liquidity event exit strategy.

But Jamison believes AIM could be a strategy for more incremental early stage companies. "At least in the early days, when they want to have some liquidity to trade in the public markets but aren't big enough to be real players yet."

Adams of Adams Harkness said AIM is a lot further advanced than most people realise. "Whether it has the capacity by itself to make up for NASDAQ, that remains to be seen," he said. "It's not being tested at this point. And it's nowhere near its capacity."

AIM has come a long, long way, he said. "It is up to 75 to 80 per cent of the NASDAQ in terms of its ability to chunk in dollars and chunk out dollars. And it's rapidly headed towards parity."