What is the FTSE AIM index?

What is the Alternative Investment Market (AIM)?

The Financial Times Stock Exchange Alternative Investment Market (commonly referred to as FTSE AIM or indeed just AIM) is a junior market of the London Stock Exchange. It was launched back in 1995 to allow smaller companies to gain access to the public markets, including liquidity and capital, but with 'light touch' regulation.

The index started out with just 10 companies worth a combined total of £82 million, and despite  delistings and other issues, there are now hundreds of firms worth tens of billions of pounds being traded every day.

The London Stock Exchange maintains three AIM indexes: the FTSE AIM 50, the FTSE AIM 100, and the FTSE AIM ALL-Share. Unsurprisingly, companies tend to do better if they move into one of the higher echelons, as they then qualify for institutional investment, passive investment inclusion, or even simply larger retail interest.

For context, many retail investors invest in AIM shares for the tax benefits including complex inheritance tax rules; and this class of investor will not touch companies that are not in the top 100 list. Similarly, institutions looking for sustainable growth may not invest in anything outside 

of the top 50.

This creates a self-fulfilling prophecy, as qualification for the higher bracket immediately sees greater investor interest — and more importantly, a wealthier class of investor.

The types of companies looking to list on AIM are usually smaller, privately held ventures which cannot gain access to private capital on favourable terms — but can raise cash quickly through an IPO. This makes most fairly high risk initially, as if they were lower risk, they could get access to private financing.

Why do companies list on AIM?

Companies list on the AIM often because they cannot command a Main Market IPO and potentially cannot acquire private finance on fair or large enough terms. Sometimes they prefer light touch regulation.

How do you list on AIM?

Listing on AIM is meant to be relatively easy, but arguably it's become harder over the years, with new auditing and ESG requirements, prospectuses running to hundreds of pages, and hundreds of thousands of pounds in costs. Listing alone can cost in excess of £500,000.

But it is still easier than a Main Market listing with less stringent requirements. A company goes through all the pre-IPO marketing blitz, and attempts to gain backers among family firms, brokers and High Net Worth (HNW) individuals. 

Perhaps the key difference to be aware of is NOMADs (Nominated Advisors) - individuals who are effectively the regulator for an individual company on AIM. They advise the business both pre and post-IPO, and often come under pressure as they have conflicts of interest; being paid from the listing in the forms of fees per company listed.

NOMADs also often act as the broker from an AIM company. Their primary responsibilities include:

• guiding a company through the IPO process
• conducting due diligence to ensure the company meets AIM requirements
• drafting the AIM admission document with support from lawyers

Your NOMAD will  engage an independent Reporting Accountant to conduct all necessary evaluations alongside their own lawyers who will review the company’s due diligence reports. 

To list, a company must:

• appoint and retain a NOMAD and a broker, both of whom must be registered with the LSE
• produce an admission document
• prepare all financial information, including three years of audited accounts where available
• have at least 12 months of working capital at hand
• have acceptable financial reporting procedures in place (FPPP)
• have completed a profit forecast where profitability is expected

It can take two years to properly prepare an AIM listing but the actual IPO process tends to last between two and three months. This can take longer when due diligence issues arise. Once the process commences, it is often extremely stressful, even if there are no major issues.

For perspective, even if all goes to plan, a company will generally be listing to raise funds from investors. This means a Roadshow, where you make multiple presentations to interested parties. 

Brokers are there to:

• evaluate interest in your company both during the IPO and at any subsequent share raises
• provide guidance on investment opportunities and share pricing
• provide ongoing advice on market matters

You also need auditors (which is becoming increasingly complex given new ESG requirements), a legal advisor with company listing experience, and usually some form of PR so that people have a clue who you are. 

Is trading or investing in AIM higher risk?

While AIM may make it easier for companies to list and get access to the public markets, their relaxed regulations have given the market the reputation of being a speculative market. The market is essentially self-regulated where the nomads are tasked with complying to broad guidelines.

The reality is that the market is a wild west, where trust is paramount and regulation weak. For perspective, a quality management team with past successes under its belt is far more important than many realise.

It's worth noting that the 100 largest stocks on AIM, called the AIM 100, are arguably lower risk due to their larger sizes and positive cash flows. In particular, these shares are often included in AIM Inheritance Tax ISAs, where investments are free from the death tax.

Five key factors to consider:

Nomads — or Nominated Advisers, are key to regulation on the AIM market, acting to advise AIM company boards pre and post-IPO. When you read an RNS, the Nomad is meant to work through it with a fine toothcomb to check for accuracy and compliance issues.

However they also usually profit from fees, or payment in shares, from the company they are advising, which puts their impartiality in question. Often, this leads to ambiguous RNS releases, where the Nomad attempts to hide negative detail — contributing to the generic RNS issues I’ve gone into in depth before.

Regulation — on a related note, AIM is seen as a far more speculative market due to relaxed, or ‘light touch,’ regulation compared to the likes of the FTSE 250 and FTSE 100. Again this is mostly because companies are expected to self-regulate by use of a Nomad, with investors accepting this additional risk. There are two sides to this coin. High risk investors can make extraordinary amounts of money in early stage companies — Novacyt’s 6,890% return in 2020 remains a prime example, and my opinion is that several junior resource companies will see similar growth in 2024.

However, there have been many cases of outright fraud on the market, with a common complaint being that investors close to company boards are given privileged insider information before the wider market is informed. This is true to the point that investors sometimes call certain companies ‘leaky,’ as their share prices react to news before it is officially announced.

Cyclical Risk Premiums — as AIM shares are higher risk, they tend to become more popular in times of loose monetary policy. The market has been falling since September 2021 — just before the Bank of England started hiking the base rate.  

This is no accident. Investors now have the choice to park their money in bank accounts paying out risk-free rates of circa 6%, with defensive dividend stocks, bonds, and gold also all doing better as rates rise and quantitative tightening turns the screws.

Reallocation of cash away from risk assets is inevitable, though the correction is now arguably overdone. Since the 1990s, there are clear cycles of rises and falls, and I suspect we are now close to the bottom.

Inverse Blue Chips — one of the most popular investing strategies for a FTSE 100 dividend investor is to buy a cheap index tracker that invests in all 100 of the UK’s largest companies by market cap, and then profit from the near guaranteed dividend income.

This is a popular strategy for a reason. It’s easy to do, very cheap, and is only slightly riskier than a typical savings account over the longer term, but with better returns.

But FTSE AIM investing is the inverse. If you invest in a premium segment index tracker — and it doesn’t matter whether it’s the S&P 500, NASDAQ 100, Dow Jones, FTSE 100, CAC 40, ASX 200, et al — then your money will almost certainly grow over the longer term.

If you do this on AIM, you will probably lose money. The index itself is down circa 33% over the past five years, and even in bull cycles, investing in the AIM index delivers a smaller return than investing in the larger indices.

This means that success is based on picking winners in an ocean of losers — and accepting you will occasionally get it wrong. A huge part of this is lack of research — picking AIM shares involves massively more research than a blue chip share, as dozens of analysts will have already done most of the legwork for you.

On a related note, there will also be huge volatility on the way to profits, so a willingness to ‘buy and hold’ is critical.

Placings — The FTSE 100 offers dividends and share buybacks, while FTSE AIM offers capital gains and share placements. A ‘placing’ is the stuff of nightmares for many AIM investors, as they are usually priced at a discount to the current share price. Indeed, the share price usually drops to the placing price in the immediate aftermath.

Worse, more shares in issue dilutes your own shareholding, and makes a stock more volatile. But placings are absolutely essential for most AIM shares on the growth to profitability, so just like a business investor needs to inject more capital to continue the growth story, it’s important to look at the justification for a placing — and crucially, how many placings might be needed.

Paying bloated management salaries is not the same as paying for a new drill programme, for example. Similarly, raising cash to pay for short term issues is fine — but issuing shares to keep a zombie company alive is not. There’s a subjective element to judging this, but one of the key things is that investors know a placing is coming.

If they know, it suggests that there is a wider plan. If it comes out of the blue, then usually one of two things are happening; either the company is being mismanaged, or it’s cleverly taking advantage of a temporarily improved share price to the long term benefit of investors.

If the cash raised is well used, then it can be a good thing over time. The company’s cash balance is immediately boosted, and typically, new investors come on board who were waiting for the placing to occur. Frustratingly, if it’s common market knowledge that a placing is coming, then investors sell to buy the manufactured dip, creating a bigger dip and necessitating a larger placing.

On the other hand, popular companies can churn new shares fast. And investors sitting on the sidelines risk a company raising cash in a more immediately positive way — for example, through an institutional lender, or else a strategic partner buys shares at a premium.

What are the differences between AIM and the Main Market?

Main Market companies must have at least 25% of shares in issue in public hands, and this is not required on AIM. Likewise, AIM companies typically must have three years of trading records, while AIM companies don't need a record at all. There are also significant differences when it comes to needing shareholder approval for major transactions. AIM prospectuses are also not pre-vetted and approved by the UK Listing Authority, though the FCA will vet an AIM admission document where it doubles up as a prospectus.

AIM companies need a NOMAD and broker at all times, where a Main Market business requires sponsors for new applicants. Main Market companies must also meet a £30 million minimum market capitalisation, where there is no such requirement on AIM. Some AIM companies are also eligible for EIS or VCT tax relief, and unlike Main Market businesses, are not subject to the UK Corporate Governance Code. 

The bottom line 

The FTSE AIM market is a high risk, high reward arena littered with poor companies, but with some of the best opportunities you can find anywhere.

The general idea is to find the diamonds in the rough, invest, and profit. But it’s harder than it sounds.