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The AIM - Global Effects for Private Equity, Hedge Fund and Venture Investing

Joseph W. Bartlett, Founder of VC Experts.com


The AIM Campaign to Enlist IPO Candidates from the US: What It May Mean For Global Venture Capital

Herewith some vital statistics on the AIM … a preview of the upcoming material:

Number of Companies[1] Mkt value ($m) Number of Admissions Money raised ($m)
UK Int’l Total UK Int’l Total New Further Total
19/06/1995
10 0 10 144.3
1995
118 3 121 4.183.9 120 3 123 122.1 44.4 166.5
1996
235 17 252 9.304.2 131 14 145 902.5 530.8 1,433.6
1997
286 22 308 9,930.4 100 7 107 604.2 614.9 1,219.2
1998
291 21 312 7,792.9 68 7 75 469.7 509.4 979.1
1999
325 22 347 23,650.7 96 6 102 585.9 1,053.2 1,639.2
2000
493 31 524 26,226.2 265 12 277 3,080.2 2,317.4 5,397.6
2001
587 42 629 20,382.2 162 15 177 1,041.5 939.9 1,981.5
2002
654 50 704 18,003.1 147 13 160 860.61 853.1 1,713.5
2003
694 60 754 32,237.5 146 16 162 1,923.5 1,755.5 3,679.2
2004
906 115 1,021 55,764.2 294 61 355 4,874.48 3,301.6 8,176.1
2005
1,179 220 1,399 99,422.1 399 120 519 11,345.9 4,356.9 15,702.9
Launch to date
1,928 274 2,202 25,810.9 16,277.4 42,088.3

As things now stand, the AIM is positioning itself as a global alternative for so called ‘mid-cap companies’ … firms with an expected market capitalization from, say, $50 million to $600 or $700 million. The AIM strategy is driven and fueled by several factors, including the post melt-down closure of the NASDAQ window for flotations which fail to anticipate at least, say, a $600 million market capitalization. Under today’s rules in the US, with sell side analysts walled off from corporate finance revenues, trading volume for a mid-cap security is generally not robust enough to compensate the analyst community to maintain coverage. And, absent analytical coverage, shares tend to flutter down into the so called “orphanage.” Moreover, the $2 million or so added annual costs of complying with Sarbanes-Oxley, particularly Section 404, entails a significant drag on earnings for smaller companies. Finally, and this may be the single most important (and least heralded) fact, the U.K. Law Society does not allow for contingent fees … and entails a “loser pays” regime, all meaning that the humongous class actions brought by opportunistic (and hugely successful in terms of fees) plaintiffs’ counsel are not the threat to corporate managers (and often shareholders) that the same pose in the U.S.

The significance of the AIM’s emergence may be materially enhanced if NASDAQ is successful in its offer to acquire the London Stock Exchange. Thus, if the NASDAQ hitches up with the AIM, perhaps opening an integrated stock exchange which offers trading from 6:00 AM in London to 4:00 PM in New York, a powerful global facility could result. Assuming the AIM retains its point of view, and with enhanced and beefed up resources resulting from its alliance with NASDAQ, the global exchange could fill in a critical element in the global venture capital equation.

The short of the matter is that this writer does not ever recall, in his forty some odd years in the business, as much interest as exists today in spreading the US venture capital metric around the globe, particularly into emerging markets. In fact, a forthcoming book by me on venture capital … past, present and future … will feature the astonishing growth of professional interest in this event … migrating the Route 128/Silicon Valley phenomenon worldwide. Quoting a study of 300 institutional investors by the Emerging Markets Private Equity Association:[2]

65%of respondents expect to increase their commitments to emerging markets over the next five years, as a percent of total commitments (compared with 45% in EMPEA’s 2004 survey).

Those most likely to increase exposure are also currently the most active investors in emerging markets.”

The missing link, however, has been a lack of a global, NASDAQ-type market, with an open window to emerging growth companies domiciled, say, in Central Europe; the Mid-East; Asia and (hopefully some day … perhaps soon) Africa. Of course, “gazelles” (as VC-backed companies are called) can always enjoy a trade sale as a liquidity event; but an IPO with US characteristics, particularly as a “portfolio maker” for the investment fund backing the company, has not (with certain prominent exceptions) been realistic up to now (other than episodically) anywhere but on NASDAQ.

That said, with a NASDAQ/AIM alliance, such an exchange may be in the cards. The possibility exists that the regulators could get it right, opening up, for example (as the AIM claims it does), analytical coverage of all listed companies, so as to separate the wheat from the chaff, for the benefit of institutional investors by evaluating the shares and keep the deserving issuers away from the penny stock “orphanage.”[3] Moreover, the idea of saddling a responsible exchange member with obligations to police companies the member introduces to the exchange is solid, in my view, particularly when issuers from areas outside the mainstream are competing for investor attention.

All of this may be pie in the sky, of course; but a confluence of factors may, in fact, be at work … e.g., globalization, electronic trading platforms, with accompanying best pricing and enhanced transparency, heightened interest on the part of US and EU investors in emerging market profit opportunities, as emerging markets growth patterns robustly curve upward; stock exchanges converting to for-profit status, turning bureaucrats into owner/entrepreneurs and, hopefully, harmonization of international regulatory standards at rational levels, including accounting, transparency and best practices. All in all, an intriguing possibility.

Parenthetically, nature abhors a vacuum and, as we come up on the 200th anniversary of the 1812 war, the colonials in the U.S. are responding. Thus, the New York Stock Exchange, following its reverse merger with Archipelago, has introduced its own growth exchange, NYSE Arca. Again previewing Book 19 of The Encyclopedia, herewith, as a data point, the NYSE Arca Listing Standards for IPOs: [4] Minimum market capitalization: $100 MM and two of the following: $45 MM minimum offering; total assets > $75 MM; annual sales: > $50 MM; total equity: > $50 MM; EBITDA or pre-tax earnings: positive. And, as NYSE Arca gets its feet underneath it, the entire equation is squared if and as the New York Stock Exchange merges with EuroNext.

The short of the matter is that with robust new entrants … and global mergers … maybe the IPO window is at last opening for venture-backed companies. If so, three cheers! The remaining chore is to get Sarbanes-Oxley right … not to eviscerate the standard but to relieve companies, large and small, and their accountants from the costs of trivial, non-essential busy work which, like so many government reforms these days, give the appearance, and only the appearance, of intrepid tribunes of the people upholding shareholder rights. More on this issue shortly.


joe@vcexperts.com

[1] www.londonstockexchnge.com/aim

[2] www.empea.net

[3] NASDAQ does offer listed companies the opportunity themselves to fund a pool of three disinterested analysts ... but the cost ($100,000 annually) has apparently discouraged participants. There are commercial alternatives for less money. The listed company can specify what it wants to pay ... say, $50,000 ... and the firm will revert with a description of what that money buys. And, NYSE Arca is apt (I am informed) to offer a lower cost version as well.

[4] For a fuller picture go to http://www.nysearca.com.