A Sharp AIM

Like many 5-year-olds, California’s Vycon corporation is going through a growth spurt. A developer of mechanical energy-storage devices (essentially batteries made of flywheels rather than chemicals), the firm is beefing up production of some of its gadgets tenfold this year to quench demand. To pay for such expansion, Vycon’s executives decided to sell shares to the public. Too tiny to trade on New York City’s NASDAQ, the company focused instead on another market catering to ambitious upstarts like Vycon. London’s Alternative Investment Market (AIM) was a “global market for small companies,” says Vycon president and CEO Tony Aoun, which would “put the company in a good light.” When the business listed on AIM in March, investors poured in $18 million, fulfilling Vycon’s best hopes.

London’s dramatic renaissance as perhaps the world’s leading financial center has been a well-documented phenomenon in recent years. But relatively little attention has been paid to just how important AIM has been to that resurgence. Launched by the London Stock Exchange (LSE) in 1995, AIM now lists more than 1,600 companies, five times the number of a decade ago. Turnover in its shares hit $114 billion in 2006, some way from the $3.8 billion bartered in its first full year. AIM attracted 198 initial public offerings last year, four times the number on the LSE’s main market, and considerably more than on the New York Stock Exchange (NYSE) or NASDAQ.

AIM offers companies seeking capital a chance to dip into London’s deep investor pool under lighter regulations than those on competing markets. That’s got U.S. rivals in a spin. As overseas firms bypass New York to trade on AIM — which now lists more than 300 foreign companies, one-fifth of them from the U.S. — it has faced accusations of lax standards. In January, NYSE CEO John Thain claimed AIM “did not have any standards at all, and anyone could list.” A month later, Roel Campos, a commissioner at the U.S. Securities and Exchange Commission, the stock-market regulator, branded AIM a “casino,” with 30% of new firms “gone in a year.” (He later said his remarks had been taken out of context.) To the LSE, such talk is just sour grapes. U.S. markets should accept that “the flow of capital is global and will seek out the most efficient and effective market places,” Clara Furse, the exchange’s chief, wrote in the Financial Times in late March.

AIM’s way of vetting companies is hardly traditional. To float on the LSE’s main market, a company normally needs a three-year business record, a minimum market cap and shareholder approval for big acquisitions or disposals; NASDAQ and NYSE have similar hurdles. But AIM’s quality control is outsourced to 85 so-called Nominated Advisers, or Nomads. Generally accounting firms or financial management companies, Nomads scrutinize a firm’s executive staff, business model and performance before deciding whether it can list. To a degree, NYSE’s Thain is right: AIM has very few prescriptive requirements for listing — the Nomad’s own judgment is key.

Since the Nomad’s fees are paid for by the company wanting to be listed, it might seem AIM is built on a giant conflict of interest, but Nomads counter that traditional auditors and accountants are company-paid, too. In practice, says Philip Secrett, a partner at Grant Thornton Corporate Finance, one of the largest Nomads, only a “small minority” progress onto AIM; most are turned away for being too immature or unsound. And there is AIM’s track record: around 3% of AIM-listed companies fail annually, a figure roughly comparable with the main market.

AIM’s advocates also say it strengthens regulations when warranted. Ernst & Young’s index of AIM’s oil and gas companies — around 7% of AIM’s list — slid by 6% in 2006, a lingering reverberation from a series of shock announcements from energy firms that their reserves were dry. Last year the LSE began requesting such firms submit independent annual reports on their reserves.

But across other AIM sectors, assessing overseas businesses from London can be like drilling for oil with a blindfold. That risk is particularly acute in emerging-markets companies. “The best way to test for integrity is to ask around,” says Simon Cawkwell, an independent trader who’s invested millions in AIM since its launch. But, he adds, “You can’t ask around in China.”

Still, many AIM participants say only so much risk can be regulated out of the system. AIM is “still a stock picker’s market,” says Nick Bayley, head of trading services at the LSE. “This isn’t a market for widows and orphans.” Investors prepared to do their homework are bullish. “The prospects for AIM look as good or better than they’ve ever looked,” says Patrick Evershed, a fund manager at New Star Asset Management in London. Vycon’s Aoun encourages firms to consider AIM, but with a caveat. “This is no minor undertaking,” he says. “Be ready for some serious work.” After all, growing up is hard to do.