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Commercial Question

Taking Clean, Green AIM

updated on 24 June 2008


AIM in 2008: can clean-tech IPOs make a comeback?


Good news stories are hard to come by in the current climate and the London Stock Exchange's junior market, AIM, is no exception. New admissions to AIM fell for the first time in five years in 2007 with a total of 284 companies being admitted. In the first five months of 2008 only 54 companies listed on AIM. Pessimists believe that worsening general economic conditions in 2008 will continue this trend, which will in turn impact the clean-tech sector.

For the optimists, however, the strong macro-economic case for clean technology, backed by growing political and popular support, suggests there has never been a better time for clean technology companies to seek a public market quotation and associated fund raising. The first half of 2008 has seen interest from venture capitalists in clean-tech companies continue to grow and several new clean-tech funds have been established, particularly in the United States. In addition, both the candidates for the US presidency have pledged to introduce a federal carbon trading system, which is sure to stimulate the market for carbon reducing technology.

For clean-tech and other companies, a listing on a public market such as AIM is attractive, offering a source of additional capital, increased profile, the means to incentivise staff through equity incentive schemes and an exit opportunity for existing investors.

AIM, more than other exchanges, has allowed growing technology companies to receive investment from blue-chip institutional investors who are sophisticated enough to understand their technology, and have deep enough pockets and distant enough horizons to weather a rocky ride in case the road to profitability takes longer than expected.

The market has increasingly become home for clean-tech companies from across the globe (over half of the clean-tech stocks listed on AIM are non-UK based) because of the ease of raising new capital and a system that provides appropriate regulation for growing companies. This year will continue to see challenges from other stock exchanges (notably the Toronto Stock Exchange, Nasdaq and Asian exchanges) for clean-tech initial public offering (IPO) business, but what London has in its favour is that it is undoubtedly the most international of stock markets. This is particularly valuable for clean-tech firms, many of which offer necessarily international solutions. In addition, AIM's more flexible system of regulation allows new companies to minimise compliance costs.

The venture capital (VC) industry has embraced clean technology in the last three years, especially in the United States, yet the number of exits (through IPOs or mergers and acquisitions) remains relatively small. Billions of VC dollars remain invested in companies that are now beginning to generate revenue, and investors in clean-tech venture capital funds are beginning to expect a return on their investment. The VC community is also very keen to be seen to have learnt the lessons of the dot-com boom and VC-backed clean-tech companies have been focused on becoming self sufficient and achieving cash-flow break-even, rather than making the kind of claims about future growth by dot-com firms that proved to be unachievable. Consequently, a number of clean-tech enterprises are now looking to raise capital through IPOs to finance technology roll-out and growth in market share.

The combination of investors seeking an exit and enterprises seeking additional capital means that the number of companies looking to list on AIM remains strong. The key question for the latter part of 2008 and 2009 will be whether institutional investors will be interested in taking up the offer of new issues.

UK institutional investors have been the quickest of European investors to invest in specialist sustainability funds as evidenced by the success of Impax Environmental Markets and Low Carbon Accelerator. Mainstream equity funds that specialise in small and mid-cap stocks have also participated in clean-tech IPOs, as have hedge funds. The moves into these fields come partly from pension funds demanding an increased clean-tech exposure as part of a strategic response to climate change. As consensus on the need to combat climate change grows, this pressure will increase.

So what is the outlook for clean-tech companies looking to list on AIM in the second half of 2008 and beyond?

The sector is too complex to stand or fall together. Companies with the right technology at the right stage of development will continue to attract a loyal following. Companies that can offer clean-tech exposure to the large, fast-growing emerging markets will also do well. Many predict that water companies will be the next big thing, while others predict that existing favourite sub-sectors, such as solar and wind power, may have been overbought. The recent controversy over biofuels and their impact on food production is likely to lead to decreased demand if UK and European targets are reduced.

Perhaps the greatest risk for the clean-tech IPO market in 2008 is that other methods of exit, such as trade sales, could be more attractive than IPOs. Cash-rich industrial giants from both the developed and developing world will offer enticing exit strategies for clean-tech investors. Ultimately, this may mean that clean-tech M&A has a better outlook in 2008 than clean-tech IPOs.

Jane Bondoux is a professional support lawyer in the corporate group at Reed Smith.