Like his counterparts in every other industry sector, Marcus Stuttard has watched with horror as the credit crunch has slowly, yet inevitably, consumed his business.
What he would give to turn the clock back 12 months. As deputy head of London’s junior exchange, the Alternative Investment Market (or Aim), Stuttard was fielding the plaudits one year ago. The exchange could then boast a peak of more than 1,700 companies quoted and was the world’s largest market for small and mid-sized companies seeking equity finance.
A successful combination of tax incentives, a flexible philosophy on regulation, a thin rulebook and a unique market structure for the time made Aim the envy of the world since its launch in 1995 – a number of subsequent imitations confirming the point.
But since January 2008, the news has been less positive: Aim recorded 262 new issues last year, compared with 395 in 2007. And the number of companies quoted is now down to around 1,540.
Some companies, such as UK steam cleaning equipment maker Proventec, delisted from Aim due to shareholder concern over a lack of liquidity. It has since listed its shares on NYSE Euronext’s junior market, Alternext. And even in the last few weeks, several companies have appointed administrators, including restaurant group FishWorks. Other high-profile drop-outs include Oakdene Homes and The Real Hotel Group.
Acknowledging the fall-offs in new issues, Stuttard emphasises that some 60% of Aim business in 2007 was raised on the secondary market and that this jumped to 75% – or approx £4 billion – in 2008.
“This is a huge amount for smaller capitalised companies and far exceeds figures recorded by Nasdaq during the same timeframe,” he says. “Lots of other growth markets around the world are domestically focused and IPO focused. On Aim, companies have smaller shareholder registers with institutional investors holding larger proportions of the companies, which is critically important.”
Stuttard adds that some 80% of all Aim shares are held by knowledgeable professional investors. “Investors are clearly buying very conservatively at the moment and across all asset classes. “Investors are clearly buying very conservatively at the moment and across all asset classes, which is affecting the IPO market. But we are equally concerned with ensuring that the market supports our current clients and their access to capital.”
The rules
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 Marcus Stuttard |
With this in mind, it has come as something of a public relations blessing for the London Stock Exchange (LSE) and the Tokyo Stock Exchange (TSE) to be able to jointly announce the rulebook for their new growth market.
The new market, with the confirmed name of Tokyo Aim, will provide a new funding option for growing companies in Japan and Asia. It aims to provide them with access to a capital market specifically tailored for their needs and a wider investor base, while creating new investment opportunities for Japanese and international professional investors.
The rulebook, which is subject to public comment and was developed following extensive discussion with market participants, sets out the regulations for securities on the market as well as the rules for Nominated Advisers (J-Nomads).
Adopting the Aim regulatory framework, the J-Nomad system will be central to the regulation of Tokyo Aim. J-Nomads will be selected and approved by the new exchange and will be required to assess companies’ suitability for the market both prior to admission and on an ongoing basis, guiding them in meeting their obligations as public companies.
One criticism of Aim’s Nomad system is that they have too much responsibility when it comes to helping companies list? Stuttard disagrees: “Nomads are absolutely core to Aim as they constantly check companies’ suitability for being on market and whether they are keeping up with disclosure requirements. The Nomad model helps very significantly and the vetting of the Nomads will be very stringent.”
He adds: “We’ve already spent time with some of the players who we would like to have as Nomads. And we’ve had a lot of support, though some have been waiting to see the detail in the rulebook.”
The latest version of the UK Nomad rulebook was published in February 2007. In many ways it sought to codify best practice and Stuttard says the rulebook for J-Nomads will be similar in many respects – though not all.
“There will be differences with recruitment,” he says. “For example, in the UK we ask for Aim transactional experience. Clearly we can’t ask for that in Japan so we’ll be looking for broader but similar transactional experience. We’ll also be looking for things such as familiarity with public documents, and bringing companies to market.”
Flexible friend
In addition to the support provided by the J-Nomad system, Tokyo Aim says it will provide companies with: a choice of either Japanese or English for the disclosure of information; the use of International Accounting Standards and US GAAP, in addition to Japanese GAAP; and the potential to reduce costs as a result of a principles-based regulatory approach that does not demand compliance with J-SOX or the filing of quarterly accounts.
It is Aim’s regulatory approach that has often caused the most controversy and is frequently misunderstood, at least by some, says Stuttard.
Part of the explanation for Aim’s impressive growth since the early 2000s has been attributed to China’s evolving regulatory requirements and the introduction of Sarbanes-Oxley in the US. The secondary exchange’s more flexible approach to regulation – with no minimum requirements in areas such as company size, track record, number of shares in public hands or market capitalisation – appeared to be a key asset.
“If anything it’s over-sold and not by us,” says Stuttard. Sarbanes-Oxley was a catalyst for some of the first US companies looking outside of their home market. But the public-equity-capital ratio of many of the companies listed on Aim was good enough for them to list in the US or China.”
He adds: “The network around Aim is the key sell. For example, the Nomads, bankers, PR firms, lawyers, accountants – and for international companies it is important to be rated alongside their international peers.”
And what of the charge that Aim’s non-prescriptive approach to corporate governance obligations often makes it difficult for companies to interpret and apply in line with their duties?
“Those comments quite often come from people outside the UK,” responds Stuttard. “Any market lives and thrives on its reputation. So we have to jealously guard this. Aim rules are written in plain English because we want directors of these smaller businesses to know what we require of them.”
He says that Aim’s strong foundations are due to its institutional pool of capital and its broad church of industry sectors. “But the level of disclosure is broadly similar to the main market,” he adds.
“In the UK we have market-driven regulation, and established standards, such as the Combined Code which is a very good benchmark for best practice. And one of the things I hear from Aim companies is that they win contracts as a result of their listing because their admission to Aim provides confidence.”
In June 2007, the LSE acquired Milan’s Borsa Italiana for £1.1 billion. This followed the NYSE buying Euronext, which controls the stock markets of Paris, Amsterdam, Brussels and Lisbon.
Aim Italia has a very similar rulebook to Aim in the UK and Stuttard says that, in the same vein, the Japanese model will take the key Aim concepts and tailor them to the local market.
“We’re trying to replicate this European network in Asia,” he says. “There will always be Japanese and Asian companies with international operations wanting to list on Aim. But there will be a wider group of companies that will want to stay in their local time zone. And some of these companies might want local advisers. So it’s very complementary to Aim.”
Together with a regional office in Hong Kong, Aim’s involvement in Tokyo Aim – in which it has made an initial cash subscription of ¥98 million (approx US$1.1 million on date of subscription) for its 49% interest in the Japanese-incorporated company – raises its profile in the region.
In addition to the acquisition of Borsa Italiana, it also diversifies its business model at a time when traditional revenue streams seem vulnerable. “We’ll always look for opportunities and we have to take a very commercial approach to that,” says Stuttard.
“Together with the Tokyo Stock Exchange, we have looked at opportunities that we could explore together and explained to policy-makers as to why we feel our model works.”
Tokyo Aim only became possible following revision of the Japanese Financial Instruments and Exchange Act, which was passed in June last year. Although initially scheduled for late 2008, and then early 2009, it is now anticipated that the new bourse will launch by the middle of this year – subject to the granting of a license by the Financial Services Agency of Japan.
Stuttard says the new exchange is for professionals only, but that there will be key components that will differ from the other Japanese junior exchanges.
“It must cater for both issuers and investors. By that I mean there must be a high level of disclosure but it should not be too burdensome for companies. We expect that some of the companies interested in coming to the new market will already be clients of the TSE.”