Remuneration policy is likely to change whether AIM companies go private, become PE portfolio companies or stay put. Sometimes the devil you know…..

Reports of AIM’s demise are premature. That said, for some time London’s junior market has not been fulfilling the purpose for which it had been designed, i.e. a nursery for high risk early-stage businesses with growth potential but which do not meet main market entry requirements, to access the growth capital they need – a place of high risk and potentially high reward.

It has been reported that there were 11 AIM IPOs in 2024, the lowest since the 2008/9 financial crisis. Negative influences include Brexit, capital outflows from the UK, costs, there are other ways to raise capital than IPO, inflation, high interest rates, flat economy, constraints on raising capital from the increasing presence of passive investors and no clear UK capital allocation policy.

On the plus side, OECD and IMF 2025 forecasts for real GDP growth among the G7 place the UK 2^nd (behind the US) and 3^rd (behind the US and Canada) respectively. Panellists discussing the future for AIM recently commented that AIM is supported by an advisory framework that understands the market, investors and companies; UK regulatory reforms focus on encouraging capital inflows to the UK, the challenges are recognised and work is in train to overcome them; the UK pension industry is the third largest in the world; AIM is trading at a discount of 30% to 40% to its 10-year average and AIM companies have more control over their destiny than, say, private equity portfolio companies.

Accordingly, despite the negative influences there are grounds for optimism about AIM in the coming year.

Companies thinking about leaving AIM have, broadly, three options; go private, seek private equity funding or stay put. A possible fourth option is to transfer to an overseas stock exchange, e.g., NASDAQ but whichever course a company takes is likely to have an impact on future remuneration policy and practice.

Private equity firms are, clearly, equity investors but their equity might not be as ‘permanent’ as equity raised from investors on a public market. Whilst (some) PE investors are taking longer-term views, their focus is on getting their money back plus their desired return within a specified time-frame. Their own remuneration arrangements are structured to be consistent with that aim. Remuneration arrangements for portfolio company executives are also structured to support the PE investor’s investment strategy. Typically, equity-based incentives represent a higher proportion of total remuneration than they might have done beforehand. However, as there is no public market for portfolio company shares, their executives must wait for an exit before cashing-out, usually at the same time as the investment professionals in the PE house. A challenge for both PE investors and their portfolio companies is to design remuneration arrangements that support investment strategy whilst recognising the different operating dynamics of PE investors and their portfolio company executives.

In one sense, private companies have greater flexibility than quoted companies about executive remuneration. Corporate governance regulation is lighter than it is for quoted firms. Our research indicates that many private companies accept the need to pay market rates to attract top executive talent. A key difference, however, relates to the use of equity. Whilst private companies can (and many do) make equity awards to executives, two challenges are (i) the lack of an open market on which to trade the company’s shares and (ii) valuation.

Staying put on AIM may also require companies to adjust their remuneration policies and disclosures. About 90% of AIM companies have adopted the QCA Corporate Governance Code, which was revised for accounting periods starting on and after 1^st April 2024. We have written about the impact of the revised QCA Code in earlier editions of this Newsletter Remuneration disclosure requirements bring big changes for companies that have adopted the QCA Corporate Governance Code. Sometimes the best course is to stay with the devil you know.

MM&K is a full-service, independent advisory firm specialising in executive remuneration, performance and related corporate governance. We advise both quoted and private companies and are the leading UK independent adviser to private equity firms. If you would like to get in touch to follow-up this article,  please contact paul.norris@mm-k.com or stuart.james@mm-k.com.

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