AIM – The better alternative

2006 saw AIM’s rise to prominence continue, and with the market now attracting foreign companies those firms just below the magic circle have had a bumper couple of years

No wonder corporate lawyers have been busy. While big-ticket M&A has hogged the headlines, the maturing AIM had a boom year in 2006. A total of 366 companies hit the index according to Deal Monitor, in addition to numerous fundraisings, transfers and reverse takeovers by AIM names. Of the 366 flotations, 278 were IPOs.

While the actual number of IPOs represents a decrease from the 335 seen in 2005, it is still significantly higher than the 243 that came to the market in 2004. In addition, the money raised by each individual IPO has increased.

The reasons for the altered activity are as diverse as the business interests of the 1,600 stocks listed on the exchange, although common themes throughout the year were a flight to quality and flotations from companies outside the UK.

So which firms are the winners? The Lawyer investigated IPO statistics and AIM client rankings to find out.

Rich pickings
Stephenson Harwood took the lion’s share in 2006, acting for 16 floating companies. It acted for a further two between January and April this year, according to data from Deal Monitor (see table). This is a dramatic change from The Lawyer’s last AIM survey (January-December 2004), when Stephensons did not even reach the top 20 firms by number of AIM deals. However, while at face value the latest result is a strong showing, Stephensons still does not even figure in Hemscott’s ranking of the top 20 law firms by number of AIM clients.

As of 8 May Norton Rose topped this chart with a total of 60 AIM clients, followed by DLA Piper with 58, Pinsent Masons with 57 and Eversheds with 53. The top 10 also features names such as Berwin Leighton Paisner (BLP), Field Fisher Waterhouse (FFW) and Lawrence Graham, all of which did appear in the 2004 deals rankings.

Most of these names were also prominent when it came to acting for IPO companies in 2006 (see table), with Norton Rose representing the highest number of nominated advisers (nomads) with 12.

According to Peter Bradley, corporate finance partner at Stephensons, while there was a drop in the number of IPOs from the previous year, 2006 was an abnormally strong year for AIM flotations, with the UK benefiting from turbulence in global markets: rather than listing on volatile home indices, many companies sought to enter the relatively stable UK market via AIM.

The bulk of Stephensons’ AIM work came from China, with the firm advising on eight Chinese listings during 2006, in addition to a number of reverse takeovers. It seems Stephensons’ Asia investment has paid off.

According to Bradley, these companies are seeking to list in the UK because of the combination of a three to four-year waiting list for admission to domestic stock exchanges, the Hong Kong market focusing on large companies at the expense of smaller players, and because AIM has been well marketed overseas.

“We have about 20 per cent of our headcount in Asia now,” he says. “It gives a good base to market from and AIM itself has been doing a lot of marketing in Asia.”

Among the IPOs on which the firm acted for the flotation company were Eastern European Property Fund, which raised £20m, London Asia Chinese Private Equity Fund, which raised £50m, and Charlemange Capital, which raised £120m.

International growth
Listing companies in the form of funds has been a big focus for Stephensons over the past year, with sectors such as real estate and renewable energy coming to the fore at the expense of traditional AIM players such as oil exploration and mining companies.

That said, Patrick Graves, a partner at Osborne Clarke, which acted for seven floating companies in 2006, points out that the internationalisation of AIM has come about as a result of the interest these oil and gas companies generated in the first place.

“When AIM first started a lot of the stocks listing were oil and gas exploration companies,” says Graves. “There was a real bandwagon because they generated a lot of international interest. Now the exchange is international in its own right.”

One IPO Osborne Clarke acted on earlier this year, with Pinsents acting for the nominated adviser, was Nighthawk Energy, a US company with a market capitalisation of £37m.

This was an interesting float to work on, says Graves, because the company is effectively an investment vehicle that owns the principal oil and gas asset in the US state of Utah.

“It owns 37.5 per cent of an area of land and the balance is owned by the people going to develop it,” he says. “It’s multijurisdictional, so there was a lot of input from lawyers all across the US.”

Graves says companies such as this are turning to AIM rather than listing in the US because regulations here are lighter, while the cost of listing is lower and the liquidity of the market is attractive.

On the back of this growing internationalism Osborne Clarke is winning a number of clients from Malaysia, with the firm acting on the flotation of telecoms provider GMO last September. The company, which has a market capitalisation of £50m and which raised £5m at float, is based in Malaysia, incorporated in Jersey and carries out the bulk of its activities in China.

Graves adds that Osborne Clarke is currently in discussions with a Malaysian financial services company about bringing a number of its businesses to AIM. The company has undertaken some work on the Singapore Stock Exchange in the past, but is attracted to AIM due to its international outlook.

Growing market
Lawrence Graham, which advised companies on 12 AIM floats in 2006, has also seen a reasonably high level of business come from Asia.

In March last year the firm floated Vinaland, a property fund dedicated to development and investments in Vietnam. The fund raised $204m (£102.9m) on entering AIM. The firm also acted for the Pacific Alliance Asian Opportunities Fund, which invests in China and which raised $275m (£138.68m) on floatation.

Lawrence Graham partner Tim Casben says: “Some of the funds we’ve been doing have been interesting because of their size and the whole funds sector on AIM has been pretty prolific. AIM was never meant to be a market for funds, but this is being driven by investment in overseas companies and it’s easier for them to float on AIM than the full list.”

In addition to the Chinese and Vietnamese funds, the firm has acted for KSK Power Ventur, one of the first Indian companies to float on AIM.

According to Casben, Lawrence Graham has been concentrating on the international market and so far has had some success there.

“We’ve been marketing quite aggressively internationally over the past year and during that period have done an equal amount of UK-based and international work,” he says. “The majority of our work in development at the moment is international, coming from the US, South Africa and Malaysia.”

FFW, which advised eight companies on flotations in 2006 according to Deal Monitor (although the firm contests that the figure was slightly higher), is also seeing an influx of foreign AIM clients, particularly from the US and Australia.

Anthony Brockbank, head of the AIM team at FFW, says: “The exchange has marketed itself well in other jurisdictions, particularly the US and Australia. It’s difficult to raise finance in Australia and the companies find it much easier to raise money in London.

“The US regulations make it expensive in terms of corporate processes to be in the US.”

Brockbank adds that the firm recently floated Plantic Technologies, an Australian manufacturer of biodegradable plastic. As well as fitting in with AIM’s overseas companies trend, Plantic is symbolic of a growing trend for eco-friendly listings on the market.

“This company is representative of the way that AIM is moving in terms of green and environmentally friendly companies. AIM is good at reacting to demand in this respect,” says Brockbank.

Looking elsewhere in the world, he adds that there has been a lot of interest from companies in former USSR countries, such as the Ukraine and Kazakhstan.

Neil Matthews, head of the equity capital markets group at Eversheds, which advised on eight IPOs during 2006, agrees that there is a growing internationalisation of AIM, pointing out that around 70 Russian companies are currently queuing up to list in London.

Although some of these companies will never make it to market while some will float on the main exchange, Matthews says a good proportion are likely to make it on to AIM. Eversheds is currently working on two prospective AIM floats from Russia.

Matthews says there is a big appetite for such IPOs from Russia, with half the companies waiting to list active in the utilities sector, while the remainder range from media companies to chemicals producers.

In addition to work for Russian clients, Eversheds is currently working on an early stage Indian float and has also advised on the flotation of Indian and German property funds.

“Around the world there’s been a lot of real estate growth and there’s investor appetite for AIM because, for example, there’s no liquidity in the Indian stock market,” says Matthews.

Despite this flurry of activity from overseas firms, DLA Piper partner Charles Severs stresses that AIM is still very much a domestic UK market, with the vast majority of companies listed on the index based in the UK. Although he does add that DLA Piper has handled work for companies in countries as diverse as the Ukraine and Israel.

Severs believes part of the reason for AIM’s continued success is the high level of cash being put into the market. This has increased during AIM’s lifetime, because when the index launched in 1995 many investors such as fund managers could not invest in its stocks. Since then their investment mandates have altered to incorporate AIM, leading to far greater liquidity for its members.

Expected slowdown
Despite the strong showing of AIM IPOs during 2006, the start of 2007 has heralded a more muted time for flotations on the main market’s junior cousin.

Between January and the end of April the index accepted a total of 58 flotations, according to Deal Monitor, less than a quarter of 2006’s total figure in a third of the time.

According to Severs, one reason for the reduction in activity is the flight to quality that is being seen across the board, with many companies seeking to list on the main market due to its perceived superiority. This could spell bad news for AIM specialists, since main list IPOs tend to get hoovered up by the top 10.

In addition, there is a growing trend in the market that any company valued at £100m or more is being pushed away from AIM towards the main market.

According to Matthews, the number of floats has lessened due to a combination of market conditions as well as the growing pressure on nomads to bring only good-quality companies to the market.

“The volume of floats will be down this year, but the hope is for better-quality companies,” he says.

Casben adds: “There’s a feeling in the market that the [London] Stock Exchange is ready to make an example of the first nomad that falls on the wrong side of the line. Small companies tend to do badly and everyone’s trying to raise the bar of companies that are floating.”

For Bradley at Stephensons, the slowdown this year is natural following AIM’s bumper year in 2005 followed by the strength seen in 2006. Pointing out that the high level of activity seen over the past two years was always going to be unsustainable, Bradley says there has to be a limit to the capability of London institutions to “gobble up” these companies.

“It would be a good idea to open this up [to foreign investors] and make it a more global market,” he adds.

While the number of IPOs has dropped this year, Osborne Clarke’s Graves points out that there has been an increase in the number of secondary fundraisings on AIM.

“One of the biggest advantages of AIM is that the costs of raising money after IPO are pretty low because companies don’t have to write pre-emptive letters to shareholders,” he says. “They’ll generally get the authority from shareholders at IPO and will just pay a commission to the broker for placing the stock with institutional shareholders.”

Casben adds: “There’s still a question mark over liquidity, so there’s been a greater concentration on consolidation rather than on new issues. We have clients who have pressure to do deals coming from their international investors.”

Of the firms advising companies on their flotations in 2007, Fasken Martineau Stringer Saul has already acted on four deals, while Osborne Clarke acted on three, with a list of names such as BLP, Eversheds, Lovells and McGrigors scoring two each.

Among the largest floats so far this year was that of the Prosperity Russian Domestic Fund, a vehicle that invests in Russia and former Soviet countries, that has a market capitalisation of $365m (£183.88m) and which raised $350m (£176.32m) on its float in February. Debevoise & Plimpton acted for the fund, while Stephensons represented the nomad on the deal.

Dawnay Day Sirius, a property investment company operating in Germany, listed at the beginning of May and raised £185m. Olswang represented the company, with Lovells acting for its advisers.

Aim flotation fees

In terms of the fees lawyers earn for acting on AIM floats, the general consensus is that it is difficult to do anything for less than £100,000, although it very much depends on the type of business seeking to list.

For example, Lawrence Graham partner Tim Casben says the fee for an Asian property company would be between £175,000 and £200,000, while a UK-based tech company, which would not require as much due diligence, could be in the region of £150,000.

Eversheds partner Neil Matthews says many law firms, particularly if they are winning clients as part of a beauty parade, will be prepared to take a slightly lower fee for floating a company on AIM because there is a high chance of future benefits.

“You have to look at an AIM float as a bit of an investment,” says Matthews. “You have to consider that the company will be doing a lot more in the future and you’ll get more fees for doing M&A work.” Agreeing, Osborne Clarke partner Patrick Graves adds: “Low billing goes on -particularly where companies are going to be acquisitive. Lawyers might take a view on the IPO fee because they’ll get all the acquisition work.”

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