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Markets still confident despite AIM wobble

11 April 2007

SCN FOCUS: CAPITAL MARKETS

When Braveheart Investment Group launched onto London’s Alternative Investment Market (AIM) at the end of March, the Scottish venture capital firm was the latest in a series of investment companies to join the market in recent months.

For Braveheart, which makes and manages investments for a syndicate of angel investors, the £6.6 million cash boost was an ideal platform to ratchet-up the level of investing. Indeed last week the company completed two such deals alone.

Chief executive Geoffrey Thomson, explained: “One of the reasons for floating Braveheart was to enable us to acquire quality portfolios where there is an opportunity for Braveheart to utilise its expertise and financial resources to add value and help companies grow.”

And Thomson is not alone in his views. Philip Secrett, a partner at advisory firm Grant Thornton Corporate Finance, says that among the new market issues in the first quarter of this year, property and private equity funds (under the sub sectors of real estate and equity investment instruments) continued to be flavour of choice.

The firm’s figures show that while during 2006 around 50 per cent of all new issue cash raised (£3.42 billion by real estate companies and £1.67 billion by equity investment instruments) was accounted for by this group, early 2007 saw that proportion rise to almost 70 per cent (£791 million raised).

But despite a strong showing by real estate and equity investment vehicles, AIM faltered in the early part of 2007 – delivering its worst admissions performance in three years and worst fundraising performance in two years.

PIPELINE REMAINS HEALTHY

In the first three months of 2007, AIM recorded 58 admissions, while new funds raised amounted to £1.1 billion.

Grant Thornton’s figures show that in terms of admission levels, Q1 2007 ranked as the worst performance in three years (since Q1 2004, 53 admissions) and represented a drop of over 50 per cent compared to this time last year (Q1 2006 – 121 admissions). In terms of fundraising levels, this was the worst performance in two years (since Q1 2005 – £370.3 million) and a 44 per cent reduction on Q1 2006 (£2.05 billion).

Philip Secrett at Grant Thornton Corporate Finance believes AIM's success in recent years has got the City accustomed to record upon record and while this latest quarter's slowdown appears brusque, the pipeline of deals remains healthy with the next few weeks and months expected to deliver a performance more in line with AIM's usual standards.

“The first quarter of the year always takes a while to get going,” Secrett said. “January and February have historically been quieter with most admissions completed in the pre-Christmas rush. This year's performance owes much to a quieter March which was affected by the ripple effects of the Asian markets tumble earlier in the month. Most companies on the brink of flotation then will have been wise to delay admission a few weeks, setting the expectation for a far busier April.”

While AIM’s long spell of impressive transaction levels hit the brakes in the first quarter, London’s junior market was not on its own. Research by KPMG’s Capital Markets group found that 10 firms sought a listing on the Official List in the first quarter of 2007, compared with 22 companies in the same period of 2006.

But while there was a fall in the number of companies listing, the figures also show that the average deal value has approximately doubled compared to those in the same period last year. Indeed, the first quarter of 2007 saw four listings which raised over half a billion pounds each, including the sportswear chain Sports Direct, which raised £929 million, and 3i’s Infrastructure Fund, which raised £700 million.

Linda Main, Transaction Services Partner in KPMG’s Capital Markets Group reckons London remains the city of choice for the world’s most ambitious companies. She says that although the overall number of IPO’s is down on last year, the value of those that came onto the market has soared with the funds raised doubling on average compared to last year.

“Although it was a quiet start to the year in January, the last few weeks have seen some significant corporates from the UK and overseas decide to raise money with a UK stock market listing,” Main said. “On [AIM], more than half of companies listing were from overseas, suggesting there is little evidence that corporates are being deterred by criticism of the way the market operates. We believe that the UK’s risk-based approach remains appropriate and a success.”

To reinforce this, figures from the data provider Dealogic underline the success of the UK equity markets in attracting new issues in the first quarter of 2007. According to Dealogic, 45 firms listed on the London main market and the AIM market raising a total of £5.4 billion. This compared with 44 deals being done on the New York Stock Exchange and the Nasdaq, raising £4.7 billion.

LONDON REMAINS CENTRE OF ATTRACTION

With AIM and the Official List attracting more activity than their counterparts in New York, the London markets also performed well against exchanges across Europe. In total, London took a 45 per cent share of IPOs in Europe during 2006, in both offering-value and number.

According to the latest IPO report from PricewaterhouseCoopers, the European markets raised more money than the US for the second year running and remained ahead of the rapidly expanding Greater China capital markets which saw a 172 per cent increase in total offering-value.

PwC said the upward trend seen in 2005 continued last year with the number of IPOs across Europe up 9 per cent and the offering value up 27 per cent. Europe was also a popular destination for international IPOs, with a quarter of all new money raised coming from such companies, despite a 6 per cent fall in their total number.

Tom Troubridge, head of the London Capital Markets Group at PricewaterhouseCoopers, said 2006 had been another highly successful year for European IPOs, with some interesting trends emerging during the year.

“First, Global Depository Receipts (GDRs) have become a highly popular method for raising substantial funds from institutional investors in London,” Troubridge said. “Europe’s top five international IPOs were all GDRs on London’s main market, accounting for more than 40 per cent of the total offering value on the exchange. They were particularly popular with companies from Russia, India, Korea and Kazakhstan. Secondly, there has been some movement away from smaller company IPOs in favour of those of larger, more established businesses, with a consequent rise in the average offering value.”

Looking ahead, Troubridge believes the pipeline for the remainder of 2007 is encouraging and that we should continue to see a steady stream of both domestic and international companies coming to IPO in Europe. “We, therefore, expect the IPO market to continue to be buoyant in 2007 provided there are no unexpected world events which could unsettle the markets more generally,” he added.