The performance of new AIM listings – if investors can access them

In the past three years, new AIM admissions have had a 12% first-day premium.

One recurring topic for smaller investors is the lack of access to new entrants to the stock market.

Institutions and favoured clients can obtain shares in new admissions, but it is more difficult for the wider investing public.

In the past three years, new AIM admissions have gone to an average first day premium of more than 12%, and there would be additional costs on top of that. So, small investors are paying substantially more just for the opportunity of being involved with a company from the start of its journey as a quoted business.

There is no guarantee that any investment will prove profitable even if shares are acquired in a placing. Adding a significant premium to the initial price reduces that profit potential, though.

Interactive investor chief executive Richard Wilson was one of the signatories of a recent open letter from the three biggest UK trading platforms to the Economic Secretary to the Treasury and City Minister John Glen, arguing for more private investor participation in UK initial public offerings (IPOs).

The signatories believe that they have the platforms to enable small investors to subscribe for shares in IPOs efficiently and with no additional cost to the issuer.

They estimate that in the three years to October 2020, 93% of IPOs did not provide the opportunity for smaller investors to participate.

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The examples used in the argument were larger listed companies that have floated recently, such as Dr. Martens (LSE:DOCS) and Moonpig (LSE:MOON). It can be even more difficult to get a chance to invest in AIM flotations, though. There is probably a greater participation in some of the micro company issues by smaller investors, but they are clients of the broker bringing the company to the junior market. Other investors find it difficult to participate.

One of the problems in the past when there have been attempts to widen the distribution of new issues – Web Shareshop Holdings, which itself floated on AIM in September 2020, for example – is that smaller investors tended to get offered the opportunities that the institutions did not fancy.

For most investors, the only way to gain exposure to new AIM admissions is to buy them in the aftermarket. This can push up the share price and mean that the entry price is much higher than for the investors in the original fundraising. A rush to buy immediately can also push up the share price, which then slips back over subsequent days and weeks.

Most of the new companies have significant share trading volumes on the first day. Even when the volumes are not high, they tend to drop in the subsequent days. This suggests that many interested investors are trying to buy the shares at the first opportunity.

Looking at the AIM new entrants since the beginning of 2018, excluding introductions and reverse takeovers of existing AIM-quoted companies, there are some significant share price premiums on the first day of trading.

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Out of the sample of 70 companies that have floated on AIM there were three that opened trading at a discount to their flotation price and one other opened at the flotation price. Eight ended the first day of trading below their flotation price and another three were unchanged from their initial share price. Five out of the eight that ended the day lower did go to a premium during the day, as did all three that were unchanged.

The largest discount was for estate agency platform operator OnTheMarket (LSE:OTMP), which ended the first day 10.3% lower than the placing price. OnTheMarket already had a broader shareholder base than many new AIM companies because it was built up by issuing shares to estate agencies participating in the platform. Even so, there was limited trading volumes on the day.

Another company that went to a small discount on the first day was Renalytix AI (LSE:RENX), which was spun out of EKF Diagnostics (LSE:EKF). EKF shareholders were distributed shares in Renalytix AI and were given the chance to invest in Renalytix AI so there was a better chance of participating in the flotation, although that did depend on owning EKF shares at the appropriate time. Renalytix AI became one of the best performing new AIM admissions in the past few years and it has gone on to gain a Nasdaq listing.

However, when Verici Dx (LSE:VRCI) was spun out of Renalytix AI the parent company’s shareholders were again distributed a pro rata stake by the holding company and given the chance to participate in a restricted offer, but the share price still went to a 82.5% premium on the first day. The higher profile of Renalytix AI probably boosted interest in the latest spin-off.

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Five out of the eight companies that went to a discount have gone to premiums since then. That includes Renalytix AI where the share price is seven times the level it was in November 2018.

The four largest premiums have been generated by companies floating in the past four months. That is probably due to the strength of the market and does not necessarily mean that the share price performance will continue to be good.

FRP Advisory (LSE:FRP) and Inspecs (LSE:SPEC) floated one year ago when the market was in the middle of a slump. Both share prices were unchanged on the first day, but they subsequently performed strongly.

It appears strange that one of the highest first-day premiums was for bar operator Nightcap (LSE:NGHT), where private investors had a chance to participate via PrimaryBid. The premium was 40% and the share price closed at its high. There was limited trading in the shares and the total deals were probably worth around £70,000. There was £4 million raised in the placing and PrimaryBid offer, and that gave Nightcap a flotation valuation of £13.5 million.

The share price has subsequently more than doubled and trading volumes did increase during the first month, although the highest value for one day’s trading was probably less than £500,000.

Another bars operator, Various Eateries (LSE:VARE), floated last September and started at a discount. However, the share price has soared this month as the prospects for pubs and bars start to appear brighter. 

There were 28 companies that ended trading at their high for the day. So, the majority of the share price premiums were higher during the day. Helium One (LSE:HE1) reversed into a shell that lost its AIM quotation just before the reversal happened. At one point the share price more than doubled, but it ended the first day 49.6% ahead. In the first five days on AIM, nearly one-third of the company’s share capital was traded and the share price nearly trebled.

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Average premium

The average premium on the first day of trading is 12.1%. If the eight companies where the share price declined are excluded the figure increases to 13.1%.

Remember that the prices used are mid-prices. There will be a bid/offer spread for the share price so the buying price will be even higher. For example, Nightcap has a bid/offer spread of 28p/31p. It is difficult to assess where the spread would have been for a similar percentage size on the first day of trading, but the premium would undoubtedly have been higher using the offer price.

Even if the spread were only 1p, that would add a further 5% premium to the first day of trading. In some cases, it would be much more than that. Adding in dealing costs, even without stamp duty on AIM share trading, the average first day premium could be nearer 20%.

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It is good to have a premium on the first day and to attract share trading, but this is an enormous charge for buying shares in newly quoted companies. There will be other investors that would have bought the shares but don’t bother to do so, and those are potential investors lost to a company.

It would be a good thing to give all investors an opportunity to invest at the time of a flotation instead of having to invest in the market. The technology is certainly available for this to be done in a way which would not be a large cost to the companies.

Aquis Stock Exchange insists that all new companies issue a growth prospectus and provide the opportunity for wider ownership when they join the Apex segment. An investor can apply for shares through any broker that is signed up to the market.

Smaller investors help to create liquidity for shares, but the percentage of shares held by individuals has declined over the decades. Giving access to flotations would at least be an attempt to reduce that decline or even turn it around.