While Aim continues to be a market for small, relatively early stage businesses it is also attracting a growing number of more mature, highly profitable, family or founder controlled companies. The major shareholders of these mostly UK based businesses clearly view Aim as a good route to access the capital markets yet still retain an active interest in the business and enjoy the inheritance tax benefits of Business Property Relief.
For many owner managers Aim also represents a viable alternative to the private equity exit route. Furthermore, shareholders need not give up the dividend income they are used to enjoying as many Aim companies, especially the older more mature businesses, now offer meaningful dividends. At a time when interest rates are close to zero, this is clearly compelling.
Then for investors there can be 100 per cent relief form potential inheritance tax (IHT) if they invest in qualifying Aim shares, hold on to them for two years and still hold them at death.
Even the high growth stars of Aim are not the speculative early stage businesses that they once were. Fevertree Drinks is a prime example of this and has grown swiftly to be the world’s leading supplier of premium carbonated mixers for alcoholic spirits.
While it arrived on Aim in November 2014 in a blaze of glory and has seen its share price rise over seven times since, the Fevertree brand was launched way back in in 2005, nine years before its Aim arrival. The majority of its sales are derived from outside the UK and it is hugely profitable and cash generative.
At the other end of the excitement scale, but no less interesting for tax planning investors, is Accrol Group Holdings, a leading independent tissue converter, manufacturing toilet rolls, kitchen rolls and facial tissues for retailers throughout the UK.
Accrol started back in 1993 with a 5,000 sq. ft. site in Accrington, Lancashire and since then the company has grown to become the leading supplier of tissue products to the UK discount market with revenue for the last full year ending 30 April 2016 of £118m and operating profit of £11.9m.
At IPO Accrol also committed to a progressive dividend policy with the intention of paying a total dividend equating to a 6 per cent yield at the IPO placing price for the financial year ending April 2017.
In the world of retail Joules Group, the premium lifestyle brand, joined Aim in May 2016. The origins of the current business date back to 1989 when founder Tom Joule, who is still the largest shareholder, started selling clothing on the country shows and events circuit. The first Joules branded product was created in 1999 and the first Joules store opened in Market Harborough in 2000. For the year ending May 2016 Joules had sales of £131m and EBITDA of £13.5m.
The above are all examples of well-established business that are using Aim to raise new money or support partial founder or private equity exits. They offer a mix of high growth, and in the case of Accrol, compelling dividend yield.
We would argue that these business are much easier for the average investor to understand than the majority of blue chips with their hugely complicated businesses models. Furthermore, they are also all companies that qualify for the valuable Inheritance Tax reliefs offering a further incentive for UK investors.
The facts seem to back up our view that the quality of businesses on Aim (in terms of profitability) is improving. Over the seven months to end July 2016 there were 60 cancellations from Aim and 30 new admissions.
Of the 30 new issues 25 were qualifying for IHT planning purposes of which 16 were profitable. These several substantial, profitable and cash generative businesses such as Watkin Jones, the leading UK developer with a focus on the student accommodation sector, Midwich Group, a specialist Audio Visual and document solutions distributor and Hotel Chocolat, the premium British chocolatier.
The overall number of companies on Aim fell in August 2016 to 1,007, from 1,010 companies at the end of July 2016, however, the overall market value of the market rose to just over £80bn. August 2016 also represented the first time Aim had breached the £80bn month end market cap level since February 2014 when companies with a total market value of £1bn were admitted.
While AIM remains well below its high point of July 2007, when the resources sector was in full swing and the market capitalisation of the market hit £108bn, many of the current newcomers are likely to be around a lot longer than the vast majority that joined back then. It is interesting to note that back in July 2007 a staggering 36 companies joined AIM with a market capitalisation of a whopping £2.5bn.
Where Aim investments sit within the whole of the client's investment portfolio, how they balance out mainstream equities, gilts and bonds, what proportion of the overall portfolio they represent are all decisions for the adviser based on the client's needs now and in the future. Beyond stock specifics there are sector considerations to be made that may or may not correlate with the main market stocks.
Advisers should research and consult specialist Aim managers who can offer the desired advice on investing in Aim and the preferred ways to invest, be it via the manager's own platform or via a DFM arrangement on an existing platform used by the client. Aim is possibly the best kept secret in the investment adviser arsenal of options for clients. Time to let more clients in on it.
Chris Boxall is co-founder of Fundamental Asset Management
Key points
Aim is attracting a growing number of more mature, highly profitable, family or founder controlled companies.
These business are much easier for the average investor to understand than the majority of blue chips.
The overall number of companies on Aim fell in August 2016 to 1,007, from 1,010 companies at the end of July 2016.
