Critics of flourishing AIMway off target

The light-touch regulatory net, which had been almost universally acclaimed as a source of competitive advantage, has been seen to have holes in it - holes large enough for a bank to drop through.

But the point that emerges most strongly from a report published today on the rise and rise of the Alternative Investment Market is that light-touch and proportionate regulation has been and remains integral to its success.

A team of academics at the London School of Economics, having conducted an in-depth examination of the market, concludes that the system of regulation specifically tailored to the needs of small, growing companies works well for investors and the businesses whose shares are traded on the market. The failure rate is low - less than 3% in the past four years - even though many AIM companies are early-stage enterprises and/or operating in high-risk sectors.

Complaints by senior officials at the New York Stock Exchange and the US Securities and Exchange Commission that AIM exposes investors to serious risk have not been borne out by the facts. The limitations of light-touch regulation may have been exposed by Northern Rock, but on balance the London regulatory system has serves the financial markets well. This is not the time to lose confidence in it.

AIM's growth has been phenomenal. Having started in 1995 with 10 companies, it now comprises more than 1600 with a combined market capitalisation of more than £100 billion, about half of which is accounted for by companies from outside the UK. Capital-raising, which was only £2 billion in 2003, doubled to £4.7 billion in 2004, almost doubled again to £8.9 billion in 2005 and again to £15.7 billion in 2006 - showing why its US competitors got rattled.

Half of this business came from overseas, generating £1 billion a year in fees for City-based advisers and market participants. But in a rare note of caution, the LSE team says the success in attracting overseas listings needs to be matched by an increase in interest from non-British investing institutions to consolidate AIM's unique position as the world's leading market for young, growing companies.

Investors have also have done quite well out of this. One of the difficulties in assessing AIM's performance is that it has a large number of companies where the free float of actively traded shares is low, and the prices of these businesses tend not to move much so overall performance appears to be flat.

However, it scores better using other measures. An analysis of after-market returns on new issues since 2000, for example, suggests that on average investors buying them all would have had a cumulative return of 84% over three years, which is better than the wider market achieved.

Not everyone will be convinced by this calculation, but the wider point is that there ismoney to be made in AIM. True, it remains a share-picker's market, but then so to a greater or lesser extent do all stock markets.