* Number of listed companies down 11 percent
* Stronger valuations fail to arrest WItrend
* Almost half delistings are sub-3 million sterling market cap
By Brian Gorman
LONDON, Dec 6 (Reuters) - Investors in the British smallcap arena should go for firms listed on the main London Stock Exchange because London's junior AIM market is beset by delistings and poor performance.
Delistings are outnumbering new players on the Alternative Investment Market (AIM). The number of companies fell to 1,204 at the end of the third quarter, compared with 1,353 a year earlier, down 11 percent. This compares with a drop of just 2.2 percent for London's main market, or official list.
Delistings since 2008 total 705, and although Initial Public Offerings have picked up and are set to double in number in 2010, this is off a low base.
"Until (recently), the performance has been appalling," said David Stormont, fund manager at Hermes Investment Management. The AIM All-Share Index index has lost more than 14 percent in the past five years, compared with a 4 percent loss for the FTSE Small Caps and the FTSE 100's gain of more than 3 percent. The gap has narrowed this year, with AIM up 20 percent against the FTSE 100's 5 percent.
Illiquidity, a perennial problem for investors in smaller companies, is exacerbated by delistings, leaving investors holding shares they cannot easily trade.
A "tail" of further companies is now likely to delist, according to Chilton Taylor, head of capital markets at Baker Tilly, a Nominated Adviser, or "NOMAD" for AIM firms. Some have only delayed the decision because they are reluctant to write off the listing costs, which can range up to hundred thousands of pounds.
"Companies can decide it's not worth the expense and delist. But it shouldn't be just a knee-jerk reaction," Taylor said.
"They think 'we could delist now and save 120,000 (pounds) a year in non-execs (fees to directors)'. But it's going to cost them 500,000 to get back on."
In the nine months to end-September, AIM saw 16 IPOs, up from 13 for all of 2009, but far short of the 335, 278 and 182 IPOs completed in 2005, 2006 and 2007 respectively.
It will take "a little while" for the AIM IPO market to return, said Taylor. "It's totally driven by the appetite of institutions. At the moment it's got to be a really good company. At times in the boom, institutions were prepared to throw money at any company."
Philip Secrett, international director of capital markets at Grant Thornton, said: "There's still a lot of caution" after the credit crisis of 2008 and 2009.
The caution adds to other, long-standing headwinds that AIM faces.
Some funds, such as pension funds, do not invest in AIM firms because they see them as higher-risk, with fewer disclosure requirements and less trading history required for admission.
The flip side of this coin has been lower initial costs and easier admission for IPO companies. But this plus point is being eroded. Data from accountants UHY Hacker Young shows AIM IPO costs now at 7.2 percent of all funds raised, up from just over 6 percent five years ago. This is because NOMADS are stepping up their due diligence, worried about regulatory retribution if the IPO goes wrong.
This makes it more likely that companies will either go straight to the main list, or not list at all.
INDEX INCLUSION
Companies on the main list can qualify for the small cap index with a market cap of more than about 85 million pounds.
This makes it easier for main-listed companies to attract the attention of certain fund mangers, a major advantage at a time of risk aversion. "Two or three years ago you would probably go to the main market rather than AIM if you had a market cap of over 500 million pounds and you wanted to widen the investor base. Now 100 million would be more of an appropriate cutoff," said Taylor.
Online gaming firm Sportingbet, with a market cap of 300 million, made the move this year, citing higher profile, better liquidity bigger range of potential investors as reasons."
There are some bright spots for AIM. Last month saw the first AIM listing of a U.S. company in two years, Seattle-based clean water technology specialist HaloSource, raising more than 50 million pounds ($78.6 million).
"I've had about a dozen enquiries (since then) - it's got people's attention," said Mark McGowan, founder of AIM Advisers Inc. which advises U.S. companies looking to list on AIM. , though he cautions that only about 15 percent of those who embark on the process of an AIM listing ultimately list. Attracting foreign firms to list represents AIM's best hope of returning to growth as the UK market is saturated, analysts said, but the percentage of overseas companies, after rising for several years, has stalled at about 40 percent.
AIM, launched in 1995, also continues to be dependent on certain sectors such as oil, and information technology, to a greater extent than the main market.
And some industry player say the shakeout leaves AIM in better shape.
"It's done the market a favour - small tiddlers ought not to have gone in the first place," Taylor said.
"Those companies that do come to market should garner a lot of attention from the investment community," McGowan said. (Editing by Andrew Callus)