After a record-breaking 2006, the first quarter of 2007 provided a return to reality for AIM, with the number of IPOs tumbling, accusations of poor standards of regulation and market jitters.

When Irish tropical fruit distributor Fyffes plc joined AIM from the Main Market on January 10 – eight days after its demerged general produce and distribution business Total Produce plc also joined – it looked like admissions would continue where they left off in 2006.

But after these initial large admissions – both had market caps of more than £175 million – the rest of Q1 proved to be quieter than players in the market were used to.

While 54 companies joined or rejoined AIM in Q1, raising some £1.1 billion, in terms of admissions the quarterly total was the worst since Q1 of 2004, when only 53 listed, according to Grant Thornton. It also represents a drop of more than 50% year on year and only about a third of the 150 companies that joined in Q4 of 2006.

In addition, the total raised was the least in a quarter since Q1 of 2005, when only £370.3 million was recorded. It was also 44% down year on year.

This follows a record-breaking 2006 for AIM, when 362 new companies joined the market, according to figures from Growth Company Investor. These companies raised £9.4 billion – compared to £10 billion in total in the five years to December 2005.

While admissions and funds raised tumbled in Q1, Philip Secrett, a partner at Grant Thornton Corporate Finance, is not perturbed by this. “AIM’s success in recent years has got the City accustomed to record upon record and while this latest quarter’s slowdown appears brusque, the pipeline of deals remains healthy with the next few weeks and months expected to deliver a performance more in line with AIM’s usual standards,” he said.

“The first quarter of the year always takes a while to get going,” Secrett added. “January and February have historically been quieter with most admissions completed in the pre-Christmas rush. This year’s performance owes much to a quieter March which was affected by the ripple effects of the Asian markets tumble earlier in the month. Most companies on the brink of flotation then will have been wise to delay admission a few weeks, setting the expectation for a far busier April.”

AIM was not the only market in Europe to experience a downturn in Q1. Overall in Europe, there were 137 IPOs in the first quarter of 2007, 16% down on the 164 recorded in the same period in 2006 and some 52% down on the 288 recorded in Q4 of 2006, according to statistics from PricewaterhouseCoopers.

International expansion

Despite the downturn, AIM’s international expansion continued in Q1, with more than half of the listings coming from overseas, according to Linda Main, transaction services partner in KPMG’s Capital Markets Group.

North American businesses were particularly active in Q1and have been welcomed by the investor community. For example, electrical components and equipment business Applied Intellectual Capital was admitted in January, raising £19.95 million and its share price has steadily increased since, from 100.5p at admission to 128.5p at the time of writing.

The continuing popularity of AIM with US companies seems to spite assertions from people like Roel Campos from the US Securities and Exchange Commission that AIM is little more than a casino.

“[This] suggest[s] there is little evidence that corporates are being deterred by criticism of the way the market operates,” Main said. “We [KPMG] believe that the UK’s risk-based approach remains appropriate and a success.”

Many of the international listings were property funds domiciled in the Channel Islands and Isle of Man – funds continue to be attracted by the tax benefits - and these raised some of the largest sums of the quarter. For example, Isle of Man-based real estate firm Dev Property Development plc raised £138 million when it was admitted on February 1, while Channel Islands fund Prosperity Russia Domestic FD Ltd raised £179.5 million on the 21st of the month.

Indeed, property funds generally, along with private equity funds continued to be in favour with investors in Q1, accounting for most of the funds raised according to Grant Thornton’s Secrett.

“While during 2006 around 50% of all new issue cash raised (£3.42 billion by real estate companies and £1.67 billion by equity investment instruments) was accounted for by this group, early 2007 saw that proportion rise to almost 70% (£791 million raised), leaving a larger proportion of ‘traditional companies’ to fight for investor interest and raise smaller amounts,” he said.