The Alternative Investment Market has been under fire from rival jurisdictions. but uk lawyers insist the market still has a lot to offer, reports Grania Langdon-Down


Lawyers working on Alternative Investment Market (AIM) deals have been taken aback by the blistering attack on the junior market’s corporate governance standards by John Thain, the head of the New York Stock Exchange.



Mr Thain, speaking at the World Economic Forum in Davos last month, claimed ‘anyone could list’ on AIM and warned that London ‘had to be careful not to damage its reputation by allowing in companies that are not well run’ – a charge rejected as ‘complete garbage’ by AIM’s head, Martin Graham.



Mr Thain’s comments coincided with the launch of a Financial Services Authority (FSA) investigation into an AIM-listed company and come at a time when the market’s popularity is under scrutiny, with a number of AIM businesses posting profit warnings.



While it raised a record amount of money last year – a 90% increase from £8.9 billion in 2005 to £15.7 billion in 2006 – the number of companies being admitted fell 11%, from 519 joining in 2005 to 462 last year.



Neil Matthews, the partner who heads up national firm Eversheds’ initial public offering (IPO) group, says: ‘AIM has been a spectacular success since it was formed, but we are in a spell where people are having a pop at it. A lot of the comment is coming from the US, where I suspect there is a bit of sour grapes, given the way their capital market appears to be disintegrating and heading over towards London.’



While he acknowledges that there has been some ‘investor fatigue’, he does not feel AIM’s popularity is slipping, pointing out that it reached a watershed in December when the number of companies on the junior market, at 1,634, exceeded the number on the main market for the first time (1,628).



According to London Stock Exchange (LSE) chief executive Clara Furse, AIM would have been the sixth best at raising capital last year ‘if it were an exchange in its own right’. It attracted record business from the US, last year, with 23 companies raising

$1.1 billion (£560 million).



Mr Matthews says: ‘There is huge worldwide enthusiasm for AIM. I am out of the country twice a month speaking at conferences to audiences of Indian, Russian, European and Chinese companies looking to come to London and the AIM market in particular.’



Nick Davis, corporate finance partner at City firm Memery Crystal, agrees that AIM is ‘alive and well’. He says: ‘We are seeing a number of deals which didn’t get done towards the end of last year coming back on stream. I think it is a flight to quality, which is a sign of a more mature market.’



He says he would not be surprised to see a repeat of the pattern of smaller numbers of companies being admitted, but with higher fund raisings. ‘It means proportionately fewer instructions for law firms but it also means some of the instructions are for much bigger deals which are more complex, which means larger fees.’



Last year was ‘phenomenal’, says Simon Gilbert, head of corporate finance at City firm Charles Russell. ‘Talking to people, the pipeline probably isn’t as solid as it was at this time last year but the value of deals is still good.’



Rachel Bond, corporate partner at City firm Macfarlanes, also acknowledges that the market is not looking as popular as it was. ‘The message that we hear is one of fatigue. There has been a wall of money going into that market, a lot in smaller companies, many of which have not produced the returns people might have been looking for.’



But, as Mr Matthews says, ‘people have to remember what AIM is all about. It is not a Nasdaq equivalent. It is a market for younger, earlier-stage, higher-growth companies, so you are going to have a higher share of companies which are not performing well.’



The AIM index has also been coloured by two factors, he says – the share price crash of high-value Internet gaming companies hit by US legislation, and the decline in the oil price.



For Mr Thain of the New York Stock Exchange, it is AIM’s light-touch regulation that provokes his antagonism – he would like to see firmer oversight. The LSE will be issuing a new rule book for nominated advisers (nomads) this month, which codifies their role and responsibilities in assessing the suitability of issuers and advising companies about compliance with AIM rules, alongside enhanced disclosure requirements for AIM companies.



Practitioners point out that the new rule book simply codifies best practice. Andrew Clarke, a corporate partner at City firm Speechly Bircham, says Mr Thain’s attack was ‘startling’. He says: ‘I think AIM’s light-touch regulation is a good balance. If AIM became more heavily regulated, it would lose its appeal. You have to try to find a balance between having sufficient regulation and having such light regulation that it allows bad apples in.’



Mr Davis is on the AIM advisory group, a body of practitioners that helped draw up the revised rules. ‘Most of the changes are aimed at nomads and they make it very clear what they have to do to discharge their duties. It is a positive step by a mature market.’



Ms Bond agrees: ‘I think the LSE’s moves in refreshing the regulations are good. The responsibility is clearly very much with the nomads rather than a regulator, but they don’t take that responsibility lightly as their reputations rest upon it, so I think the balance is about right.’



For the brokers Mr Matthews acts for, ‘their reputation is pretty sacred’. He continues: ‘We don’t see a huge difference between AIM and the main market approaches. You don’t have the FSA looking at the documents, but that doesn’t mean brokers are putting out things on the back of a postage stamp. There is proper due diligence and vetting.’



Certainly AIM is proving attractive worldwide, with 306 international companies listed at the end of 2006. Mr Davis recently acted for a Greek company domiciled in Cyprus, which makes wheelie bins at factories in the UK and Greece. ‘A lot of money was raised in Greece, so it brought with it some investors from its domestic market, which I think is very much the secret to going forward.’



Indian real estate is another buoyant sector, while there is still enthusiasm for renewable energy, says Mr Matthews. ‘Technology comes in and out of fashion,’ he adds. ‘Anything unproven is tough at the moment. What stands out last year in our deal list is the variety of AIM floats. We have been involved in flotations of US technology companies, Indian and German real estate funds, a Bangladeshi pharmaceutical company, UK infrastructure support services companies, UK shipping companies, as well as a range of sectors covering food, retail, mining and life sciences.’



Apart from the variety, there is also the attraction of seeing a young company grow. Mr Matthews says: ‘Helping to take a management team onto a public market is very exciting – it’s high-profile work and rewarding because the clients appreciate what you are doing to help them achieve their goal.’



It can also raise unusual issues. Mr Clarke acted for a company developing properties in Bulgaria, which involved questions relating to the restitution of property under the old communist regime. ‘The appeal is you don’t know what you are going to find.’



Mr Gilbert says Charles Russell now has more than 40 fee-earners across its offices in London, Cheltenham, Guildford and Oxford, all spending more than half their time on AIM-related transactions.



‘There is a misconception that because AIM is not the official list, it is dead easy to pick up lots of clients,’ he says.



‘We were toiling away for a few years without a huge amount of success and then the market picked up. We had some very good contacts, we put a lot of effort into marketing, and the work started to come through.



‘A lot of the big firms didn’t focus on AIM in previous years because they couldn’t get the returns they were looking for with their cost base.’



For Mr Matthews, the demand remains huge. ‘AIM will have its critics but the model works very well. It has proved itself over a long period, has survived peaks and troughs, and is continuing to mature. There is nothing on the horizon in the US which is going to challenge it.’



Grania Langdon-Down is a freelance journalist