AIM stocks worth £40bn make it to FTSE 100 and FTSE 250

There's been a lot of discussion about the failure of the UK stock market to finance the building up of large, world-class technology companies, including in the recent Tony Blair Institute paper. AIM is singled out as failing to provide the platform for these growth businesses.

Technology companies have generated investment by coming to AIM, but some have been taken over by private equity investors or larger technology companies. Others, of course, have run out of money, but there are always going to be technology companies that fall by the wayside because they are by their nature risky.

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Some pharma and technology companies, such as the first UK-quoted cannabis-based medicines developer GW Pharma, have moved from AIM to US listings rather than the Main Market. That is not AIM’s fault, because it gave them a start.

AIM has never been a market predominantly for technology companies. It has always been a more general market, and it has evolved over time. It is silly to expect it to be the Nasdaq, which has a much greater pool of informed technology investors. The successes of AIM are not always immediately apparent and can be missed.

One of the reasons for launching AIM was to provide an initial market for companies before moving on to the Main Market. Many companies have moved the other way because of the tax incentives and less-stringent red tape for deals, but more than 200 companies have switched from AIM to the Main Market – although some did return.

In September, Hiscox Ltd (LSE:HSX) became the fourth current constituent of the FTSE 100 index to have started out on AIM. The others are Entain (LSE:ENT), Melrose Industries (LSE:MRO) and UNITE Group (LSE:UTG).

There are also 17 former AIM companies in the FTSE 250 index. Building products supplier Tyman recently dropped out of the index after it was taken over by US-based Qannex Building Products for around £800 million in cash and shares. Tyman is the only company to have moved from AIM to the Main Market and then back to AIM before returning to the Main Market.

Some of those companies were not on AIM for long, but it gave them their start on the public markets. Many have grown via a range of acquisitions, while others are predominantly focused on organic growth.

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There are a wide range of sectors represented, although admittedly there is a lack of technology and pharma companies.

Even so, the total valuation of these companies, which does not include former AIM companies not in the FTSE 100 and FTSE 250, is nearly £39.6 billion – not including Dowlais Group (LSE:DWL), which was demerged from Melrose Industries and is in the FTSE 250. That is around 55% of the current market capitalisation of AIM. There are also examples of companies that were built up on AIM taken private and then joined the Main Market, such as Safestore Holdings Ordinary Shares (LSE:SAFE), which is also in the FTSE 250.

AIM'S contribution to FTSE 100 index

Source: London Stock Exchange, SharePad. Past performance is not a guide to future performance.

Insurance firm Hiscox was the 15th company to join AIM. Athelney Trust Ord (LSE:ATY) is the only older AIM company still quoted, although it also moved to the Main Market. Changes in the rules of Lloyd’s enabled Hiscox to become a corporate entity and join AIM.

Hiscox focuses on niche markets, such as flood, small business or kidnap and ransom insurance. According to its website, Hiscox has returned more than $1.5 billion to shareholders over the past decade.

Hiscox was initially headquartered in the UK and it redomiciled in Bermuda. The initial adjusted price on Sharepad.co.uk is 150.64p and it had risen to 200.85p by the time of the move to the Main Market two years later.

Melrose Industries started out as a shell company run by an experienced management team seeking engineering and industrial acquisitions. It did not stay on AIM for long and has made many acquisitions in the past two decades, the most significant of which was aerospace and automotive components manufacturer GKN.

Last year, Melrose Industries demerged Dowlais, which is effectively the GKN automotive business. Following a consolidation of three shares into one new Melrose Industries share, investors were issued with one Dowlais share for each share held. This enables it to concentrate on its core aerospace engineering business. Melrose Industries recently started a £250 million share buy back programme.

Prior to this, the revenues guidance for 2025 was cut from £4 billion to £3.8 billion, but management said the company could still meet the profit target of £573 million despite problems with the supply chain.  

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Entain started out as Gaming VC when it joined AIM two decades ago. The domicile was subsequently changed from Luxembourg to the Isle of Man. The name was changed to GVC Holdings, which became Entain at the end of 2020.

Again, acquisitions fuelled a lot of the increase in size. Entain has acquired Ladbrokes Coral and former AIM company Sportingbet, which was bought in partnership with William Hill. The initial share price was 420p. The online gaming sector was in fashion when the company floated and there was a subsequent downturn in the market when many rivals disappeared.

There have been a number of special dividends over the years including one of 41.96p a share in 2010. There have also been regular dividends since 2006, except for 2020 and 2021. Back in 2021 the share price was five times the initial level, but it has drifted downwards.  

Prior to Hiscox, student accommodation provider Unite Group was the oldest former AIM company to join the FTSE 100, because it floated in June 1999, and it stayed on AIM for less than one year.  

Unite was the earliest quoted entrant into the student accommodation development and investment market. Unite has continued to prosper even though the student accommodation market has been tougher in recent years. There is still an underlying shortage of student accommodation.

At the end of June 2024, net tangible assets were 969p a share. The loan to value had fallen to 26% following disposals. The total value of Unite’s portfolio is £5.75 billion. There is £1.5 billion of developments pipeline. Rental growth is expected to be 7% in the coming year.

All four companies have higher share prices since joining AIM, although the true performance of them is difficult to assess because of special dividends and the demerger of Dowlais from Melrose Industries.

AIM'S contribution to FTSE 250 index

Source: London Stock Exchange, SharePad. Past performance is not a guide to future performance.

There are similar difficulties in assessing the performance on FTSE 250. Adjustments have been made for bonus issues, etc. The performance in the table is impressive.

There is only one of the 17 AIM companies in the FTSE 250 where the share price has fallen since joining AIM. That is IP Group (LSE:IPO), which has itself spun off investments on AIM. There were periods of time when the share price was doing well, but investors do not currently favour the type of early stage technology company that IPO Group invests in and develops. That is also why the Molten Ventures Ord (LSE:GROW) share price has also fallen back since the move from AIM.

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One of the top five performers is animal breeding company Genus (LSE:GNS), which started off on Ofex/Aquis Stock Exchange before moving to AIM in 2000. Genus came out of the Milk Marketing Board and was focused on cattle until it acquired Sygen International, previously PIC International and before that Dalgety, for £189 million to diversify into the pig market. Two years later it moved to the Main Market.

The top performer is UK pizza franchisee Domino's Pizza Group (LSE:DOM), and this does not take account of the level of special and ordinary dividends paid. Admittedly, most of the share price growth had been achieved 10 years ago.

It is correct that AIM is not the ideal market to build up a major technology company like the ones that the Tony Blair Institute talks about in their paper. However, getting rid of AIM just because of that is not a good idea.

The London Stock Exchange has been trying to come up with ways to attract growing technology companies – techMARK and the High Growth Segment, for example – for decades.

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The High Growth Segment was supposed to be a way of attracting fast-growing companies. It was launched in 2013 and there have been a handful of entrants. Just Eat Takeaway.com NV (LSE:JET) was one of the first two companies and the other was Matomy Media, which cancelled its listing in 2020. PensionBee Group When Issue (LSE:PBEE) joined in 2021. The High Growth Segment was closed on 29 July.  

This market was equivalent to a listing and companies were not eligible for the tax breaks that are available to AIM companies because they are deemed to be unlisted. Any replacement for AIM could not be part of the Main Market and retain the tax breaks, if they are still available after the Budget.

The main problem is the lack of the correct type of investor for the technology companies that could become global giants. It requires a patient investor willing to continually put more cash into the business. Many of these companies would be better off not being quoted on AIM too early in their development.

Getting rid of AIM, though, would not help the companies in other sectors. The junior market is in the doldrums, but it is not surprising given that there have been tough economic conditions and the uncertainties around the tax regime.

Andrew Hore is a freelance contributor and not a direct employee of interactive investor.