London investors are hungry for U. S. IPOs. Here's what they're buying.
When executives at Solar Integrated Technologies began prepping for an IPO last year, they knew they had the kind of story that Wall Street would hate. The Los Angeles-based manufacturer of solar roofing systems had completed major projects for Coca-Cola and Frito-Lay, and it had a backlog of new business on tap. But with only $8 million in projected revenue, it lacked the earnings mojo to pass muster on U.S. exchanges.
So the company cut Wall Street out of the deal. Instead, it found financing on London's Alternative Investment Market, a 10-year-old exchange run by the London Stock Exchange. Similar to OTC trading in the U.S., AIM was once considered a destination for companies with nowhere else to turn. But the exchange has since become one of the world's most active IPO markets -- including for U.S. companies shunned by risk-averse domestic investors.
That's because AIM is geared specifically toward growing businesses without long track records or money to burn on a costly IPO. With fewer listing requirements than either Nasdaq or Amex, companies can slash legal and accounting costs for going public. In 2004, 355 companies went public over AIM, compared with 260 U.S. IPOs during the same period. Of the AIM IPOs, 61 were from outside the U.K.
Jon W. Slangerup, CEO of Solar Integrated Technologies, says his company never seriously considered a U.S. IPO because of its modest revenue. However, it found a community of London-based traders who follow alternative energy companies closely and were eager to snap up the company's stock. It raised $23 million, which it is using to add inventory and employees to complete more than 80 new projects -- work that will send company revenue to nearly $70 million this year. "We knew we could get into AIM without a lot of constraints," Slangerup says. "We'll move to the U.S. when we're stronger and bigger."
Most shares on the exchange are traded by buy-and-hold institutional powerhouses such as HSBC and Whitehead Mann Group, which manage large sums from investment trusts. "Institutions are attracted to AIM because it's an active capital market," says Andre Peschong, a partner at Bridgewater Capital Corp. in Newport Beach, Calif. "There's a lot of liquidity there."
Demand tends to be strongest for tech, financial services, and energy firms. And those without a brand or business that appeals to a European audience may have trouble. Moreover, because almost no retail investors own shares, there's a limited pool of capital compared with U.S. markets. That puts more pressure on AIM-traded companies to build lasting relationships with institutional traders to ensure liquidity. After all, if the institutional backing doesn't remain in place, unloading stock during difficult times could be tough.
And there's always the danger that AIM's star could fall as quickly as it's risen. So far the exchange has been spared the accounting scandals that have plagued domestic markets. But AIM's looser regulatory environment and the fact that companies going public do not need to demonstrate a history of strong revenue means they tend to be more speculative than the typical U.S. IPO. "A few nasty blowups with fraud and the exchange could be tainted," says Gary Benton, an international lawyer with Pillsbury Winthrop Shaw Pittman.
Still, going public on AIM can be an attractive alternative to a domestic IPO, especially for companies raising limited amounts of money. Whereas offerings on Nasdaq rarely take in less than $20 million, a company can raise as little as $3 million on AIM -- and surrender far less equity. "The banks on this side [in the U.S.] wanted us to raise very big sums, $200 million to $700 million," says John Scott, CEO of XL Tech Group, a tech-company incubator based in Melbourne, Fla., that raised about $40 million on AIM last year. "We didn't want to do that. On AIM, we could do a right-size offering."
Sidebar: The Offshore IPO
The Exchange Alternative Investment Market (AIM) Location London Number of AIM IPOs (2004) 355 Number of U.S. ipos (2004) 260 Most attractive industries Energy, technology, financial services