Post by Bozur on Apr 10, 2005 16:43:53 GMT -5
Risky Shares Find a Home on London Exchange
Graham Barclay/Bloomberg News
The London Stock Exchange oversees operations of the Alternative Investment Market from its new building in Paternoster Square.
By HEATHER TIMMONS
Published: March 31, 2005
A brochure promotes AIM, a stock market specializing in speculative issues, in London.
LONDON, March 30 - One company's top product is a numbing aerosol spray, which it claims can help some men improve sexual performance. Another business strategy involves stripping abandoned cargo from sunken ships. And a third says it plans to explore for oil in a field that the Sudanese People's Liberation Movement, a former rebel group, claims it controls.
None of the three companies have ever made a profit but they have all gone public recently on London's Alternative Investment Market, the British small-company stock exchange.
The market, known as AIM, bills itself as "the most successful growth market in the world," and it has been living up to the slogan in recent months.
In 2004, 335 new companies listed on AIM, more than double the year before. More than 100 of these came from outside the United Kingdom. The exchange's overall market capitalization reached $60.9 billion by year-end, outstripping Tokyo's small-cap market, its closest stock exchange competitor, by almost $30 billion.
Stock exchanges for small companies are often shunned by mainstream investors, who view them as speculative and unregulated markets, potentially ripe for corruption and misrepresentation. Similar markets in Germany and Vancouver started out well and then failed, or had to merge to survive. But so far, the investor frenzy at AIM shows no sign of slowing this year. Fifty new companies, including Plethora Solutions, the spray drug company, plan to list on AIM in March, a record month for the decade-old market.
Since it was founded in 1995, AIM has evolved from a tiny offshoot of the London Stock Exchange, popular with private investors with an appetite for high risk, to a market that draws half its capital from institutions. A host of small companies now look to AIM when they need money to grow, rather than to venture capital, private equity or bank investors.
"AIM has re-emerged as a market of first choice for companies seeking development or expansion finance," said a recent report by the accounting firm, Deloitte & Touche. AIM suffered a setback, along with other major markets, in 2001. But some investors and bankers are starting to ask whether AIM's popularity, which owes much to an unabashedly unregulated structure, could ultimately become its undoing.
"How long the AIM flotation window remains open, I'm not sure, because it only takes one high-profile blow-up" to hurt the market, said Simon Raggett, a managing director at Strand Partners, a London financial firm that advises AIM companies.
The unique quality of the companies offering shares and the concern over the nature of those companies both stem from AIM's unusual listing rules: although a company has to prepare a prospectus to join the market, it does not need to demonstrate an operating history, meet a minimum listing size or have its financials vetted by the London Stock Exchange, which oversees the alternative exchange.
What they need to have instead is an exchange-approved "Nomad" or nominating adviser, generally a bank, accountant or law firm, which vouches that a company's reports are factual and that its business and growth plans are sound. In return, the company pays what is often a six-figure fee to the Nomad. In 10 years, only a handful of AIM companies and Nomads have been publicly fined by the stock exchange for wrongdoing, and just 3 percent of the companies listed on AIM have gone bankrupt.
But the recent rush to the market is providing a reason to be cautious, some advisers say.
"Like any market there are slight warning or danger signs when you see a significant number of companies pile in," said David Carson, a partner with Deloitte in Ireland.
Of particular concern is the high number of mining and exploration companies that have listed on AIM in the last 12 months. The two sectors made up about one-third of AIM's market value by February 2005. Many of those companies are unproved businesses with exploration rights, but no income. Investors "need to realize that this could be a very successful company, or not successful at all," said Mr. Carson of Deloitte.
One of the most controversial companies to list on AIM in the recent rush is an oil exploration company called White Nile. The shell company, founded by a former cricket player this year with £9 million ($16.9 million) in capital from institutions and private investors, shot to more than £200 million in market capitalization just days after going public in February, even though it had assets other than cash.
Soon after listing, White Nile said it obtained rights to 60 percent of an oil field in Southern Sudan, an area torn for years by civil war, from a former Sudanese rebel group, the Sudan People's Liberation Movement. But the French oil company, Total, says it has claims to the area that date back decades. "The legal situation is quite clear," said Jean-Francois Lassalle, external relations manager for Total's upstream business.
White Nile has since suspended its own shares from AIM, and is preparing a second set of documents to explain the issue to shareholders. It has also parted ways with its first nominating adviser, Grant Thornton, a large accounting firm. A spokesman for the adviser would not say if Grant Thornton had quit or been fired.
White Nile's new Nomad is Numerica Capital Markets, a small British adviser that has already sponsored six companies on AIM. "We're doing as much due diligence as we can," a Numerica director, Jeff Ward, said in a telephone interview, to show that the agreement for the Sudan field is a "real viable" deal.
It is the uncertainty of companies like White Nile that drives the volatility of small-cap stock exchanges, and some do not survive. The Neuer Markt in Germany closed after share values plummeted 90 percent from their peaks, and Vancouver's stock exchange disappeared in a merger after it collapsed because of too much speculative investment. Both markets had competed with AIM for new ventures.
So it is not surprising that specialists say that only the experienced should consider the market. AIM is "not for early-stage investors," said Robert Talbut, chief investment officer for Royal London Asset Management. There are "quite a few natural resources companies that are trading with a lot of hope value attached," Mr. Talbut said.
Even so, AIM's investor base continues to spread. Once AIM was purely the playground of private investors, but now institutional investors make up half its stakeholders. In the last year, most of the world's largest investment banks, such as Merrill Lynch and Goldman Sachs, have applied to become Nomads, and some are major stakeholders in AIM companies.
London Stock Exchange officials, who have been aggressively trying to attract new companies to the market, particularly from overseas, are jubilant. The exchange's success is a result of a "London standard of regulation and disclosure, with an environment suited to young companies, " says Martin Graham, the exchange's director of market services, who took on the additional role as head of AIM in February 2004.
Still, "with the amount of money looking to invest in AIM, there is a danger that prices will get inflated," said David Livesley, a fund manager with Yorkshire Fund Managers, which has about £250 million in assets, including AIM shares. Another concern would be that "some businesses which are fundamentally unsound are managing to list," he added.
Graham Barclay/Bloomberg News
The London Stock Exchange oversees operations of the Alternative Investment Market from its new building in Paternoster Square.
By HEATHER TIMMONS
Published: March 31, 2005
A brochure promotes AIM, a stock market specializing in speculative issues, in London.
LONDON, March 30 - One company's top product is a numbing aerosol spray, which it claims can help some men improve sexual performance. Another business strategy involves stripping abandoned cargo from sunken ships. And a third says it plans to explore for oil in a field that the Sudanese People's Liberation Movement, a former rebel group, claims it controls.
None of the three companies have ever made a profit but they have all gone public recently on London's Alternative Investment Market, the British small-company stock exchange.
The market, known as AIM, bills itself as "the most successful growth market in the world," and it has been living up to the slogan in recent months.
In 2004, 335 new companies listed on AIM, more than double the year before. More than 100 of these came from outside the United Kingdom. The exchange's overall market capitalization reached $60.9 billion by year-end, outstripping Tokyo's small-cap market, its closest stock exchange competitor, by almost $30 billion.
Stock exchanges for small companies are often shunned by mainstream investors, who view them as speculative and unregulated markets, potentially ripe for corruption and misrepresentation. Similar markets in Germany and Vancouver started out well and then failed, or had to merge to survive. But so far, the investor frenzy at AIM shows no sign of slowing this year. Fifty new companies, including Plethora Solutions, the spray drug company, plan to list on AIM in March, a record month for the decade-old market.
Since it was founded in 1995, AIM has evolved from a tiny offshoot of the London Stock Exchange, popular with private investors with an appetite for high risk, to a market that draws half its capital from institutions. A host of small companies now look to AIM when they need money to grow, rather than to venture capital, private equity or bank investors.
"AIM has re-emerged as a market of first choice for companies seeking development or expansion finance," said a recent report by the accounting firm, Deloitte & Touche. AIM suffered a setback, along with other major markets, in 2001. But some investors and bankers are starting to ask whether AIM's popularity, which owes much to an unabashedly unregulated structure, could ultimately become its undoing.
"How long the AIM flotation window remains open, I'm not sure, because it only takes one high-profile blow-up" to hurt the market, said Simon Raggett, a managing director at Strand Partners, a London financial firm that advises AIM companies.
The unique quality of the companies offering shares and the concern over the nature of those companies both stem from AIM's unusual listing rules: although a company has to prepare a prospectus to join the market, it does not need to demonstrate an operating history, meet a minimum listing size or have its financials vetted by the London Stock Exchange, which oversees the alternative exchange.
What they need to have instead is an exchange-approved "Nomad" or nominating adviser, generally a bank, accountant or law firm, which vouches that a company's reports are factual and that its business and growth plans are sound. In return, the company pays what is often a six-figure fee to the Nomad. In 10 years, only a handful of AIM companies and Nomads have been publicly fined by the stock exchange for wrongdoing, and just 3 percent of the companies listed on AIM have gone bankrupt.
But the recent rush to the market is providing a reason to be cautious, some advisers say.
"Like any market there are slight warning or danger signs when you see a significant number of companies pile in," said David Carson, a partner with Deloitte in Ireland.
Of particular concern is the high number of mining and exploration companies that have listed on AIM in the last 12 months. The two sectors made up about one-third of AIM's market value by February 2005. Many of those companies are unproved businesses with exploration rights, but no income. Investors "need to realize that this could be a very successful company, or not successful at all," said Mr. Carson of Deloitte.
One of the most controversial companies to list on AIM in the recent rush is an oil exploration company called White Nile. The shell company, founded by a former cricket player this year with £9 million ($16.9 million) in capital from institutions and private investors, shot to more than £200 million in market capitalization just days after going public in February, even though it had assets other than cash.
Soon after listing, White Nile said it obtained rights to 60 percent of an oil field in Southern Sudan, an area torn for years by civil war, from a former Sudanese rebel group, the Sudan People's Liberation Movement. But the French oil company, Total, says it has claims to the area that date back decades. "The legal situation is quite clear," said Jean-Francois Lassalle, external relations manager for Total's upstream business.
White Nile has since suspended its own shares from AIM, and is preparing a second set of documents to explain the issue to shareholders. It has also parted ways with its first nominating adviser, Grant Thornton, a large accounting firm. A spokesman for the adviser would not say if Grant Thornton had quit or been fired.
White Nile's new Nomad is Numerica Capital Markets, a small British adviser that has already sponsored six companies on AIM. "We're doing as much due diligence as we can," a Numerica director, Jeff Ward, said in a telephone interview, to show that the agreement for the Sudan field is a "real viable" deal.
It is the uncertainty of companies like White Nile that drives the volatility of small-cap stock exchanges, and some do not survive. The Neuer Markt in Germany closed after share values plummeted 90 percent from their peaks, and Vancouver's stock exchange disappeared in a merger after it collapsed because of too much speculative investment. Both markets had competed with AIM for new ventures.
So it is not surprising that specialists say that only the experienced should consider the market. AIM is "not for early-stage investors," said Robert Talbut, chief investment officer for Royal London Asset Management. There are "quite a few natural resources companies that are trading with a lot of hope value attached," Mr. Talbut said.
Even so, AIM's investor base continues to spread. Once AIM was purely the playground of private investors, but now institutional investors make up half its stakeholders. In the last year, most of the world's largest investment banks, such as Merrill Lynch and Goldman Sachs, have applied to become Nomads, and some are major stakeholders in AIM companies.
London Stock Exchange officials, who have been aggressively trying to attract new companies to the market, particularly from overseas, are jubilant. The exchange's success is a result of a "London standard of regulation and disclosure, with an environment suited to young companies, " says Martin Graham, the exchange's director of market services, who took on the additional role as head of AIM in February 2004.
Still, "with the amount of money looking to invest in AIM, there is a danger that prices will get inflated," said David Livesley, a fund manager with Yorkshire Fund Managers, which has about £250 million in assets, including AIM shares. Another concern would be that "some businesses which are fundamentally unsound are managing to list," he added.