Over the past three decades, the Alternative Investment Market has offered the possibility for investors to own a slice of high growth companies, and it remains one of the most successful markets for smaller growth firms in the world.   

Despite the turbulence which has hit the AIM in recent years, there is plenty of opportunity ahead for UK smaller companies particularly with further interest rate cuts on the horizon. The challenges of retaining and attracting new companies are very real, with total companies trading down around 60% from the peak in 2007.

But since then, efforts have been made to increase the quality threshold through measures such as a Corporate Governance Code, and the average market cap coming into this year has nearly doubled to £101 million, since 2007.

There is opportunity ahead, but investors need to be mindful of ensuring they are well diversified. AIM quoted shares are often more volatile than larger companies and firms often have lower levels of liquidity which can make it harder for investors to sell shares when they want. Due to their fledgling nature, there is a higher risk of companies failing. Notable examples of AIM failures include Langbar International. The company claimed to have £370 million in bank deposits but were later discovered to be non-existent. Bidstack, the digital advertising company, saw its share price fall by more than 99% while Patisserie Valerie, the high street cafe and bakery chain faced a major accounting scandal, leading to its collapse.  Another big disappointment was African Minerals. It saw its share price surge to great heights based on excitement around its iron ore mine in Sierra Leone but ultimately collapsed due to production issues and falling iron ore prices.

But there have been big successes over the years. Jet2, the leisure travel company has flown particularly high, with its valuation ballooning on the market. Its shares have gained around 4,170%, as established itself as a significant player in the UK travel industry. Pan African Resources, the gold producer focusing on mines in South Africa has seen its share price increase by more than 1,000% as it’s been well-placed to benefit in the surge in demand for the precious metal over the past year. Shares in the tonic maker, Fevertree, have risen by more than 450% since it listed a decade ago, but they have still been on a volatile ride and have dropped dramatically from the peak they reached in 2021. Boohoo and ASOS seemed to have the recipe for success during the pandemic, and the accelerated switch to online shopping, but their valuations have also dropped significantly as overseas rivals Shein and Temu have entered the market. Boohoo shares are now below the offer price, and although ASOS is still trading higher compared to its launch price it is nowhere near the heady heights of its 2008 valuation.

Research commissioned by the London Stock Exchange shows the benefit AIM-listed companies have brought to the wider economy. It’s estimated that through direct and indirect impact in 2023 AIM quoted firms contributed £68 billion and poured £5.4 billion via tax receipts into government coffers.

But the macroeconomic climate means that it’s been a tough few years for AIM-listed stocks. They had a torrid 2024, with companies suffering from depressed valuations. After a surge in activity in 2021 when there were 66 IPOs on the AIM market, sentiment took a turn for the worse in 2022.  The march upwards in inflation which reached 11.1% in October 2022 made some investors less willing to take risks in small companies, with some AIM-quoted firms also beset with supply chain challenges. Political chop and change in Westminster didn’t help investor sentiment and although stability returned with the new Labour government, speculation that business property relief would be scrapped in the Budget led to further sharp losses. Although the change wasn’t quite as bad as feared, the reduction to 50% still means confidence in the smaller firms hasn’t recovered.

The relief had been an incredibly valuable tax break for AIM investors over the years, who could hold qualifying investments for two years and see them fall out of their estate for inheritance tax purposes. The reduction may mean it will be harder for firms to raise funds, as investors won’t benefit from such a generous tax break.  Although not all AIM quoted companies were able to benefit from this ‘business relief’ and qualification is judged on the holder’s death, whether it was applicable. Nevertheless, perception can often count when it comes to interest in certain sectors, and with this tax-benefit changing, it could still mean more investors will steer clear from these riskier investments. There could be longer-term economic implications here given that this small change might have big repercussions when it comes to creating a nurturing environment for entrepreneurial businesses, which may be counter-productive to the Chancellor’s growth agenda. With inflation creeping back upwards again and the UK economy sluggish, confidence doesn’t look set to return to the market anytime soon and depressed valuations are likely to mean overseas buyers will be circling AIM quoted firms this year.

Government efforts to channel more funds into British investment could help the AIM market. The Mansion House Accord agreed in May, involving 17 pension providers, is designed to unlock up to £50 billion of investment for UK businesses and major infrastructure projects. Part of this plan to focus on revitalising the AIM market. Also, there are some hopes that government push to establish pension ‘megafunds’ to power growth in the UK economy could help revitalise the market. AIM-quoted companies are anticipated to be included in the unlisted equities definition for pension fund allocation. However, it’s still unclear to what extent the market would be benefit over the longer term.’’

Joseph Hill, senior investment analyst, Hargreaves Lansdown:

“Over the last five years, the FTSE Small Cap ex IT index has delivered a return of 78.33%, ahead of the 72.94% and 41.74% returns delivered by the FTSE 100 index and FTSE 250 ex IT index respectively. From here, the long-term case for UK smaller companies is compelling.

For those looking to invest in smaller companies within a diversified portfolio, HL’s Wealth Shortlist features two active UK Smaller Companies funds.

Artemis UK Smaller Companies

The fund is managed by Mark Niznik and Will Tamworth and aims to grow an investment over the long term by investing in UK smaller companies. The managers employ a valuation focused approach, meaning the fund invests differently to many of its peers in the IA UK Smaller Companies sector.

The managers won’t invest in companies that are pre-revenue because of their focus on cash generation. They’re also sceptical about investing in small businesses with very ambitious growth expectations. The outcome of this process is a value style bias.

This higher quality approach and focus on valuation means that we expect the fund not to fall as much as some others during down markets, but it could lag its growth focused UK smaller companies peer group in a strongly rising market.

Royal London UK Smaller Companies

The fund is managed by Henry Lowson and Henry Burrell, investing in some of the smallest companies in the UK stock market, using a growth focused investment approach to achieve long term growth.

The fund approach is centred on identifying quality companies trading at attractive valuations. The managers assess companies using the acronym ‘SIMBA’: scalability, innovation, management, barriers to entry and unique assets. They require companies to possess at least four of these characteristics to be considered for investment.”

Comment provided by Susannah Streeter, head of money and markets, Hargreaves Lansdown.