So, why are so few construction companies willing to go for this financial arrangement? Only 30 building sector companies are listed among the 850 firms taking advantage of the AIM's brand of public-ownership-without-the-tears. Small and medium-sized firms may have been performing well this year, despite the faltering economy, but they are still ignoring the advantages of having a higher profile and the chance for capital expansion.
"Firms are not exploiting the AIM as much has they could", says Martin Eales, assistant director of corporate finance at Brown Shipley and an adviser to AIM-listed firms. "There is enormous potential for companies that need £2-10m for organic expansion or acquisition. Construction is perceived as being made up of big firms and family-run businesses; small to medium-sized businesses need to change this perception."
If a company wants to float, it has three main options in the UK: the London stock exchange's main market, the AIM or OFEX. The main market offers scant reward for small and medium-sized companies, as the regulations are costly and time-consuming and the chances are that institutional investors will ignore them. So, in 1995, the stock exchange started the AIM to give smaller companies an opportunity to achieve the benefits of flotation with less regulation. The move has been well received and, since it has opened, more than 850 companies have been admitted.
There is enormous potential for companies that need £2-10m for expansion
The stock exchange boasts that these companies have raised more than £6bn on the AIM – £976m last year alone. Most companies go for the AIM over the OFEX, a junior market that is not regulated or owned by the stock exchange. The AIM is widely regarded as a better way for a smaller company with a capitalisation of about £2m to float – although many are worth less.
The two biggest reasons for floating on AIM are to raise capital for expansion and to raise the profile of the company in the City. John Pierce, chief executive of the Quoted Companies Alliance, says: "Floating your company on the stock market places a spotlight on your firm that can be desirable – if it is performing. Companies can then use the City to help the business grow. But a company wanting to float has to realise that being a public company brings great responsibility – and it doesn't come cheap, with all the regulations and corporate governance."
Despite the risks of public visibility, many construction firms are missing juicy benefits. Joining the AIM is far easier than joining the main market. Whereas on the main market shareholders outside the company must hold a minimum of 25% of shares, there is no such restriction for the AIM. A trading record is not required nor is shareholder approval for transactions. There is no pre-vetting by the exchange and there is no minimum market capitalisation. Instead, firms are assigned a nominated adviser, known as a "nomad" to assess suitability, project-manage flotation and give third-party advice thereafter.
We floated to increase our public profile and raise money. We achieved all our aims
By floating on the AIM, companies can gain access to substantial capital to fund expansion. Enneurope, a construction company that floated on the AIM in December 2001, funded an acquisition in Poland. In anticipation of the Poles joining the European Union in 2004, Enneurope acquired a sand and gravel quarry in the north-western town of Loryn. The AIM has given the company the chance to exploit the union money that will flow into Poland's road-building programme by providing the money for the acquisition.
Mike Fletcher, the nominated adviser for Enneurope, says that there is a real incentive to float on the AIM. "If you are fully listed, there is more competition and investors are less likely to put money into medium-sized firms among the larger companies," he argues. "But on the AIM, Enneurope has really benefited from the less stringent regulations for shareholder approval and the flexibility of the market. Unlike OFEX, the AIM is a regulated market and is attracting an increasing amount of funds from institutions."
The share price of flooring specialist James Halstead has risen 43p to 283p after floating on the AIM early last year. Company secretary Jack Whittaker says that it's the best decision that the firm could have made. "We had previously been a minnow in an extremely large pond on FTSE. Now we have a higher profile and there are less procedures to go through. It might not work for everyone, but it has worked for us."
A question of control
Yet several construction companies are reluctant to commit themselves. Eric Wright Group has grown from a £25m business to one worth £100m after breaking away from its parent company in the 1970s. Director Peter Forrest says all a company really needs is a strong balance sheet and a good business plan to show the bank. "We wanted to control our own destiny and not be at the mercy of institutional investors," he says. "We knew what it was like to be a quoted company, but didn't need to fight for capital.
We invested in a property portfolio that has generated its own income. The City looks on the construction sector as a poor relation and as a very short-term market. It is not a path I would recommend, because I think you lose control."
The construction industry is not highly rated at present by the City, and the AIM is intended for industries with high growth – a description that applies to few construction firms. Gerry Beaney, partner at Grant Thornton and nominated adviser for construction materials producer Dimension Resources, says: "AIM companies tend to have an average of £15m market capital and, looking at the official list statistics, construction companies on the markets are either very large with high capital requirements, or tiny companies."
Beaney points out that construction and building material companies have a share price of eight times earnings, whereas listed companies have a price of 16 or 17 times earnings. The higher the price/earnings multiple, the higher the market thinks its future profits will be. He says: "Construction companies need a lot of capital and have a perceived low rate of growth." Clive Benfield, chairman of the Chartered Building Company and Consultancy Schemes Board at the CIOB, believes that this stems from the market not being able to predict trends in construction. "Construction has never been a favourite of the stock market. Most construction jobs are short-term, therefore it is difficult to project long-term profit," he says. "Construction companies are also not valued by the City because they are thought to have generally low margins and multiples."
But it's not just the City's attitude that construction firms should consider. The EU has published a directive that may lead to minimum transparency requirements and is likely to burden most companies on the AIM with in-depth quarterly reports. Although the EU recently proposed some concessions to this system, it is still a worry for companies hoping to float, since one of the original benefits of AIM was the lack of an onerous report process.