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Aiming High18/07/2006. Source: SJ Berwin. Perry Yam 
Research published in April by the British Venture Capital Association showed the importance of healthy stock markets for the venture capital and private equity community, says SJ Berwin. About one-fifth of divestments in the UK since 1998, measured by acquisition cost, have been by way of an IPO. And that figure would be even higher if measured by realised value, since IPOs tend to be reserved for the better performing investments.
But the research also revealed a striking mutual dependence - about half of all IPOs on the main market in London over the same period were of companies backed by private equity. And although the historic relationship with the UK's secondary market, AIM, has not been so close - only around 10% of all AIM IPOs have been of private equity backed companies - that is changing rapidly. In 2004, for instance, about half of all private equity backed IPOs in Britain were on AIM.
AIM has certainly enjoyed spectacular success over the last few years. Starting with only 10 UK-based companies in June 1995, it has grown into a market of over 1,500 companies, including more than 250 from outside the UK, and has become the market of choice for young, dynamic companies from all over the world. Last year set a new record, with 550 new companies joining AIM, raising a total of £9 billion to fund their growth.
The number of international companies has more than doubled in the last 18 months: 26 countries are now represented, including the United States, China and Australia. And prospects continue to look good for 2006 - although there has been a slight drop in the number of companies admitted to AIM so far this year, the amount raised in Q1 2006 is more than three times that raised in the same period last year.
In developing AIM, the London Stock Exchange set out to create an attractive, appropriately regulated market which recognised that "one size does not fit all companies". The secret of AIM's success has been the way in which it has remained true to these principles.
AIM's relatively simple regulatory environment has been specifically designed for the needs of smaller companies, enabling them to access public markets at an earlier stage of their development. For example, there is no requirement for an established track record, nor is there a minimum market capitalisation requirement or any requirement for a minimum level of shares to be in public hands.
The principal requirement for any company wishing to join AIM is to appoint a specialist adviser, called a 'nominated adviser' or Nomad, who will ensure that the company is appropriate for AIM, assist in the IPO process and then ensure that the company observes its continuing obligations under the AIM Rules once it is admitted to trading.
Aside from its attraction to companies, AIM has attracted an ever widening pool of UK and international investors, and AIM shares have now become a mainstream asset class. The market is now invested in by almost every major Institutional investor (who make up over 40% of the market), and the BVCA research shows that - although still less liquid than the main market (even allowing for the fact that liquidity is a function of size) - average monthly turnover is now much higher than a few years ago. The gap between the markets is narrowing, particularly in the size brackets of most relevance to venture investors.
The integrity of the market is fundamental to its continued success. Last year, the rules governing cash shells were tightened and stricter rules were introduced for Nomads acting for companies in the resources sector - the regulatory environment continues to evolve whilst at the same time retaining the flexibility that has been the hallmark of AIM since its inception.
The London Stock Exchange has also recently introduced a number of initiatives to enhance AIM's secondary market liquidity - including the launch of a new FTSE AIM Index series and the introduction of a hybrid trading system, SETSmm, to increase the efficiency of trading in the top 50 AIM stocks.
With its sights now firmly set on European expansion - a series of road shows is about to start and the creation of a European network of nominated advisers is envisaged - AIM looks set to become the growth market for Europe. In turn, that should provide a boost to private equity and venture capital - and continue to build the virtuous circle of mutual support.
Perry Yam
SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on our services to the private equity industry please contact Simon Witney in our London office 020 7533 2222 or visit our website at www.sjberwin.com.
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