The Alternative Investment Market (AIM) is no longer a holding area for smaller companies before they move up to the main market, with a number of quality businesses choosing to remain there after listing, according to Octopus Investments’ Richard Power.
The manager of the £34m FP Octopus UK Micro Cap Growth fund said the days of AIM being treated as a junior market are long gone.
With success stories such as a ASOS.com, which should it choose to join the main market would be a FTSE 100 company, and FeverTree (which is just outside the ranking), it shows that many of the UK’s best businesses are choosing to remain traded on the AIM market.
Performance of stock over 10yrs
Source: FE Analytics
“The idea that when these companies grew up they would go onto the main list – that thinking is long gone. In fact, we are seeing that more companies move from the main list to AIM,” Power said.
“When we ran these portfolios pre-financial crisis we used to lose one or so a year to the main list whether it was Dominos Pizza et cetera there was quite a regular trail of companies going up into the FTSE 250 but we haven’t lost a single one since 2008, I don’t think. So, it has stopped.”
And companies now see AIM as the market of choice, he added, as ambitious growth business can access capital without the constraints of the main market.
“Look at all the recent well-known brands that have IPOed – Hotel Chocolat or FeverTree – they have all come to the AIM market,” he explained.
“They are all well-established, profitable businesses that are the right size and shape to be in the FTSE Small Cap aiming for the FTSE 250 and that would have been a journey they took 10 years ago but now they are all coming to AIM.”
With companies becoming bigger on AIM, Power picks out four companies that could join ASOS.com as a company large enough to be in the FTSE 100.
Abcam
Life sciences company Abcam is already a company that is not far away from FTSE 100 status as with a market capitalisation of £2.5bn it would rank as the 161st largest company on the FTSE All Share if it were listed on the main market.
“That is one with an agenda and I believe they will get there,” he said. “It is a very exciting business.”
The firm has provided antibodies used by pharmaceutical companies in clinical trial research since its launch in 1998.
Performance of stock over 10yrs
Source: FE Analytics
“The management team that IPOed it in 2005 have stepped aside and they have brought in new management to really take it to the next level,” Power said.
“Although it has £100m of cash on its balance sheet the team are very ambitious to take this business to the next stage.”
Recently, the firm made a proposal to acquire fellow AIM biotech company Horizon Discovery Group although this was unsuccessful.
“They tabled a bid for Horizon that was turned down two weeks ago so they have walked away from that, but they will do more deals,” the manager noted.
GB Group and First Derivatives
While there is little in the way of technology companies on the main market, AIM still provides investors to new opportunities in the sector.
“As far as UK technology companies go, most of the sector has fallen foul of M&A. It has been extraordinary within the last 12 months how many of the better-known names in UK tech have gone to American acquirers,” the manager said.
However, two that he hopes can remain independent and will thrive on AIM are GB Group and First Derivatives.
GB Group is a service offering that specialises in identification verification helping clients to verify the identity of people quickly and easily.
“What they have got which I believe still puts them in a unique position is the ability to do cross-border ID verification beyond anyone else’s capability. They say they can now do verification on 75 per cent of the world’s population,” Power noted.
“So, the eBays of this world are big customers of theirs but if the potential for social media businesses to be hauled into line and made to do ID verification on all those accounts that have questionable content coming through them [comes through, then] GB Group would be well positioned. It would be quite transformational for them.”
First Derivatives has a data management software that it sells to some of the world’s largest finance, technology and energy institutions.
Performance of stocks over 10yrs
Source: FE Analytics
“They’ve expanded over the last few years out of just the financial vertical into the multimedia vertical and they are seeding lots of other companies who can use their software to create new little industries. If they get more traction there then I think that is quite exciting,” the manager said.
Keywords Studios
The final company is gaming service provider Keywords Studios. Originally started as a company that translated games into various languages, the company has expanded since 1998.
The £1.3bn firm, which launched in 2013, has since expanded its range through a number of bolt-on acquisitions, working with top 20 mobile game and traditional video game manufacturers.
The company has been successful in these acquisitions as it allows the bought firms to retain their brand and has built up a global offering that deals with sensitivities in different regions well, according to Power.
It is run by chief executive Andrew Day, who the manager said is a blend of both optimistic and realistic – something that is rare in smaller companies as CEOs are usually one or the other.
“I think Keywords could get [to the FTSE 100]. It is such a big marketplace that if they execute well then they have got the opportunity there,” he said.