January 30, 2006
Investment Dealers' Digest
(c) 2006 Investment Dealers' Digest and SourceMedia, Inc. All rights reserved.

London's AIM Calls To US VC Community
by Colleen Marie O'Connor

As the number of venture capital-backed IPOs in the US has nosedived-due in large part to burdensome costs and strictures imposed by Sarbanes-Oxley-the London Stock Exchange's AIM has emerged as an aggressive alternative for venture capital firms angling for a public exit from their smaller portfolio companies.

"To some extent, the AIM is replacing the Nasdaq as the international market for growth companies, and that, increasingly, is of interest to venture capitalists," explained Matthew Doughty, an attorney with the US law firm of O'Melveny & Myers, which has been working with the AIM on a series of seminars in the US targeted at, among others, VC firms.

It's easy to see why VCs here would be interested. The costs of going-and being-a public company stateside in a post-Sarbox world are especially onerous for small companies. What is more, public companies here with a market capitalization of less than $500 million often can't attract the interest of a single analyst, with devastating results for their investor base. As a result, there were only 56 venture-backed IPOs that raised a total of $4.5 billion in the US last year versus 93 that raised just over $11 billion in 2004, a thumping 59% decline in volume, according to data from Venture Economics and the National Venture Capital Association.

Enter the AIM, which has no minimum size to list and no outside regulatory review in most cases. At least three of the 19 US companies that went public on the AIM last year were VC-backed, IDD research discovered, but definitive statistics could not be obtained on Thomson Financial databases nor from the AIM.

In any event, the dozen or so AIM-related seminars scheduled stateside in the first quarter seem perfectly timed to catch the wave of discontent among emerging growth companies. Just last week, East Coast VCs got an earful when Silicon Valley Bank hosted a seminar in Massachusetts to disseminate info about the AIM to attendees with interests in small and midcap companies. There were two more AIM-related seminars in New York City that same week, sponsored by Canaccord Adams-the entity that emerged last year from the merger of Vancouver-based Canaccord with US boutique Adams Harkness-and Sjberwin, a UK law firm now pushing into the US. Next up: three events on the West Coast in February sponsored by O'Melveny & Myers as well as Bridgewell, a UK securities firm, at which AIM officials reportedly will speak.

A satisfied customer

For Mountain View, Calif.-based Polyfuel, a venture-backed developer of a direct methanol fuel cell for mobile applications, listing on the AIM in July 2005 provided a much-needed capital-raising opportunity.

"The more we looked at it, the more we said this is a viable answer for us," said Mark Campion, Polyfuel's CFO.

Campion spoke with several investment bankers about a possible public offering in the US prior to charging across the pond. "There's a strong sense that unless you want to do a $50 million-or-more offering and expect a post-market valuation of $250 million, it's hard to get someone to pay attention to you," he said.

Initially seeking later-stage funding, but finding little in the way of agreeable terms from the private equity community over dilution and valuations, Polyfuel instead embarked on an AIM IPO last year that raised GBP8 million (about $14 million). What is more, the AIM proved sufficiently deep that Polyfuel was able to add a follow-on offering just last week that raised another GBP10 million, or about $17.8 million.

"There is so much capital in London that wants to invest in later-stage ventures, but would prefer to do so through a public deal rather than a private deal," which is the preferred North American route, said David Berkowitz, a partner at VentureWest, one of Polyfuel's VC-backers. "It seems there is less mezzanine-level capital available in the US for pre-IPO companies."

The Polyfuel IPO was not considered an exit for the VCs, but a capital raising, Berkowitz noted. "I was initially hesitant [about the IPO],"
he said. "But for American companies, [the AIM] opens up a new set of investors that otherwise wouldn't be investing in North America-based companies."

The other two VC-backed IPOs last year on the AIM included New York-based Allied Healthcare, which had been backed since 1996 by funding from Hyperion Partners, as well as Clipper Windpower, a portfolio company of Energy Spectrum, which listed on the AIM in September.

Beyond the industries of those three companies-renewable energy and healthcare-several telecommunications-related portfolio businesses are also being approached about AIM listings.

No quick fix

True enough, the AIM serves up a host of advantages over its US rivals (see IDD, "AIM Attracts Reg-Weary US IPO Candidates," 12/12/05). And it is not at all shy about tooting its own horn. "It offers a unique regulatory environment offering a more flexible approach for younger companies" compared with US exchanges, said Tracey Pierce, head of company services for the AIM.

But it is not a quick fix, nor the only exchange for every small portfolio company, according to VentureWest's Berkowitz. "For one, your management team is going to spend a lot of time flying back and forth, as you have a new shareholder base to manage in Europe,"
Berkowitz said.

Also, due to SEC regulations, there are certain restrictions on how US-based individuals can hold stock in US companies that have listed abroad. Securities attorneys note that this restriction usually lifts about a year after an IPO. Additionally, shares of US-based companies do not trade electronically on the CREST system the AIM uses, but by paper, oddly enough. That's primarily because UK regulators are extremely wary of letting any shares restricted by US regulations slip through to American shores. However, given that the majority of trading activity on the AIM is done by large institutions, not retail investors, the liquidity of that paper-based trading doesn't appear to have suffered. Institutions seem willing to acquire these stocks despite the challenge of trading paper in an electronic world, O'Melveny's Doughty said.

But Doughty added that US companies "need to have achieved a certain amount of critical mass in terms of having relevance to investors based in London." It can help achieve that by selling products to European customers, having an office in the UK, and/or hiring a London-based director to sit on the company's board-considered a particularly smart move for an aspirant to an AIM listing.

At the end of the day, of course, there is always the possibility of a dual listing as a company grows. Polyfuel hasn't ruled that out, but doesn't plan on it anytime soon. It is still recovering from the process of listing on the AIM, which was no stroll in St. James's Park. "It's a different process from doing an IPO in the US, but you still feel like you've been through the grist mill," Campion said.