AIM – Is Enough Being Done to Protect Investors?

Last night (27/9/2016) BBC Radio covered the topic of the AIM market and asked whether enough was being done to protect investors. See File on Four http://www.bbc.co.uk/programmes/b07wby0z . Here’s a brief summary of the contents with some comments.

The BBC visited Hotel Chocolat, a recent AIM listing, and spoke to Angus Thirlwell, the CEO. He indicated they wanted “light touch regulation” so as to avoid a lot of paperwork and said it was one of the attractions of AIM. Comment: it seems that AIM promotes the market on that basis, while telling investors that in terms of regulations and oversight it is very similar to the main market. Somewhat contradictory is it not?

ShareSoc Director David Stredder explained that almost everyone might be invested directly or indirectly in the AIM market and that now that ISAs have been opened to AIM holdings there are a very wide range of investors.

Simon Taylor-Young explained the role of Nomads and suggested they are supposed to act as both policemen and advisors. He mentioned the problems of AIM companies in one country in particular – China and explained what happened at Naibu.

Richard Edwards, a director of Anpario, explained how he had invested tens of thousands of pounds in Naibu. At one time the company was valued at £70m but it fell over 90% (it’s now delisted and the shares are in essence worthless). Despite some negative announcements he continued to hold the shares. He asked what happened at Naibu and suggested “no one really knows”. Investor Brian Geary flew to China and found information about the company that was not disclosed in the IPO – loans undeclared for example. (Comment: in other words a typical example of complaints about AIM companies that information was concealed to investors, inadequate due diligence done before listing, and thereafter failure to disclose significant news when it comes to light that all might not be as it appeared). It was said the management of Naibu have now vanished.

Giles Elliott, the former Chairman of Naibu, spoke and said he is still pursuing recoveries for shareholders. But said you cannot check all the numbers, interview all the staff or visit all the sites. Naibu Nomad Daniel Stewart was asked to comment for the programme but did not want to do so.

Marcus Stuttard, Head of AIM, then defended it. He said the Nomad model works incredibly well and had been copied in other countries. The interviewer suggested there was an issue in that the Nomads are paid by the companies. Marcus said that Nomads are not policing the companies. But Nomads are held to account and there have been a number of situations where they have been censured and in some cases it caused them to go out of business.

Simon Taylor-Young criticised AIM for not taking action when problems appear in companies. He suggested AIM should be doing this. Marcus Suttard said there were a number of problems – a lot related to the economic backdrop in China. Comment: this is not so surely – the problems were due more to cavalier approaches to accounts and regulations in China, and the inability for directors and shareholders to enforce rights under Chinese law. When asked what he had done to ensure it cannot happen again, Marcus focussed on the complete disclosure of the risks involved in investing in AIM companies (effectively saying that investors should and could have their eyes wide open on the risks they might be facing).

The programme then turned to the activities of former England cricketer Phil Edmonds and his colleague Andrew Groves who launched 9 AIM companies operating in Africa – mainly mining companies but also a medical business named African Medical Investments. This story has been well covered by an organisation called Global Witness. The allegations are that Edmonds and Groves profited by buying a property for $2m (via an offshore company, thus concealing their interest), and then selling it on to the AIM company for $5m which was higher than it’s real value. They also covered the case of Sable Mining where allegedly the mine was acquired by bribing local officials. {Note: both companies subsequently delisted). The allegations are denied.

The programme presenter suggested that AIM is unable to regulate such companies effectively but Stuttard suggested it was simply the reality of risk capital.

David Stredder summarised the position by saying he wants stronger checks on companies before they list on the market and that regulations should be upheld and enforced.

In conclusion this was useful coverage of some of the problems of AIM faced by investors. It was reasonably well balanced and factually correct, but some might think that AIM management got off somewhat lightly.

As readers are probably aware, ShareSoc has been running a campaign to improve the AIM market because of the numbers of complaints from our members (the companies mentioned in the BBC programme are just a very small sample of those who have gone bust or delisted). See http://www.sharesoc.org/aim-campaign.html for more information, and to register your support.

Indeed we had a meeting with Marcus Stuttard and colleagues the day before the programme went out and will report further on that later. As we said at that meeting, we do not wish to see investors discouraged from investing in AIM companies because it can be very profitable to invest in good early stage companies. But the AIM market does need to be improved to remove the gross abuses and unacceptable risks that investors face. If the BBC programme concentrates the minds of LSE management to improve matters, so much the better.

As David Stredder has pointed out, taking into account all the AIM failures there could have been many millions of pounds diverted into the pockets of individuals or otherwise lost that could have been invested in sound companies.

Roger Lawson

BBC Radio Programme on AIM

Are British investors being ripped off by unscrupulous businesses exploiting the AIM market? This is one of the questions being tackled on the BBC tomorrow night (27/9/2016) in a File on Four radio programme – BBC R4 at 8.00 pm – see http://www.bbc.co.uk/programmes/b07wby0z

It should make for interesting listening.

It certainly came up as a topic of conversation in our meeting with LSE management today where we discussed the problems of AIM. More on that later and I hope to write a report on the BBC programme in due course.

Roger Lawson

Robert Peston goes shopping and Carpetright

Last night a new series of TV programmes called “Robert Peston Goes Shopping” was launched on the BBC. It told the story of how a few individuals changed the nature of retailing in the UK in the 1950s and 60s. People such as Stanley Kalms of Dixons who was interviewed, Marcus Sieff of Marks and Spencer, Jack Cohen of Tesco and the Sainsburys. Typically these were dominant and self-driven personalities who adopted new methods to attract retail customers from their competitors. Jesse Boot was a similar kind of character. Apart from being an interesting programme for all students of business (and for stock market investors who invest in such businesses), it was particularly topical because one person from the same mould returned to lead the business be founded on Friday.

To be successful in a retailing business requires a single-minded approach and a strong focus on cost control, which is why forceful personalities who dominate the business can be winners when “corporate” teams often fail.

Although this programme did not mention him, Phil Harris (now Lord Harris of course) resumed the role of Executive Chairman at Carpetright on the day before (Friday the 4th October) after Darren Shapland, the CEO, resigned.  Reportedly Lord Harris was not aware of the reason for the resignation (he was actually abroad at the time), but on the same day the company gave a Trading Update that was effectively a profit warning. Like-for-like sales were down 2.5% in the 10 week period and overall sales down 4.1%, with particularly weak figures in the overseas operations in Europe.

Mr Shapland had only been in the job since May 2012 when Lord Harris moved to the “non-executive” Chairman role. Business has been difficult in the carpet sector for some years and Carpetright looks quite a “mature” business with few growth opportunities. Lord Harris has effectively been running it since it was founded 25 years ago – and before that he ran a similar business called Harris Carpets (which later became a listed company under the name Harris Queensway) after his father died when he was aged 15. He developed the model of using a central carpet cutting warehouse at Harris Carpets now used at Carpetright, which enabled operational cost efficiency and low cost buying, and hence competitive retail prices, while ensuring quick delivery to customers. At present Carpetright has the biggest carpet warehouse in Europe and a lot of investment in the cutting operations, but that does result in high operational gearing, i.e. profits are sensitive to volumes, which have been weak of late.

The author of this piece worked for Harris Queensway for some years, and Lord Harris certainly ran that business in a dominant manner – it was not so much a strong management team as a one man band with acolytes following. This style did not seem to change much at Carpetright, so management succession was always going to be a problem. But Lord Harris is now 71 years old, so relinquishing the role of CEO surely made sense. But as any Corporate Governance expert will tell you, moving to Non-Executive Chairman is far from ideal, particularly when with such a large shareholding he would obviously not be “independent” plus has a relative on the board. Such dominance over so many years in an executive role, with no doubt strong personal relationships with other staff in the company, makes it very difficult for anyone else to come in and really take charge of the business. Did the real decision maker change as planned? Or was Lord Harris still interfering in the operations of the business and not allowing Mr Shapland to really lead it? It does seem likely to me that this was more the cause of his resignation.

But whatever the reason, for Lord Harris to take back the role of Executive Chairman makes no sense. For the good of this company, they should look for a proper successor as CEO and a new independent and non-executive Chairman.  However much I respect Lord Harris for the quality of his past abilities in building this business, it is surely time for change.

Other founders of retail empires mentioned at the start of this article eventually had to face up to the succession problem – some more successfully than others. Carpetright also faces some strategic challenges that diversification into selling beds and into a few continental countries surely do not solve. It probably needs a substantial overhaul with some new ideas that only new leadership can provide. But will Lord Harris with his family’s substantial holding allow it to happen?

Meanwhile the share price fell over 8% on Friday after the trading statement, valuing the company at £455m but even that might be optimistic. The share price was over 1300p back in 2007 but is now 616p – there was a loss last year and the prospective p/e is 43. The share price seems to continue to lead a peculiar life perhaps because of the shares being closely held, not just by the family but by those who respect Lord Harris from his past success. But the latter might lose patience after a while unless there is some real change. And as we have seen at Victoria (another carpet company), if the founder bows out for any reason, even the family members can become unhappy if their dividends are threatened and the business gets into difficulty.

Yes it’s surely time for a real change at Carpetright rather than a reversion to the old guard.

Roger Lawson