Can alternative finance eclipse the AIM market?
In 2015 the alternative finance market enjoyed near triple-digit growth, with the value of its loans, investments and donations hitting £3.2bn.*
Within this, peer-to-peer lending and equity crowdfunding all played a part as the concept of lending directly to individuals – and excluding those entities like the banks which have for too long dominated markets – continued to win over ever more consumers.
One market which appears to be moving firmly in the opposite direction is the Alternative Investment Market, or AIM as it is more commonly known.
Launched just over two decades ago in 1995, AIM is less tightly regulated than the main markets such as the FTSE 100, but has nonetheless been the platform from which many businesses – including Domino’s Pizza and ASOS – have gone on to achieve greatness.
Like many markets, AIM peaked in size in 2007 before the credit crisis and subsequent global economic downturn sent values plummeting. But unlike peers which have recovered much of their lost ground, AIM is still stalling.
According to statistics from the London Stock Exchange**, there has been a sharp drop in the number of companies listing on AIM, with the total near halving from 76 in 2010 to just 47 in 2015. It is far below the peak of 399 seen in 2005.
The value of new money coming into the sector is also tumbling. Collectively, new and existing AIM companies raised £5.5bn in 2015, down from £7bn in 2010. In the last year alone it saw inflows drop by £400m, while the number of admissions to the market halved.
This compares with alternative finance which saw growth of 84% year-on-year in 2015 to £3.2bn.*** If it grows at the same rate this year and AIM fails to reverse its downward trend alternative finance will overtake the London Stock Exchange’s junior market.
Even the argument that AIM offers more protection for investors is redundant, with one of the biggest supporters of AIM recently commenting on what a jungle it can be when it comes to finding the right stocks to back.
Harry Nimmo, the famed smaller companies investor who has run the Standard Life Investments UK Smaller Companies fund for almost two decades, told Investment Week that at least half of AIM is made up of conceptual or blue-sky investments which have no revenues and should be avoided.
That is not to say there are no opportunities within the AIM market – of course there are – but investors may struggle to back the right investments in that market, especially as the knowledge and understanding of what many of the companies actually do will be limited.
Total assets within AIM still far outstrip the alternative finance market (as you would expect given the huge disparity in their respective lifespans) and given it is less mature, alternative finance still needs to overcome a number of hurdles, not least regulation, to ensure investors remain at the heart of the offerings coming to market.
But it continues to offer investors and SMEs something which AIM has always struggled with – a relationship.
AIM is a faceless stock exchange where communications between investors and the companies they buy is non-existent, and driven by broker recommendations.
In contrast, alternative finance brings both parties much closer together – be that via the way raisings are carried out, the way investors are rewarded, or the types of business the market naturally attracts (which include brewers like Innis & Gunn, high street chains such as John Lewis, or sporting attractions like The Jockey Club, all of which are well-known and understood by potential investors).
If it can maintain this relationship aspect, alternative finance could not only surpass AIM but eclipse it over time.
*According to blog titled “Another year of growth for P2P lending and crowdfunding in the UK” published on nesta.org.uk on 17 February 2016.
***According to “Pushing Boundaries: The 2015 UK Alternative Finance Industry Report”, published in February 2016 by Nesta and the University of Cambridge.