Why the UK’s AIM is struggling 30 years on

The UK’s alternative investment market (AIM) has seen some major successes since its inception 30 years ago but has struggled to attract and retain companies in recent years.

Launched on 19 June 1995, AIM was set up to help smaller and high-growth companies get more access to capital. When it started out, the UK’s junior market comprised of just 10 companies, with a total market valuation of £82m.

Eleven of the companies that joined AIM in its first six months of existence are still on the UK stock market today and eight of those companies are still on the junior market today, according to AJ Bell (AJB.L). Since launch, AIM has helped more than 4,000 companies raise nearly £136bn.

Well-known companies that started out on AIM include travel company Jet2 (JET2.L), online retailer ASOS (ASC.L) and drink mixer producer Fevertree (FEVR.L).

While AIM has produced a number of successes, it has also had its fair share of failures. That includes “cash shell” Langbar International, which claimed to have £370m in bank deposits but collapsed in 2005 after discovering these funds were non-existent.

Another high-profile example was the collapse of cafe chain Patisserie Valerie in 2019 on the back of an accounting scandal.

Such disasters have led to AIM being described as the “Wild West”, though it is said to be the most active growth market in Europe, with 45% of the capital raised on European growth markets over the past five years raised on AIM, according to the London Stock Exchange (LSE).

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In addition, an analysis conducted by Grant Thornton found that, in 2023, AIM companies contributed £68bn in gross value added to the UK economy and supported more than 770,000 jobs.

Even so, AIM has had a challenging time in recent years and research has suggested that its troubles are set to continue. According to investment bank Peel Hunt (PEEL.L) and Aberdeen Investments, AIM is set to shrink by a fifth this year, as 61 companies representing £12.3bn of market capitalisation have announced plans to leave the junior market — either to move to the main market, to delist or because they’ve been subject to mergers and acquisitions (M&A). If all of these moves go ahead, AIM is set to shrink by 20%.

“AIM was once a thriving market, but it has been brutally knocked back by outflows in recent times,” said Abby Glennie, co-manager of the Abrdn UK Smaller Companies Fund and the Abrdn UK Smaller Companies Growth Trust plc (AUSC.L). “As a result, we’re seeing many of the biggest and best AIM companies moving to a main market listing.”

She added: “Eventually we will be left with a tiny, illiquid market. That’s fine for small, individual investors but will make it very hard to get large-scale institutional money into the growth companies of tomorrow.

“In that scenario, we need to be asking: how are we going to nurture the next generation of big UK companies?”

With that in mind, experts shared why AIM is struggling and what could be done to help revive the junior market and resolve these issues.

Jason Hollands, managing director at Bestinvest by Evelyn Partners, said that the sharp decline in companies on AIM largely “reflects a wider malaise facing European markets for small and medium sized growth stocks in recent years, as well amplifying the broader headwinds ‘unloved’ UK equities have faced.”

“Let’s not forget that there has been a dearth of IPOs on the London Stock Exchange’s main market too in recent years, with a steady stream of UK companies moving their listings overseas to markets like NASDAQ (^IXIC) and the NYSE where they can command higher valuations due to deeper pools of capital,” he said.

Hollands added that there have also been a number of public-to-private transactions by private equity firms, which are able to pick up UK-listed businesses on low valuations.

“AIM has been at the sharp end of these trends, magnifying the effect given the lack of investor appetite for small, illiquid UK companies amid an environment where passives have grown in popularity,” he said.

Hollands explained that tracker funds don’t touch very small companies, so the trend towards index funds “sucked away capital from this part of the marked as actively managed funds have battled relentless outflows”.

Instead, he said that the focus has been on a relatively small group of mega-cap growth US stocks — the “Magnificent 7”, which is made up of Nvidia (NVDA), Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL, GOOG), Tesla (TSLA), Amazon (AMZN) and Meta (META).

In addition, Hollands said that smaller companies have had to contend with the impact of the pandemic, the cost of living crisis, along with increases in financing costs as interest rates and bond yields rose.

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Nicholas Hyett, investment manager at Wealth Club, said that AIM’s “recent struggles are due in part to powerful macro-economic trends affecting public markets all over the world, however they’ve been compounded by a series of unfortunate own goals.”

Firstly, he highlighted that the rise of venture capital and private equity has meant that public markets are playing a smaller part in fundraising globally. He pointed to data from law firm White & Case, which showed that initial public offerings raised $126bn in 2024 — a marginal increase on 2023, though that is well below the $211bn raised in 2018.

“Companies just don’t want to list on stock markets to raise money any more,” said Hyett. “Staying private is lower cost and significantly less hassle than accepting the scrutiny that comes from being a public company.”

In addition, Hyett said AIM had also struggled with a number of “political own goals — most notably around the inheritance tax (IHT) benefits associated with AIM companies.”

“IHT relief has been a key driver of AIM ownership — creating a reason for individual investors to hold shares in AIM listed companies that they might not otherwise consider — providing a stable investor base that might not otherwise invest in smaller UK companies,” he explained.

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Historically, if investors held AIM shares for at least two years at the time of death, they would be exempt from IHT because they qualified for business property relief. However, changes to IHT in the autumn budget meant that the rate of relief was halved from 100% to 50%, meant that AIM holdings will be subject to 20% tax for those with estates above their nil-rate allowances.

Bestinvest’s Hollands said: “While this was not the worst outcome, it has reduced the attraction and the recent leaking of a memo of tax proposals by [deputy prime minister] Angela Rayner, included scrapping all IHT relief on AIM, will renew speculation at a time when concerns are mounting that the chancellor will need to find further tax raising measures in her next budget.”

Indeed, Susannah Streeter, head of money and markets at Hargreaves Lansdown, said that “perception can often count when it comes to interest in certain sectors, and with this tax-benefit changing, it could still mean more investors will steer clear from these riskier investments.”

“With inflation creeping back upwards again and the UK economy sluggish, confidence doesn’t look set to return to the market anytime soon and depressed valuations are likely to mean overseas buyers will be circling AIM quoted firms this year,” she said.”

Bestinvest’s Hollands said that one potential “ray of sunshine” could be the Mansion House Accord, which was a government agreement with the UK’s largest workplace pension schemes to invest 10% into private markets by 2030, at least half of which has to be in the UK.

“One can only hope that some of this might eventually find its way into AIM companies, but a lot more could be done to revitalise the market, including beefing up VCT income tax reliefs to at least 40% and quashing speculation of tampering with IHT reliefs again,” he said.

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Wealth Club’s Hyett said that uncertainty over IHT relief “needs to be resolved and as soon as possible”.

“While the uncertainty remains, the flow of money into AIM will be stifled and the government risks slowly throttling the UK’s growth market,” he said.

“Longer term, AIM faces the same challenges as the wider stock market. Steps need to be taken to encourage UK investors, including pension funds, to put money into UK companies if you want to revitalise the UK stock market.”

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