Do not blame London for this latest stock market departure
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
We know the UK stock market is in a pinch, but one minnow may be taking the mickey.
Biotech business Redx Pharma this week blamed low liquidity on London’s junior market for its decision to delist its shares from Aim and re-register as a private company. Minority shareholders can either sell in the market or get stuck; the stock plummeted by two-thirds.
The median stock turnover ratio on the Aim All Share — daily volume as a proportion of shares outstanding — was 0.07 per cent since the start of 2021 compared with 0.23 per cent for FTSE 100 companies.
Still, Redx’s moaning does not stack up. It moans about liquidity, but it has a free float low enough to prevent it joining the index. Redx’s market value, about £70mn before this week’s collapse, would put it 200th in the 650-strong All Share. Its free float of just 8 per cent doesn’t meet the 15 per cent minimum required.
It says it needs improved access to capital, but it claims to be one of the largest biotech fundraisers in recent years. Redx raised £26mn in 2021 and £35mn in 2022; it even got another £14mn last October when markets were barely open. Indeed, Aim companies overall raised some £10.5bn in 2021 — the highest total since 2007, according to Dealogic.
What is odd is that this flounce from the market comes at a point where London’s liquidity is finally improving. The junior market did not suffer the same squeeze on trading, as City research budgets were cut following the Mifid II reforms. Research from the University of Bath found that a 12 per cent drop in analyst coverage from 2015 to 2020 had hurt share turnover on the main market. Coverage on Aim increased over the same period, in part because of the requirement to have a nominated adviser or nomad.
Lower liquidity is a factor in the UK market’s broader valuation discount to global markets — a shortfall that is now at its largest since the early 1990s. Small caps also face particular issues as active managers consolidate and minimum liquidity requirements rise.
This double whammy has pushed the Aim All Share index to its lowest level ever relative to that of the FTSE All Share. This is doubtless annoying for ambitious companies trying to distinguish themselves in London’s junior ranks. But for a biotech with a tiny free float, shrinking revenues and mounting losses, it is also possible that London’s liquidity is not actually the major problem.
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