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AIM IPOs have ground to a halt, but there’s still money out there for London’s small-caps

Last updated: 12:00 16 Feb 2019 GMT, First published: 14:46 15 Feb 2019 GMT

London
It’s not just in the UK, there haven’t been many IPOs around the world in recent months

Initial public offerings (IPOs) on London’s junior market have all but dried up in recent months as the UK heads towards the cliff edge that is Brexit.

While most businesses are understandably reluctant to nail their Union Jacks or European flags to the mast, many have grown frustrated at the lack of clarity offered by Prime Minister Theresa May and co, despite the deadline being only weeks away.

That uncertainty has filtered down to AIM – the home of almost 1,000 small-cap UK stocks.

New IPOs have been few and far between over the past six months, with only ten companies joining the AIM ranks since July. That compares with 30 in the six months before.

READ: Brexit uncertainty hitting deal flow, warns Numis

Typically, when a company comes to market, it will look to raise money as part of the process. That could be a cash injection for the firm itself or a way for existing shareholders to sell down their stakes.

It is the job of brokers to find out what the demand is like for a new issue and who is willing to put their hand in their pocket.

The brokers are the ones who are paid, often handsomely so, to tap institutions and wealthy individuals and raise money on behalf of businesses.

As such, the slowdown has taken its toll, particularly on many of the City’s small cap brokers for whom fees from piloting new issues are a handy source of income.

“The fundraising environment was really awful in November and December,” explains Stuart Andrews, head of corporate at broker, finnCap.

“All of the brokers were saying that life had been tough and that there was not a lot going around in terms of corporate transactions. We certainly saw risk appetite disappear completely.”

Even Numis Securities, which helped struggling construction firm Kier Group bring in £250mln back in December, said earlier this month that the market backdrop has been “particularly challenging”.

Few IPOs in the pipeline

There doesn’t appear to be much work on the horizon either. No IPOs are planned on the junior market for the foreseeable future, although Digitalbox is looking to raise £1mln as part of its reverse takeover of cash shell Polemos. Leander Capital is the lucky one to have bagged that.

AJ Bell investment director Russ Mould thinks the chances of the gloom lifting over the next six weeks or so are “pretty slim”, something echoed by Peel Hunt’s head of UK IPO origination, Indy Bhattacharyya.

“I don’t think anyone is going to sit here and say the first quarter of 2019 into Brexit is going to be the most fertile period of their career,” said Bhattacharyya.

“I think most people’s IPO timelines are shifting out into the second quarter and possibly into the second half for obvious reasons.”

Even secondary issues – where listed companies raise fresh capital through a placing or rights issue, for example – have slowed.

Last month, AIM companies squeezed £101.3mln out of investors, well below the long-term monthly average of around £300mln.

Global issues weighing on sentiment

Brexit is undoubtedly playing a part in this slowdown, but those in the City point to economic and political issues around the globe.

US and China, two of the world’s economic superpowers, are arguing with one another about trade tariffs, while the latter, China, is starting to show signs of a slowdown after years of strong growth.

On top of that, Germany, the biggest economy in Europe, has just, by the skin of its teeth, managed to avoid a recession.

All of this is weighing on sentiment, even in January, a time of year when many companies start to flirt with investors in anticipation of listing shortly after.

“UK IPOs have been scarce this year,” admits Bhattacharyya. “But, actually, how many US IPOs have there been? How many German IPOs have there been? How many French IPOs have there been?”

“It’s very scarce everywhere.”

finnCap’s Andrews agrees: “The UK stock market is not being dominated by Brexit … which, on a global scale, is just a weird regional issue.”

For the right investment, money is still available

But while investors might be exercising more caution given the current geopolitical and economic climate, brokers are adamant that money is still there for the right investment.

Andrews says he and his team sat down after the Christmas break and were unsure what was going to happen this year given the sharp sell-off in equities in the final quarter of 2018.

“But we put out Altitude Group in the first week of January and they were looking for £7mln to start with and we suddenly saw financing available from good quality, blue-chip institutions. To us, that became a real bellwether.”

finnCap managed to get in £9mln for Altitude Group PLC (LON:ALT), and it has gone on to tap the market for Anglo African Oil & Gas PLC (LON:AAOG), SRT Marine Systems PLC (LON:SRT) and Hardide Plc (LON:HDD) in recent weeks.

“None of those were massive fundraisings, but what they do show is that the market is not shut and that for the right companies with the right story, the institutions have money.”

The past few weeks has seen a rise in the number of big-ticket placings, too: Blue Prism Group plc (LON:PRSM) knocked out a £100mln placing at the end of January, as did tech investor Draper Esprit PLC (LON:GROW), while GB Group PLC (LON:GBG) raised £160mln only last week.

The Blue Prism and Draper deals will count towards February’s total as the new shares weren’t formally issued until a couple of weeks after.

Don’t believe the naysayers

“The assumption that the UK is shut is wrong,” says Bhattacharyya. “There are deals going on and money being raised.”

Mould and Andrews are of the same opinion that, while things aren’t easy, companies in need of investment can still find it.

“Is it true to say that raising money is like falling off a log and everything is fine and dandy?” asks Andrews. “No. Is it all doom and gloom and no one can raise money for anything? Also no.”

“It’s not easy, but it’s perfectly possible. What we’re not hearing is that the institutions are lacking cash or that there’s not enough money in the market.”

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