This article is written by:
Judith MacKenzie
Partner and Head of Downing Fund Managers
The investment case
There is a disconnect in AIM investments right now that I don’t think is being fully appreciated.
At its simplest: the fundamentals of many AIM companies remain strong, but market sentiment has not caught up. And when that gap opens up, it can create opportunity.
Let’s start with what the underlying businesses are actually doing.
AIM companies have scaled significantly over the past decade. Average profits have increased from around £2 million per company in 2010 to more than £14 million in 2025.i This is a meaningful shift in the quality and maturity of the market.
Growth is not the issue. Nor, in many cases, is resilience. AIM businesses today are generally more established, better capitalised, and more globally diversified than the market perhaps gives them credit for.
What has changed is sentiment.
After a difficult couple of years - driven by rising interest rates, outflows following the Autumn 2024 Budget, and a broader rotation away from smaller companies - AIM valuations have compressed. As a result, many companies are trading at levels that, in our view, do not reflect their underlying fundamentals.
This is not unusual in smaller company markets. But the scale of the dislocation today is notable.
In many cases, underlying earnings have continued to progress while valuations have moved in the opposite direction. For long-term investors, that can provide opportunities to access growing businesses at valuations that do not fully reflect their future potential.
A market that has quietly reset
AIM today is not the same market it was five or 10 years ago.
Periods of stress tend to force a reset. We have seen weaker businesses exit, leaving behind a smaller but, in our view, stronger cohort: cash-generative companies with clearer business models and a greater resilience.
Fundraising activity has begun to recover, while regulatory changes are helping make the market more attractive to growing businesses. Taken together, this points to a market that is evolving, not declining.
Why valuation discipline matters more here
Unlike large-cap markets, AIM is less efficient. Analyst coverage is lower, liquidity is thinner and share prices can diverge meaningfully from fundamentals.
That can create risk, but it also creates opportunity.
At Downing, our approach has always been grounded in valuation discipline. We focus on under-researched parts of the market and avoid crowded trades where the quality of a business is already fully reflected in the share price.
This selectivity matters.
Within AIM, outcomes are driven far more by stock selection than by market direction alone. It is perfectly possible to generate strong long-term returns even through periods of volatility - but only if you are disciplined about what you own and the price you pay for it.
Addressing the obvious concern: risk
The question advisers are rightly asking is whether AIM is simply too risky, particularly in an estate planning context.
I think that conflates two different issues.
AIM has always been a higher-volatility asset class and that hasn’t changed.
The more relevant question is whether investors are being adequately compensated for taking that risk.
When valuations are elevated, that trade-off becomes less attractive. When valuations are depressed, but underlying earnings remain intact, it becomes more compelling.
That is where I believe we are today.
Put another way, the opportunity is not that AIM has become less risky. Rather, investors are being offered more potential reward for taking that risk than they have been in recent years.
A more compelling entry point than the recent past
Periods of weak sentiment are rarely comfortable. However, they have often provided the foundations for attractive long-term returns.
The challenge for investors is that markets rarely wait for confidence to return before re-pricing opportunities. By the time sentiment improves, a significant portion of any recovery may already have occurred.
We believe the current environment - where fundamentals remain sound but valuations have been driven down by sentiment - offers one of the more attractive entry points into AIM in recent years.
For advisers seeking exposure to entrepreneurial, growth-oriented businesses, today's market presents a relatively unusual combination: companies that are demonstrably stronger than they were a decade ago, available at valuations that reflect considerable investor caution.
The risks have not disappeared.
But the pricing of those risks has shifted.
Download The Case for AIM to explore the data behind this disconnect, including our analysis of earnings growth, valuation trends, and where we are finding opportunities today.
Important notice
Past performance is not a reliable indication of future performance.
This article is intended for financial advisers and has been approved and issued as a financial promotion by Downing. Any personal opinions expressed are subject to change and should not be interpreted as advice or a recommendation. Capital is at risk and investors should note that their investments can rise as well as fall and investors may not get back the full amount invested. Downing is a trading name of Downing LLP. Downing LLP is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 545025). Registered in England and Wales (No. OC341575). Registered Office: 10 Lower Thames Street London EC3R 6AF.
