Little respite from dearth of small company research (Financial Times)
By David Blackwell
Published: June 9 2006
The lack of research into small companies is a long-standing problem.
A survey of institutional investor attitudes towards Aim suggests the situation is getting worse as companies continue to flood on to the junior market.
A survey - from Financial Village and sponsored by Arbuthnot Securities - finds 48 per cent of respondents describing coverage after an initial public offering as only "adequate", down from 54 per cent 12 months ago. More worrying still, 43 per cent regard coverage as plain "poor", up from 24 per cent last year.
The findings tie in with an underlying sense of unease that the market is being driven by quantity rather than quality. The stock exchange is sensitive to such criticism and has already tightened up the admission procedures for cash shells and introduced specific guidance for oil, gas and mining companies intended to ensure investors are properly informed.
There is more to come. The Aim Advisory Group met yesterday to discuss ways of beefing up the monitoring of nomads, the nominated advisers responsible for taking new companies on to the market and providing continued guidance afterwards.
In the foreword to the survey, Aim chief Martin Graham admits that the difficulties of balancing high standards and a regulatory structure appropriate to the needs of a market for growth companies.
"Of particular interest is the capacity within the community to deal with the large number of applications to come to market and the ability to maintain a close relationship with those companies," he writes. "While we wish to nurture Aim's appeal as a lightly regulated market, it is essential that all parties within it acquit their regulatory responsibilities."
Mr Graham will be speaking further at the stock exchange's Aim conference on Monday, when one of the morning sessions will give a regulatory update.
However, at least another month will pass before the exchange publishes a consultation document on possible action, so it will be late summer before the new code takes effect.
Meanwhile, investors remain keen to back Aim companies. The survey, published today, includes replies from 40 leading institutional investors, VCT funds, hedge funds and private banks - and 62 per cent will be investing more in Aim this year. This is despite the fact that 38 per cent were disappointed by the share price performance after flotation while only 35 per cent were pleased.
One possible reason is that there is so little competition. It is a surprise to find that as many as 30 per cent of respondents to the survey trade on Ofex and that 16 per cent see it as a viable alternative to Aim. And, to quote the survey, "there are still no credible alternative small company markets in Europe, Sarbanes-Oxley legislation in the US has made listing there prohibitively expensive for many growth companies and other international exchanges are still at a fledgling stage".
But back to the subject of research. The institutional investors would like to see three analysts covering companies once they have floated. But such plentiful coverage is only likely once a company has a market capitalisation of £100m and there are fewer than 200 of that size on the market.
All of this is good news for the providers of research commissioned or sponsored by companies themselves. The survey found that 70 per cent of institutions believe this type of research adds value and another 8 per cent said it adds considerable value.
Which is just as well - because it is all investors will get until they are prepared to pay for it themselves.
