When technology-driven drug developer eTherapeutics delisted from Aim last month, it did so out of deep frustration with the market. Instead of a promised land of easy access to capital, what life on Aim had offered was a harsh lesson in how illiquidity, driven by an absence of interest and risk appetite, constrains the most ambitious of companies.
The highly illiquid environment encountered by the company meant its share price either failed to move or was “blown around like a leaf in a hurricane”, says chief executive Ali Mortazavi. “The lack of a vibrant secondary market was as bad as the lack of capital.” Without healthy trading in the company’s shares, there was no price discovery and eTherapeutics was left with “no currency” meaning it could not part-fund deals using paper. Tom Ilube, chief executive at Aim-listed microcap Crossword Cybersecurity, concurs. Liquidity gives companies “the ability to use shares to help fund acquisitions” he says.
In the end, Mortazavi concluded two things: there was no point in maintaining the listing, and it would make sense to explore a future on Nasdaq.
If you’re thinking that perhaps the blame for its lifeless share price lies with eTherapeutics and the quality of its proposition, here’s some additional food for thought. Since 2020 the number of small companies listed in London has fallen by a third. In 2023 alone 76 companies delisted from Aim. According to UHY Hacker Young, the average value of daily trading in Aim shares fell in the year to the end of February by 15 per cent, and is down by 44 per cent since the end of February 2022.
The purpose of discussing eTherapeutics’ quandary is not to ascertain why UK institutional investors are fleeing the junior end of the market, but rather to highlight that urgent help is needed. eTherapeutics’ tale - instead of being about how a plucky little upstart is rewriting the rules of drug development has become one of how the tight leash of illiquidity chokes off growth - demonstrates that support for British high growth, high tech companies is badly needed.
What support exists should be not only maintained but improved. James Ashton, chief executive at the Quoted Companies Alliance, says: “One of the most damaging steps any new government could take would be to dismantle the system of business reliefs that has underpinned investment in so many growth companies on Aim.”
Yet, at least two think tanks are calling for important reliefs to be snatched away, on the grounds that a handful of rich people appear to be reaping excessive benefits. Dan Goss at think tank Demos told the FT that the justification for including Aim shares in the relief was “unclear”. The Institute for Fiscal Studies argues that relief for Aim shares should be scrapped, arguing that it is “unfair”.
There is a whole other side to the business relief coin. Business relief was originally designed to prevent a forced sale of businesses and farms on the death of their owners and to allow families to continue running the assets. The special treatment is, logically, available to any owner of the business. And backing high growth businesses is a risk-laden venture - remove business relief from Aim shares and you remove an important incentive for buying them in the first place. There are requirements around the nature of the qualifying businesses (to rule out the safest ones) and the length of time that the shares are held. “It is very important to keep incentives in place that encourage investors to fund early stage growth companies in the UK,” says Ilube.
Sean O’Flanagan at Whitman Asset Management echoes this view. “It has become increasingly evident that UK-listed companies both on the main market and Aim require more, rather than less financial support. We should be encouraging more small companies to list as a way to raise funds they need for future growth.”
It is right that every tax break should be examined for efficiency and effectiveness. But they should also be considered in terms of the harm the removal of a relief could bring. There are at least as many voices predicting the end of the UK’s growth capital market as there are demanding an end to tax breaks for “toffs”. The next government should think carefully before deciding to whom it listens.
