The Alternative Investment Market (AIM), the junior market of London Stock Exchange, saw the lowest level of fund-raising last year in its 15-year history. This was pretty much in line with the state of IPO markets all over the world. Marcus Studdard, who was appointed as the head of AIM in April last year, had a busy time last year as “there was much to be handled at home itself.” The exchange saw a lot of action from Indian companies across sectors – real estate, media and commodities – but shareholder activism appears to have played a spoiler. In an interview with VCCircle, Studdard who was recently on a roadshow to India, an economy that is registering positive growths and is attractive to AIM, he talks about investor appetite and concerns on shareholder activism. Excerpts:-
How important is India as a market?
Indian companies registered a 212% increase ( in the price – performance index) last year in 2009. We are essentially here to understand the performance of the promoters and build the future pipeline. We did see a couple of fund raisings last year. In 2008, 18% of the fund-raising at AIM was by Indian companies. That aligned with the performance indices of the Indian companies this year demonstrates a healthy investor appetite. We see a lot of corporate interest and we expect to see a lot of fund-raising by Indian companies at AIM.
What are you making out of the pipeline here?
A lot of trends that we see globally apply here too. One of the important side effects of the financial crisis is that for a certain type of sectors, particularly technology, debt finance isn’t just appropriate. And for these small and mid-cap technology companies, raising equity has always been a difficult proposition. For companies who have international aspirations and look to raise equity, AIM serves the purpose well. We saw a lot of real estate, media and tech companies tapping AIM in the previous boom.
What are the unique features of AIM?
One of the key strengths of AIM (as compared to other growth markets) is that we have never designed it in such a way that there is a specific sector or jurisdiction focus. We focus on a very wide range of sectors and a very strong critical mass. During the dotcom bust, a lot of markets fell as they were dominated by technology. In any business cycle, there will always be a certain sectors in which AIM has had prominence–energy, commodities and real estate–and that makes us stronger as we enter into our next phase of development.
We conducted a review of AIM regulation at the end of 2006 not that we had any regulatory failures but just to sustain our brand building in a very fast growing environment. We got corporate finance houses or investment bankers called the Nominated Advisors (Nomads) on to the corporates being listed on our markets. These nominated advisors have to work with those corporate, look after their finances, due diligence and are held responsible for all their admission documents. So, before any companies get listed on the AIM, these institutional investors look at the track record of the corporates. So, it’s the Nomads reputation that is at risk.
Besides, a new rule book got designed in 2007 which dealt with the best practises of due diligence and corporate governance We maintain a balance that companies have access to capital at reasonable cost and investor protection. AIM companies were able to raise 5.5 billion pounds last year. This shows that investors believe in the practises and some of the regulatory standards that we follow.
What is the perception about AIM here? From a valuation perspective, how enticing is it for a corporate to look at AIM?
The perception of AIM is strong. We have a critical mass of sectors and a long-term institutional investor base for small and mid-cap companies. We find that, with companies looking to raise between $50 million and $150 million, valuation has been higher compared to other growth markets in the world. We just don’t have generalist funds but funds specialising in small and mid cap companies, and the infrastructure around these funds is such that the investor focus, valuation statistics, and liquidity event are all driven by their peer large companies. ( he meant that they are seen in groups with peer companies and become more visible that ways). Promoters should not be thinking about valuation from day one but long-term progression in valuation.
Corporates today have a lot to access to private equity money. How does that compare with raising funds on the AIM?
AIM will not pitch against private equity or the domestic markets. For certain types of companies, AIM may be a more appropriate mode of fund raising. But companies, that have international aspirations, have had previous rounds of finance and now want to look up to equity markets should look at AIM. They have a lot of spinoff benefits at AIM. From what I hear, a lot of technology companies, when they got raised, they stood to benefit as a lot of their performance gets rated or analyzed against the performance of a peer large public equity company which helps them get supply contracts, projects and become much more visible. This gives the company a confidence than just looking inward and relying on PE finance. There are other benefits like incentivising the key staff.
What are the sectors in India which are attracting the interest of institutional investors?
What we are expecting to see in business cycles is that more established companies are looking at an IPO. The investors are looking at much more certainty than they were in 2006-07, probably at slightly more mature companies. Technology and cleantech seem to be coming back. But, infrastructure continues to be a very strong story as international institutions have a clear understanding that there is a significant growth here and are looking at exposure there.
There has been a lot of news about shareholder activism in Indian companies listed at AIM (Hirco, KSK and Trikona)? How do you address this perception?
I don’t think it’s a wider issue but just related to specific companies. The kind of shareholder activism seen at AIM companies is no different from strategic private equity finance be it the expulsion of the directors or hiring new board members. You got to expect this anywhere. But the major lesson learnt here is that companies need to understand that the day they are listed they are public companies with external shareholders. The last thing that an investor wants is a surprise, good or bad. Investors need to be sure that they are in investee companies where they can trust the management teams. Companies need to think about their investor relations and communication and the need to maintain constant dialogue with their investors. These investors, by virtue of them being long term public equity investors, are much more knowledgeable than private investors who look at capital appreciation in a short term. They don’t really want to manifest themselves into shareholder activism.
How long-term are these institutional investors?
The institutional investors tend to take a long-term view. Valuations that we saw in the recent past were not really because of shareholder withdrawal but because these long term institutional investors were holding on to the companies that they have invested in. In the last 18 months, the core investors have stayed with the core team, more often than not. Markets globally are adjusting to new sense of realities. Any company preparing for an IPO or coming to the markets now should really think about how they want to do their investor communication.