Small Talk: London’s junior market has been hit by falling resources prices

The Alternative Investment Market has just enjoyed its best year since the financial crisis, or one of its most disappointing – which view you take depends on how you judge the performance of London’s junior stock market.

The good news is that Aim has finally arrested the decline in the number of companies that it hosts, which has seen the total come down from a peak of more than 1,700 seven years ago to around 1,100 today. In part that is because companies have stopped leaving the market in such large numbers, but also because Aim has attracted new listings – almost 120 businesses joined during 2014.

Investors’ interest in Aim is at record levels – not least thanks to the Government’s decision last summer to allow investors to hold Aim-listed stocks within their tax-free individual savings accounts (Isas). An average of 26,600 transactions took place on Aim each day last year, an all-time high.

There’s a problem, however. Aim’s investors – including all those shiny new Isa investors – got their fingers burned. While the main market in London fell just 2 per cent over 2014 – and the smallest companies on that market were up by an average of 6 per cent – Aim investors suffered average losses of 17.5 per cent. That makes 2014 one of the market’s worst on record, especially in terms of its underperformance of the main list.

The big factor explaining these dire returns is the number of resource companies on Aim – many of which, at the start of last year at least, ranked among its biggest constituents. The poor performance of energy stocks in 2014 amid plunging commodity prices and a slowing global economy hit Aim disproportionately hard. Better performances from sectors such as consumer goods were not sufficient to undo the damage.

It’s possible that many investors avoided the worst of the losses. Aim is a market for stock pickers, with investors less likely to have exposure to the market as a whole through collective funds or index-tracking vehicles. Inevitably, however, some investors will have suffered, including those encouraged to consider the market for the first time by the Isa concession. The question is whether those investors will now turn their backs on Aim.

It would help if the market had started the year by showing signs of a recovery, but the first couple of weeks of January have seen further declines. And worryingly, while Aim is no longer over-exposed to the fortunes of resources companies, the financial sector now accounts for 24 per cent of the market – it appears to have swapped one dependency for another, which sooner or later is bound to prompt another period of disappointing returns.

Then there are the nagging doubts about corporate governance standards on Aim. The market has improved since its Wild West days prior to the financial crisis, but anxieties persist.

Aim still has much to prove – and its fate is not entirely in its own hands. Another year of poor performance relative to other equity markets would seriously undermine investors’ confidence in the junior market. Even the tax breaks on offer to Isa investors might not be sufficient to persuade them to stick with the market.

That would be unfortunate, for Aim remains a fertile breeding ground for innovative young companies that have the potential to be the big names of the future – or to attract attractive price tags from acquisitive larger businesses. It’s the favoured market of some of the UK’s most successful bargain-hunting fund managers. And it represents a useful, low-cost and lightly regulated marketplace for companies raising equity publicly for the first time.

In the end, however, the numbers matter. Cross your fingers for a bounce this year.

British entrepreneurs’ growth ambitions may be limited by the jump in the tax rate they must pay on sales of larger businesses, a leading accountant claims. UHY Hacker Young says the difference between the tax rates paid on sales of small and large companies in the UK is far larger than in most other G7 economies.

The sale of a £6m business built up from a standing start would incur capital gains tax at a rate of 9 per cent after tax reliefs and exemption, UHY Hacker Young calculates. The tax were the business to have grown to £50m would be close to 22 per cent.

Roy Maugham, a partner at the accountant, said that the additional tax bill on larger sales was a disincentive to entrepreneurs. “The system doesn’t reward the additional risks an entrepreneur would need to take to bring their business to the next level,” he said. “They would almost certainly need to put a professionalised management structure in place, or take out substantial loans to generate economies of scale or develop new product lines.”

The Federation of Small Businesses is taking its campaign against supply chain bullies to Parliament. The campaigning group has persuaded a cross-party group of MPs to work on potential solutions to the issue, with a meeting convened for tomorrow.

The way in which large companies treat their smaller suppliers has come under scrutiny with businesses accused of forcing firms to pay to remain on a list of preferred contractors. Other companies have been charged with deliberately paying their suppliers late in order to benefit for their own cashflow.

Mike Cherry, the FSB’s national policy chairman, said: “It is simply unacceptable for any company to exploit its market position to enforce unfair and unreasonable payment terms. The money outstanding in late payments is in the billions and has consistently grown larger and larger. We need greater leadership from all parties competing to be in the next government.”

“I launched the business in 2008 after a career as a logistics officer in the Royal Navy. I’d spent years building supply chains all around the world, but I initially began working in recruitment when I left the Navy. I realised that the business model of existing businesses didn’t work and I set out to build a technology platform that enabled companies needing staff to reach out to as many people as possible.

“The internet makes it possible to apply that model to the supply chain – you can reach an incredibly long tail of potential suppliers of every good and service imaginable. That’s especially important for local government, where most of our customers are.

“We enable a client looking for a service to set criteria to reduce the list of potential suppliers to those most relevant – and then to interrogate those suppliers on what they do.

“Initially, it was difficult to persuade clients who started using us for recruitment that we could help throughout the supply chain – our reputation got us through the door, but they struggled to see us in a different context. Setting up separate companies has helped with that and we’re now acquiring new clients.

“It’s hard work running your own business, but we’ve come a long way since 2008 – we’re turning over £3.5m a year and we’ve set ourselves up in Milton Keynes, where we employ more than 60 people. It’s a fantastic area for attracting really good first-job graduates.”