Where the pros are finding opportunities in shrinking AIM market

The AIM market is not for the faint-hearted, but there are pockets of opportunity. Beth Brearley asks fund managers to outline where they are finding value.

4th September 2025 08:53

Beth Brearley from interactive investor

The AIM market is inherently volatile, sensitive both to market sentiment and shocks in the domestic economy, and its constituents don’t react favourably to rising interest rates.

Little wonder then that the post-pandemic era has proved to be a trying time for the junior market, compounded by uncertainty over reductions to tax breaks for AIM investors. Indeed, the FTSE AIM 100 Index is down just over 50% since its all-time high in August 2021.

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Adding salt to the wound, research from Aberdeen Investments and Peel Hunt released in May predicted that the market is likely to shrink by a fifth this year, with 61 companies representing £12.3 billion of market capitalisation planning to leave the market.

The outlook for AIM

Although changes to the tax regime were clarified in last year’s Autumn Budget, when it was announced that the inheritance tax exemption on qualifying AIM shares will be halved, has the damage been done?

Regulatory reforms could be a tailwind. Under the Mansion House Accord, 17 major pension providers have pledged to invest 10% of their portfolios in assets that boost the economy such as infrastructure, property and private equity by 2030. At least 5% of these portfolios will be ring-fenced for the UK. AIM-listed shares will be included in the Mansion House Accord.

Simon Moon, manager of the Unicorn UK Smaller Companies fund, points out: “For AIM to thrive over the long term, it is essential that companies recognise it for what it is: a flexible, well-regulated platform that provides access to capital, visibility with investors, and a proven route to growth.”

Will Tamworth, co-manager of the Artemis UK Smaller Companies fund, admits the dwindling market is not healthy over the long term, but agrees that there are pockets of opportunity in the AIM market.

“At an aggregate level, the AIM has been pretty disastrous,” he said. “But from an investor’s perspective, we can make good returns from an out-of-favour, shrinking market.”

Tamworth said the Artemis portfolio has seen 36 takeovers since 2019 at an average premium of just under 50%, such as Brooks Macdonald, Gamma Communications and Johnson Service Group.

“If you can reinvest that 50% premium in similarly undervalued companies, you can have a very profitable fund that generates strong returns over a long period, even in a shrinking market.”

He added: “It’s not good for the UK economy or the UK stock market to have a declining AIM market, but in the short term, that can create lots of opportunities.”

IPO drought

Another contributing factor to AIM’s dwindling size is, of course, the dearth of IPOs, as Moon points out: “A healthy pipeline of IPOs is needed to replenish the market and keep the ecosystem vibrant.”

However, Brendan Gulston, manager of the WS Gresham House UK Micro Cap fund, is sanguine on the outlook for the IPO market, which he describes as “a cyclical phenomenon”.

“In 2021, we had one of the biggest IPO markets we’ve seen in decades,” he said. “I’d expect this phenomenon to revert at some point; I don’t subscribe to the school of thought that we’re going to have 10 or 15 years of companies exiting the market with none to replace them.”

Where the pros are finding opportunities

Commenting on the opportunities at the small and micro-cap end of the market, following the “material” sell-off, Gulston said: “The difference in valuations from micro-caps up to large-caps in the UK has become the biggest disconnect I’ve seen in the 10 years I’ve been doing this, which creates a buying opportunity.”

Gulston focuses on sectors that are less cyclically exposed and capital light, namely financial services, TMT, consumer, and healthcare.

He picks AIM newcomer MHA (LSE:MHA), tech firm ActiveOps (LSE:AOM) and software and lending solutions provider Trufin Ordinary Shares (LSE:TRU) as examples.

Gulston notes: “MHA is an accountancy firm with a strong balance sheet and high recurring revenue, and it’s got long-term structural trends driving growth.

“ActiveOps helps large corporates manage their in-person and remote workforce, and TruFin has a subsidiary, games publisher Playstack, which sits in an attractive segment of the video gaming market because the cost to develop games is limited.”

At Artemis, two of Tamworth’s largest AIM holdings are GB Group (LSE:GBG) and Victorian Plumbing Group (LSE:VIC).

“GBG is the market leader in online identity verification and fraud prevention and has a strong balance sheet,” he explained. “It’s buying back its shares, and trading on an 8% free cash flow yield that’s a world away from the valuation it was on a few years ago.”

Another market leader in the portfolio is Victorian Plumbing, which is operating in an under-penetrated market, Tamworth said.

“Victorian Plumbing has just moved into a new warehouse, which gives them the capacity to increase sales to £600 million, so broadly double the size of the business.”

Unicorn’s Moon is also finding cash-generative businesses across a range of sectors, such as photonics technology firm Gooch & Housego (LSE:GHH), which serves growth markets ranging from aerospace to healthcare, defence technology group Cohort (LSE:CHRT) and flooring firm James Halstead (LSE:JHD).

Moon points out: “Cohort is benefiting from rising European budgets and offers multi-year revenue visibility, while James Halstead combines steady demand for commercial flooring with outstanding cash generation and long-term dividend growth.

“These profitable businesses are run by aligned management teams that can prosper as confidence in UK small and mid-caps returns.”

Georgina Brittain, who co-manages the JPMorgan UK Small Cap Growth & Income (LSE:JUGI) fund, the product of a merger between the JPMorgan Mid Cap Investment Trust and the JPMorgan UK Smaller Cos Investment Trust last year, holds AIM giant Jet2 Ordinary Shares (LSE:JET2) in the portfolio.

As winner of AIM Growth Business of the Year in 2024, Brittain praisedJet2’s “conservative” management and foresight.

“During Covid, Jet2 ordered lots of new planes at great valuations; nowadays there’s a long waiting list. They were on the front foot and now they’re gaining market share and growing rapidly,” Brittain said.

Radio frequency technology manufacturer Filtronic (LSE:FTC) is another AIM holding, which also recently caught the eye of SpaceX. The US space tech company now owns 10% of Filtronic and has further warrants issued as part of a strategic partnership.

“Not only is that a fantastic contract for Filtronic to have, but it shows Filtronic has succeeded where hundreds of times the number of people at SpaceX haven’t.”

AIM stocks tend to be volatile high-risk/high-reward investments and are intended for people with an appropriate degree of equity trading knowledge and experience.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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