It is, in the words of one recent TV commercial, a big world: big firms, big investment houses and big initial public offerings (IPOs). The London Stock Exchange (LSE) main list and techMARK have been home to a vast number of deals over the last 18 months, with some of the biggest firms cashing in on one of the largest IPO periods in recent history (The Lawyer, 25 September). All well and good, but being big is not everything to everyone. Outside the main list, there is the major new world of the small, otherwise known as the Alternative Investment Market (AIM).
The exchange was created five years ago out of the Unlisted Securities Market (USM). The concept was to design a marketplace specifically for small-cap companies which were unable to find a home on the main list. It therefore had less restrictions and more flexibility.
Immediately there was something of a rush as the medium-sized firms cottoned on to the opportunities of AIM. As Colin Ives, a partner in Smith & Williamson’s professional partnership group, notes: “The change from USM to AIM was very slow and gradual, but it was recognised that AIM was much better and the way to go.”
SJ Berwin, for example, set up seminars and sent out mailshots in a bid to establish itself as an AIM-affiliated firm. Many firms were already dealing with USM and witnessed their client’s transfer to AIM, meaning their small-cap corporate finance practices had to develop as well.
For the first two years all went well. After 1997, though, AIM began to slump until it was, in the words of one corporate finance lawyer, “quite a sick market”. Quite simply, investors were not interested. Simon Walker, corporate finance partner at Taylor Joynson Garrett, was not surprised. “They were in a bit of a backwater, there was no real liquidity and the companies were not particularly interesting,” he says.
But just as the main list entered January 1999 with technology media and telecoms (TMT) stocks riding high, so did AIM. Like its big sister, AIM has witnessed a roller coaster 18 months, predominantly on the back of investor interest in technology and the dotcom bubble. AIM has since come to be viewed as another way of financing by replacing third, second and sometimes even first-round funding.
So what are the benefits for the firms that service AIM? Quite simply, AIM is ideally suited to medium and smaller firms. Here the magic circle is a distant rumour – the leading AIM firm is 12-partner Memery Crystal. Lovells and Herbert Smith are notable absentees, although Norton Rose has acted on a handful of key deals.
The real winners are those outside the top 10 firms, and in some cases the top 30. These include Lawrence Graham, Nabarro Nathanson, Olswang, SJ Berwin, Taylor Joynson Garrett, Gouldens and Theodore Goddard to name but a few. Hugh Maule, corporate finance partner at Lawrence Graham, says: “We’ve always wanted to act for small caps because we are the equivalent size.”
The main advantage of advising AIM is the concept of getting a company while it is young and being able to grow alongside it. Without such companies having an in-house legal capability, it is more than likely that nearly all of a law firm’s practice areas will be able to get a piece of the action during an AIM float – employment, employee benefits, stock options, property, pensions and the like. And there is always the hope that there will be a loyalty bonus. Often, it will be the first time the fledgling company has needed a law firm, so board and partner will build up solid relationships that will not easily be knocked down.
Or so the perceived logic goes. In reality, life is never that fair. AIM is an attractive market for one reason: that somewhere, lurking among the many companies that will inevitably flounder, lies the next Microsoft. Spot it, and you are on to a winner. Or perhaps not – after all, it is unlikely that Microsoft still uses its US equivalent of Memery Crystal. As companies get bigger, their investment banks are upgraded and new law firms are appointed. It would be like Memery Crystal pitching against Slaughter and May, and not just on cost.
There is also, of course, the matter of money. Fee levels are considerably smaller for AIM work than for main list work, and will also fluctuate depending on who the firm is acting for (nominated adviser or issuer) and on the nature of the deal. Fee income can rise dramatically depending on the complexity of the deal. Throw in a couple of acquisitions at the time of flotation, and fees can hit the £100,000-150,000 mark.
A lot of AIM IPOs over the last 18 months have been shell companies, which – according to SJ Berwin corporate finance partner Delphine Currie – float with “the sole purpose of finding a sexy internet company to reverse into”. For these sorts of transactions, the fee level could be as low as £30,000. Currie says: “This work is quite simple and very much mechanical.” And AIM work is unlikely to be the mainstay of the corporate department, and will not be privy to the same amount of resources. In SJ Berwin, private equity has more partners and more total fee-earners, hence the ability for higher billings.
Therefore, with AIM work it is more important to focus on volume rather than value, which is particularly pertinent when one considers that the total value of the AIM market over the last 18 months is roughly the same as British Airways’ market capitalisation. There is evidently an argument for acting for the banks – the home of deal flow – even though there is often less legal work and less fees. Memery Crystal, for example, has clearly benefited from a long-term relationship with Seymour Pierce.
Just as the smaller firms dominate the market, so too do the smaller corporate finance houses. For a bank to advise on AIM, it must be a nominated adviser (nomad) that has been approved by the exchange. This is to enable companies to find easily the required adviser for AIM trading. Should a nomad resign and the company fail to appoint a new one within one month, trading in its shares will be suspended.
They are easy targets, then, for firms wanting to increase their amount of AIM work because, just as on the main list, relationships between corporate finance partners and individual bankers are key. Nomad Smith & Williamson, for instance, has relationships with several key firms, including Hammond Suddards Edge, Lawrence Graham and Memery Crystal. SJ Berwin has long-term relationships with Insinger Townsley and Shore Capital, although the latter tends to split the work between SJ Berwin and Berwin Leighton. SJ Berwin, though, has recently been expanding its relationships, notably with Grant Thornton. Currie explains: “We came across each other on a number of deals, and both parties were keen to cement the relationship. We’ve made a point of doing things together.”
The future of AIM and small-cap companies, though, was thrown into doubt earlier this year during the proposed merger between the LSE and Deutsche Börse. And although that threat may now have been lifted, any future mergers – as there inevitably will be – will bring back the concerns.
Small medium enterprises (SMEs) may be a current buzz term for both investors and governments, but since when has any buzz term lasted? Equity capital markets will always be buoyant during strong economic periods, but it will also be one of the first to feel the pinch at the merest hint of a downturn. If the LSE main list will feel this, AIM, and in turn its advisers, will feel it even more strongly. Nor is it a likely scenario that AIM will replace the more profitable private equity methods of raising capital despite making some recent inroads into it.
No wonder, then, that those firms doing well in small-cap corporate finance are spreading out the load of their clients, the banks they work with and the levels of financing they practise. While putting your eggs in one AIM basket may be fine in the short term, the danger that some firms could end up with egg on their face is never far away.