Nowhere is the weakness of London’s capital markets more obvious than in the Alternative Investment Market, or AIM, which marks its 30th birthday this year.
Launched by the London Stock Exchange on June 19, 1995, the small-cap index was designed to provide capital to companies with a market capitalization of £250 million or less, creating a dynamic space for the UK’s fastest-growing and exciting companies.
By January this year the total number of companies in the index had plummeted to 680, a two-decade low. This compares to the all-time high of 1,700 recorded in 2007, ahead of the financial crisis.
AIM is now home to just six stocks with a market capitalization of £1 billion or more, the LSE says.
For Michael Field, chief equity market strategist at Morningstar, 2025 is a an important year for AIM.
“There are many explanations for [its difficulties], but the high cost of capital required to fund this growth market is the most obvious,” he says.
“Falling interest rates are not a golden bullet, but one would expect this to boost the index in 2025.”
AIM Has Been Hit by a Perfect Storm
Performance concerns are at the heart of AIM’s struggle.
Over the last three years the FTSE AIM 100, the index of the largest 100 AIM stocks, has lost –30.2%, underperforming the Morningstar UK Small Cap Index, which returned –0.2%.
Despite expectations that the exodus of companies from AIM will continue in 2025, Marcus Stuttard, the LSE’s head of AIM & UK Primary Markets, says the junior market’s challenges are part of a broader narrative of global headwinds.
Stuttard’s role primarily includes responsibility for growing AIM and advocating for small businesses looking for fresh injections of capital, though he also oversees new listings on LSE’s larger indexes.
“Some of these trends are underpinned by global macro factors,” he says.
“They’ve led to higher interest rates and people making investment decisions in [that] environment. [Then there’s] all the other global trends around supply chain interruption and inflation after the pandemic.
“There are some specific elements that have been structural in the UK, some of which have undoubtedly been impacted by Brexit, but the broader trends we have seen in the UK have been global trends.”
A substantial equity valuation gap did emerge after the Brexit result in 2016. The UK market has been shunned by international investors, with UK equity funds haemorrhaging billions in assets.
That isn’t entirely Brexit’s fault. Attractive valuations in the US driven by the Magnificent Seven have provided more than enough reason for investors (and companies looking to float) to choose London.
How Have The UK’s Listing Rules Changed?
Last year, the UK government announced long-awaited reforms to the UK’s listing rules to make it easier for companies to list and place the burden of IPO due diligence on the shoulders of investors themselves. It’s hoped the changes will speed up growing companies’ access to capital investment and close the gap between London and New York.
To do this, the two-tier system of standard and premium listings has been replaced with an Equity Shares Commercial Companies (ESCC) listing category on the main market.
This, it is hoped, will make it much easier for companies to float. But it could also encourage AIM companies to reclassify. An ESCC classification should grant companies access to a wider pool of investors, which should itself support greater analyst coverage.
There is also talk of UK pension and ISA reform to unlock billions more in liquidity. Talks of replicating the so-called “Canadian” model of pension “mega-funds”, which would merge the UK’s 86 local authority pension schemes, are already underway.
“There is also very significant amount of capital sat in individual cash ISAs that could be much more productively invested into the real economy and into growth companies including those on AIM,” Stuttard says.
He adds that the Mansion House Compact, which was signed by 11 large pension providers in 2023, will do some heavy lifting. That commits signatories to a target of investing 5% of their pension fund assets into unlisted equities by 2030.
Despite the push for reform, a noticeable turnaround is yet to be seen. And there is a policy hurdle ahead for investors.
The halving of inheritance tax relief on AIM shares is another headwind. Until the Autumn Budget last year, owners of AIM stocks were exempt from inheritance tax on their holdings if they held them for two years or more. From April 2026, this relief will be limited to 50%.
AIM is in Thinktanks’ Crosshairs
Some are now calling for an overhaul.
In a report by two thinktanks, the Tony Blair Institute for Global Change and Onward, both call for AIM to be scrapped completely. Stuttard thinks the report is unconvincing.
“There is a very comprehensive plan about how we back our growth companies and how we bring more capital into the market,” he says.
“For example, for AIM companies it will be a lot easier to offer their IPOs or their follow-on issuances to a much broader range of investors, including individuals.”
He also backs the UK government’s push to collaborate with the British Business Bank, a government-owned economic development bank tasked with supporting small businesses with credit and advice.
It is also home to the British Growth Partnership, a new project set up to deploy capital from UK pension funds into growth businesses.
“We tend to focus more on the negatives than the positives. By focusing on what some of the opportunities are in the UK, that is more likely to support future growth,” Stuttard says.
Which AIM IPOs are Next?
A series of IPOs is expected to bring a welcome boost to the London Stock Exchange in 2025. It’s hoped AIM will play host to Bedford-based RC Fornax, a defense consultancy business. According to PitchBook data, an IPO could value the company at £5 million.
Founded in 2020 by Royal Air Force veterans Paul Reeves and Daniel Clark, Fornax’s company reports show that it generated revenues of £6.5 million last year.
According to a note from AJ Bell, 2025 could also be the year that both internet service provider Gamma Communications GAMA and airline Jet2 Jet2 move to the main market from AIM.
Gamma Communications, the £1.28 billion internet service provider, said the move would serve “to enhance the company’s reputation and support market penetration.”
The operative word, then, is hope. But it will take more than hope to get AIM growing again. Change doesn’t happen overnight.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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