The raw numbers continue to impress: 130 IPOs on AIM in the first half of 2006 vs 48 on NASDAQ, as reported by fellow VC blogger Shantanu Bhagwat of Amadeus. But this comparison tells only part of the story. The volume numbers are misleading: the average AIM company is far smaller than a NASDAQ company (median revenues of $11m vs $95m), and the listing criteria are more lax for companies going out on AIM.
We have been studying AIM IPOs for years to determine whether they are a viable exit alternative for our European portfolio companies. The answer has so far been: not really; although heavy US regulations like Sarbanes-Oxley are certainly making the relative comparison more attractive (as reported earlier here).
Now M&A boutique Innovation Advisers has published new research tracking the performance of AIM-listed companies over time. It's perhaps not surprising that such research would be done by a US investment bank, and not a European one...
"AIM companies don't age well," says Eric Gebaide, the Innovation managing director who spearheaded the study. "Bankers tell you that the AIM welcomes small companies and that you are going to become public more easily and cheaply than on Nasdaq, but what they don't tell you is that two years after going public, your stock is likely to be worth less than half of its IPO price."
The numbers confirm our earlier anecdotal view on the market. Over time most AIM companies tend to underperform, both in absolute terms and in comparison to their peers. The study found that 2 years after IPO, AIM companies on average traded 57% below their IPO price (vs up 12% on NASDAQ), by year three the performance was -65% vs -26% on NASDAQ. Here it is in pictures (thanks Eric):
The implication is that only a small minority of AIM companies are equity success stories long-term. It's worthwhile to think hard about what makes those few successful. Many AIM floats feel like companies that have run out of ideas.
Companies that are able to sustain their "equity story" long term are the ones that thought of AIM not as an exit but rather as a way to raise capital for a clearly defined growth plan (be it organic or through acquisitions). I think AIM can be very effective for this kind of play, but the risks to companies that float without a 24-month growth plan are significant. And since most investors are locked up in their AIM shares for at least 12 months post-IPO, it is in their interest to help shape this plan. Something to think about.