London’s Alternative Investment Market (AIM) is attracting a new generation of adviser these days. As the junior bourse continues to outperform its older brother, a number of larger City firms, historically associated with the full list, have jumped on the AIM bandwagon.
Lovells, for instance, made its AIM debut in the summer when it advised Lehman Brothers on the IPO of advertising agency M&C Saatchi. Meanwhile, Slaughter and May acted on its first AIM deal this year when it advised on the Canary Wharf sale.
So with some of the City’s finest muscling in on a sector traditionally dominated at the quality end by national firms and mid-tier City players, it is not surprising that a number of US practices are also having a dabble.
According to the statistics compiled by the AIM & Ofex Deal Monitor, US firms that have advised on AIM deals this year include Dechert, Kilpatrick Stockton, Morgan Lewis & Bockius, Salans, Weil Gotshal & Manges and White & Case. The latest US firm trying to capitalise on the junior market’s success is Hunton & Williams, which hired former Hammonds AIM rainmaker Martin Thomas in September.
The appointment marks a considerable shift in Hunton’s London strategy. It originally launched its London arm in 1999 to service its stateside projects practice. But unfortunately that strategy went belly-up, forcing Hunton to return to the drawing board.
Then, after reassessing its London direction, Hunton decided to boost significantly its corporate practice. Thomas, the former head of Hammonds’ equity capital markets practice, was a natural choice: at Hammonds he billed between £1.5m and £2m during the last three years. Additionally, his client base was almost completely portable and Hammonds did not require him to enter into any restrictive covenants.
Indeed, thanks to Thomas’s arrival, Hunton has already scooped its first ever instructions from four broker clients: Charles Stanley & Co, Collins Stewart, Evolution Securities and KBC Peel Hunt. Last year the firm did not advise on any successful AIM floats.
Thomas also talked to Berwin Leighton Paisner, Jones Day, McDermott Will & Emery, Nabarro Nathan-son and White & Case. But he plumped for Hunton partly because it offered him an opportunity to help the firm build a full-service corporate practice in London. Indeed, he is wasting no time and it is understood that he is already in advanced discussions with another AIM specialist.
The firm’s six-partner London office has historically turned over around £6m, but it is hoping turnover will reach £20m within the next two to three years with between 60 and 70 lawyers.
But will Hunton’s strategy to target a hugely competitive market suffer the same fate as its short-lived London projects practice?
The US firms with the strongest foothold in the AIM arena are Faegre Benson Hobson Audley, Jones Day and Mayer Brown Rowe & Maw. Their success in advising on AIM-related deals rests on the fact that the London offices of all three have merged with established City practices with their own client bases.
Selling AIM to US companies is not easy. “Our merger has gone very well, but the AIM practice has to date produced the least amount
of synergies. While we’re optimistic about the attractiveness of AIM for US companies, it’s going to take time to convince US companies and institutions of the merits of AIM,” argues Faegre Benson partner and AIM specialist Max Audley.
Some US companies seeking listings may favour AIM because of the tough corporate governance requirements imposed by Sarbanes-Oxley. AIM also has the advantage of not requiring companies to have a minimum share capital or a three-year trading history.
Although there is more proof that AIM is continuing to go upmarket, there is unlikely to be a sudden rush of US companies coming to AIM. “I don’t think anyone should be deluding themselves by thinking that they’ll be advising lots of US companies on AIM listings in the short term,” adds Audley.
As such, Hunton appears to be among the minority of US firms jumping onto the AIM bandwagon by deliberately targeting work in this sector.
Although AIM specialists at other firms are keeping a close eye on Thomas, they don’t think his move to Hunton will have a negative impact on their own practices. One partner at a rival firm says: “If 2004 is repeated, then there’ll be enough work for all the firms; and certainly at AIM’s current growth rate there’s plenty of room for more players.”
There is no doubt that Thomas has a considerable AIM pedigree, or that his clients will move with him to Hunton. But even if Hunton’s AIM practice is successful in winning bundles of AIM deals, a question mark still hangs over how lucrative this type of work is for lawyers.
At the top end of the market, average rates are continuing to slide, with firms advising the issuer being able to charge a maximum of £200,000 and lawyers to the broker commanding fees of £40,000-£70,0000.
Meanwhile, at the bottom end of the market, where competition is even more fierce, firms have been known to bill the nominated adviser as little as £10,000-£25,000.
According to one AIM specialist based in a rival’s London office, another US firm is unlikely to survive unless it is billing at least £50,000 on AIM deals.
Hunton is planning to target the full range of deals, but Thomas concedes that he is conscious of continuing pressures on fees at the bottom end of the market. On smaller deals, the expectation is that aggregate fees should not exceed 10 per cent of the total amount raised. On bigger deals, that drops to just 6 per cent of the amount raised, although on a comparative basis this would be considerably morej than the fee for smaller deals.
Thomas’s problem is that, although he has a considerable profile in the AIM sector, Hunton has zero profile.
In order to target new clients, he may need to cut fees to get around the firm’s lack of brand. But with the overheads of a US firm in London and no regional offices to do work cheaply, Thomas can’t afford to pitch low.
When he joined Hunton, Thomas amazed the market by scooping up an unprecedented £250,000 golden hello. Now that’s the kind of fee his US partners must dream of. Time to justify it.