What is the Alternative Investment Market?
Launched in 1995, the Alternative Investment Market is the London Stock Exchange’s growth market, created to assist smaller companies in raising the capital they need to scale up. AIM, or London’s Junior Market, as it’s often referred to, replaced the Unlisted Securities Market (USM) and began operating with 10 companies listed with a combined market cap of £82.2 million. In just over 20 years the exchange has grown to around 1,000 companies and a combined market cap of over £90 Billion.
The Alternative Investment Market is often considered the most successful growth market in the world.
Why was AIM started?
AIM was created to serve smaller companies that sought to seek capital to grow but couldn’t afford the costs associated with listing on the London Stock Exchange’s Main Market or could not meet the stringent requirements needed to float. The main market requires companies seeking to float to have existed for three years, to have a market value of at least £700,000, to be willing to float a minimum of 25% of their share capital, and to have enough working capital for at least one year’s trading. AIM does not have these requirements which means that smaller, more entrepreneurial companies are less likely to be put off by floating on AIM.
What types of companies list on it?
Companies looking to float onto AIM are typically looking to raise between £1 and £50 million through their IPO. While this may seem small, there have been some notable larger raises of £100m+. And, while many companies use AIM as a springboard to the main market (over 150 companies have made the move), there are still a few companies listed on AIM with market capitalisation of over £1 Billion. This list includes ASOS, ABCAM, and Fevertree, all of which have delivered significant returns to investors who invested early on.
The companies on AIM are spread across 37 different sectors, 90 different sub-sectors, and come from 26 different countries. In fact, over 250 companies listed on AIM are from outside of the United Kingdom making it, proportionally, one of the most diverse exchanges in the world.
AIM Companies by Sector as of July 2017
Market value ranges of companies listed on AIM as of July 2017:
Who invests in AIM companies?
Trading on the Alternative Investment Market accounts for up to a quarter of all trading done by private shareholders. Despite the risks often associated with investing on AIM, many of the investors are attracted to it as they view it a place to find the next big growth story. It is the excitement and volatility of the AIM market that attracts many younger investors to it with a recent survey conducted by TD Direct Investing reporting that the AIM index had 350% more 30 to 44-year-old investors than those in the 45 to 75 age group. And while investing here is viewed as riskier than the main market, there are some tax incentives on offer for those that are willing to invest.
The tax advantages of investing in AIM companies
AIM shares offer investors a number of ways to take advantage of government sponsored tax reliefs including Inheritance Tax Relief, Capital Gains Tax Relief, and various forms of loss relief on shares that qualify for the Enterprise Investment Scheme (EIS) or are invested in through a Venture Capital Trust (VCT). The fastest growing form of tax relief on AIM shares arises through holding them in a stocks and shares ISA.
- Holding AIM shares in an ISA
Since 2014 investors have been given the opportunity to add AIM listed shares into their stocks and shares ISAs and the appeal of paying no Capital Gains Tax at disposal, and paying no income tax on dividends, has seen a steady increase in AIM shares being held in ISA portfolios.
- Inheritance Tax Relief (IHT)
Many AIM companies will qualify for Business Property Relief (BPR) which offers up to 100% Inheritance Tax Relief on “Transfers of Value”. Transfers of Value come into play when a family member passes away or when the shares were transferred by way of a lifetime gift within the previous seven years. The full relief is only applicable for certain unquoted companies and to benefit from BPR an investor must have invested in the shares directly as IHT is generally not available through funds. There are some exceptions, and discretionary portfolios created by wealth managers on your behalf may qualify.
- The Enterprise Investment Scheme (EIS)
Some companies that list on the Junior Market may qualify to offer shares through the Enterprise Investment Scheme. Companies that qualify can offer generous income and capital gains tax relief as well as loss relief in the event of a company ultimately failing and the shares becoming worthless. While the shares are listed on AIM, investors must hold onto the shares for a minimum of 3 years or the tax reliefs they have gained will be clawed back by HMRC.
A Venture Capital Trust is a fund like instrument that investors can receive tax relief from. Venture Capital Trusts use the money raised to invest in early-stage businesses and offers investors income tax relief and capital gains tax relief similar to those offered through the EIS. Dividends paid by companies invested through a VCT do not incur income tax. VCTs do not however offer the IHT relief that EIS does.
What are the risks associated with investing on AIM?
AIM listed companies are often still in their early-stages, so some of the risks associated with investing in startups can be applied here. Whilst many of the companies listed do make it onto the Main Market, there are a number of companies that do not survive, with rates of delistings on AIM far exceeding those on the London Stock Exchange. In general, the companies listed on AIM have lower levels of liquidity and it is more difficult to sell shares when you want. Finally, it can be more difficult to find information about AIM listed companies, with levels of market research generally much lower than Main Market equivalents.
Recent additions to AIM
Fast-fashion retailer Quiz was accepted on AIM on July 28th 2017 with an estimated valuation of £200m. Read more about the float here.
Kettle safety company Strix, floated on AIM in August 2017. The company, which claims to have a 38 per cent market share in global kettle safety, raised £190m with a price per share of 100p.