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Small investors miss out as institutions and banks cash in

Last week, we received this request from a reader.

Dear Editor

I'm hoping you might consider publishing a commentary on the recent spate of share purchase plans and placements. The mechanism seems anomalous and disadvantageous from a shareholder's point-of-view. What intrigues and annoys me is that in almost all cases retail shareholders are not given the first and biggest bite of the (often very attractive and profitable) cherry. What seems to be the case is that institutional investors are given the bulk of the issue and smaller shareholders the residue (the crumbs).

Surely directors of a company are supposed to act in the best interests of all shareholders and yet they appear to ignore this by not giving preference to the company's owners - the people they are supposed to represent. The recent SPP/placement by Cochlear illustrates the point and inequities. Thanks for your publication.

***

The biggest equity capital-raising binge since the GFC is showing no signs of abating. However, Australia’s retail shareholders are getting increasingly scaled back and diluted by boards and investment banks.

After raising $1 billion from institutional investors, Ramsay Health Care initially proposed limiting its follow-on share purchase plan (SPP) for retail investors to just $200 million. But when $695 million came through the door from more than 41,000 applicants, it expanded this to $300 million, refunding $395 million.

Medical device company Cochlear trod a similar path, raising $880 million from institutions and then proposing a derisory $50 million cap on its SPP for retail investors. This cap was then reluctantly lifted to $220 million after 16,651 shareholders applied for $417 million worth of stock.

Allocate according to ownership

Neither Ramsay Health Care nor Cochlear, even after lifting their SPP caps, adhered to the principle of dividing up the capital raising to reflect the relative proportions of the company owned by institutional and retail shareholders before the capital raising was launched.

It’s not hard to comprehend. If retail shareholders own 30% of a company, the SPP should represent 30% of the overall capital raising.

National Australia Bank never respected that concept. It was 48% owned by its 615,000 retail shareholders before the board decided to launch an emergency $3 billion institutional share placement at the knockdown price of $14.15 in late April.

Retail shareholders were promised a compensatory $500 million SPP at the same price which was always going to be swamped, given that if all 615,000 shareholders applied for the $30,000 maximum, a whopping $18.45 billion would have come through the door.

The last 12 months have seen a step change in company disclosure about capital raisings, so we now have comprehensive data from 25 companies in terms of how many retail shareholders were sent capital raising offers and how many actually applied.

This is how NAB did it on Wednesday:

“The SPP offer was made to approximately 615,000 eligible shareholders, with valid applications received from approximately 155,000 eligible shareholders for a total value of approximately $2.9 billion. Valid applications received represented a participation rate of approximately 25% of eligible shareholders (representing 21% by shareholding), with an average application amount of approximately $18,500.”

NAB’s directors succumbed to pressure and used their discretion to increase the SPP from $500 million to $1.25 billion, meaning they are only refunding $1.65 billion.

Imagine if all retail investors participated

The Australian Securities and Investments Commission’s (ASIC) move last year to double the maximum amount of an SPP offer for individual investors from $15,000 to $30,000 has turbo-charged the structure as a capital-raising option, but imagine if all retail shareholders acted rationally.

NAB shares were 8.5% above the offer price when the SPP closed on May 22 but 75% of them, or some 460,000, didn’t bother applying at all.

One of the problems is that financial intermediaries such as brokers, financial advisers and accountants are not passing on the details of in-the-money SPP offers to their clients. Administrative incompetence has diluted retail shareholders out of billions of dollars over the years.

Sadly, the biggest losers in Australia’s anything-goes capital raising system are the retail shareholders who ignore an in-the-money offer. That is usually a substantial majority of the share register, as occurred with NAB.

Handsome fees to investment banks

Investment banks have now pocketed more than $300 million worth of fees, underwriting almost $20 billion worth of capital raisings over the past 10 weeks. They rarely get paid to underwrite SPPs. For instance, NAB’s $3 billion institutional placement generated $39 million worth of fees for underwriters Goldman Sachs and Macquarie, while the SPP generated nothing.

This is partly why boards should increasingly turn to their retail shareholders for fresh capital rather than listening to investment banks and tapping their institutional clients for excessive funds whilst not leaving enough cash on the table for the retail shareholders.

There’s more to come on this front. Lend Lease did a $950 million institutional placement last month, followed by a $200 million SPP. Gold miner Newcrest has a similar dilemma after it too did a $1 billion institutional placement but then proposed limiting its SPP to just $100 million.

At least they’ve worked out that their circa-60,000 retail shareholders, who will still probably throw about $500 million at the SPP, only own about 6% of the company, whereas they are being offered 9% of the capital raising.

A rare example indeed of institutional investors getting diluted.

 

Stephen Mayne is the Founder of Crikey, where this article was first published. He also updates data and writes at The Mayne Report. The author has participated in some of the SPPs mentioned in this story.

See also The Mayne Report’s article on best practice capital raising outcome announcements, from which we have extracted the following:

 

Best practice capital raising outcome announcements

Here is a selected list of best practice announcements by companies at the end of capital raisings in terms of disclosing information about retail shareholder participation rates.

Lend Lease: after a $950 million placement, launched a $200 million SPP that was expanded to $260 million and adopted best practice transparency but was the first to do it through dot points. See the SPP outcome announcement which included the following words:

  • The SPP was open to 60,688 eligible securityholders.
  • Lend Lease received approximately $429.4 million worth of valid applications from approximately 24,700 securityholders.
  • The average application amount was approximately $17,400.

NAB: after a $3 billion placement, the $500 million SPP was expanded to $1.25 billion and the bank adopted best practice disclosure in this SPP outcome announcement:

"The SPP offer was made to approximately 615,000 eligible shareholders, with valid applications received from approximately 155,000 eligible shareholders for a total value of approximately $2.9 billion. Valid applications received represented a participation rate of approximately 25% of eligible shareholders (representing 21% by shareholding), with an average application amount of approximately $18,500."

Ramsay Healthcare: after a $1 billion placement, the $200 million SPP was expanded to $300 million and the company adopted best practice disclosure in this SPP outcome announcement:

"The SPP was open to 80,273 eligible shareholders and valid applications totaling $695 million were received from 41,877 shareholders, reflecting a participation rate for eligible shareholders of 52% and an average application amount of $16,596."

Infomedia: after a $70 million placement, the $15 million SPP ended up attracting $13.94 million and the company adopted best practice disclosure in this SPP outcome announcement:

"The SPP offer was made to 5,011 eligible shareholders. Valid applications totalling approximately $13.94 million were received from 771 eligible shareholders. This represents a participation rate of approximately 15.3% of eligible shareholders." And unstated, the average application was $18,080.

Monash IVF: completed an $80 million capital raising with some excellent detail when announcing the outcome of its $15 million entitlement offer where "overs" of 100% permitted. See SPP outcome announcement:

"A total of 1,203 valid applications for retail entitlements were received for approximately 10.1 million News Shares for approximately $5.3 million, representing a take-up rate by eligible shareholders of approximately 36%. In addition, a total of 424 applications for approximately 2.3 million News Shares for approximately $1.2 million were accepted under the top-up facility, increasing the total take-up from eligible retail shareholders to approximately $6.4 million representing a total take-up of approximately 43%."

Metcash: after a $300 million placement at $2.80, a $30 million SPP was launched which ended up being priced at $2.28, a 2.5% discount to VWAP. See SPP outcome announcement:

"The SPP offer was open to 19,124 eligible shareholders and valid applications totalling approximately $13.6 million were received from 1,214 eligible shareholders. This represents a participation rate of approximately 6.3% of eligible shareholders. The average SPP application amount was approximately $11,200."

SCA Property Group: after a $250 million placement at $2.16, offered a $50 million SPP and adopted best practice disclosure in this SPP outcome announcement:

"The UPP offer was sent to approximately 60,000 security holders and valid applications totalling $29.3 million were received from approximately 2,350 holders. This represents a participation rate for those security holders of 3.9% and an average application worth $12,500."

Next DC: After a $672 million placement, they completed a $190 million uncapped SPP in May 2020 and adopted the following best practice disclosure in its SPP outcome announcement:

"The SPP offer was open to 17,015 eligible shareholders and valid applications totaling approximately $191 million were received from some 8,684 shareholders, reflecting a participation rate for those eligible shareholders of 51% and an average application amount of $22,051."

Cochlear: responded positively to a transparency request using the following words in its 3-page SPP outcome announcement:

"The SPP offer was made to 36,724 eligible shareholders and valid applications totaling approximately $417 million were received from 16,651 shareholders. This represents a participation rate of approximately 45% of eligible shareholders. The average SPP application amount was approximately $25,000."

Webjet: Wrapping up its $118 million non-renounceable 1-for-1 retail offer in April 2020, the company responded positively to requests for extra transparency with the following words which provided more information on the "overs" component than any other issuer to date:

"The offer was sent to 24,060 eligible security holders and Webjet received 12,633 valid applications for approximate 50.4 million shares worth $86 million, implying a take-up rate of 72.7%. Webjet also received, under the top up facility, applications from 8324 retail investors for 27.5 million additional new shares in excess of their entitlement aggregating to approximately $46.7 million... All eligible applications for additional new shares will be scaled back by approximately 31%."

Afterpay: didn't go for precise numbers but still broadly embraced the improved disclosure template with these words on January 22, 2020. They were also the first issuer to do this when imposing a scale back on an SPP:

"The SPP Offer was sent to approximately 40,000 eligible securityholders and over 15,000 valid applications were received, representing a participation rate of 37% based on the registered holdings. As the value of applications, approximately $240 million, significantly exceeded the cap of $30 million for the SPP, the Afterpay board has decided exercise its discretion under the SPP terms to scale back applications to a total of approximately $33 million." See announcement.

Westpac: adopted the new model for disclosing participation rates in the SPP with these words on December 10, 2019:

"The SPP Offer was made to approximately 618,300 Eligible Shareholders, with valid SPP applications received from approximately 40,900 Eligible Shareholders. Valid applications received represent a participation rate of approximately 7% of Eligible Shareholders with an average SPP Application amount of around $18,850. The final amount raised of $770 million excludes approximately $68 million of withdrawal requests accepted from approximately 3390 Eligible Withdrawal Applicants." (Those who had applied before the AUSTRAC litigation was launched).

AMP: partially adopted the new model for disclosing participation rates in the SPP with these words on September 10, 2019 but didn't disclose low percentage of 2.1% and rounded up the participation number:

"The SPP was sent to 713,273 eligible shareholders, with valid applications received from approximately 15,000 shareholders and an average application worth A$10,000."

AMP reported that it had 738,817 shareholders in May 2019, so 96.5% were eligible for the SPP.

GPT: lifted a $50 million cap on its SPP to $66.8 million and then used these excellent words in the outcome announcement:

“The SPP offer was sent to 31,781 eligible Security holders and valid applications were received from 5,980 Security holders. This represents a participation rate of 18.8% and an average application worth approximately $11,170.”

GPT reported it had 32,614 shareholders in March 2019 so 97.44% of shareholders were eligible for the SPP.

Mirvac: see this announcement in July 2019 which included the following key paragraph:

“The SPP offer was sent to 24,158 eligible Security holders and valid applications totalling $46.2 million were received from approximately 3,386 Security holders. This represents a participation rate for those eligible Security holders of 14 per cent and an average application worth $13,600.”

Mirvac reported it had 24,183 shareholders in August 2019 so the offer was sent to 99.9% of shareholders.

Dexus: voluntarily set a new benchmark for transparency and data disclosure in their announcement in June 2019 by including this paragraph:

“The SPP offer was sent to 26,774 eligible Security holders and valid applications totalling $63.9 million were received from approximately 4,640 Security holders. This represents a participation rate for those eligible Security holders of 17.3 per cent and an average application worth $13,800.”

Dexus reported in August 2019 that it had 26,175 eligible shareholders so somehow the SPP was sent to 102.3% of eligible holders.

Woodside Energy: After email requests, it was great to get a positive response which saw Transurban-style disclosure from the oil and gas giant at the conclusion of its $2.5 billion PAITREO capital raising. Woodside's 1-for-9 offer at $27 saw $1.57 billion raised from the institutional offer which was 90% subscribed. The shortfall cleared at $29.60 giving $2.60 to non-participants. The $930 million retail offer retail offer opened on February 21 and rights trading ran from February 19 until February 28. Best practice set by Transurban saw Woodside make this ASX announcement, disclosing the size of the retail shortfall before the auction. It was 40% or 14.4 million entitlements costing $389 million. The announcement also revealed that $12 million worth of rights were traded in a range between $1.12 and $2.58.

Transurban: It is always pleasing to see new levels of transparency in the public company space and this announcement from Transurban on January 29, 2018 set a great benchmark. After making a specific request for additional disclosure of Transurban, we loved this response from the company because never before had there been such detail revealed on capital raising participation. When chronic non-participation by retail investors in capital raisings is a major problem, we need more data on what steps need to be taken to both lift participation and ensure non-participants are compensated fairly when diluted.

Transurban revealed that 53,800 shareholders applied for $395 million shares, comprising 72% of the $554 million worth of new shares on offer in the PAITREO. Even better, was this statement: “Retail entitlements worth approximately $7.5 million were traded on the ASX between 15 December and 17 January in a range between 26 cents to $1.75. The volume weighted average price for retail entitlements traded during this period was 88 cents.”

No issuer had ever summarised the outcome of rights trading in this level of detail before and we trust others will follow suit in the future.

 

30 Comments
Chris Cooper
June 24, 2020

Capital raisings should all be on a strictly pro rata renouncable basis. To ensure essentially full participation the pricing should be significantly discounted thereby motivating shareholders to either participate or sell their rights which would logically be clearly " in the money " and easily sellable. The significant discount on offer would be entirely fair in light of the issue being 100% pro rata .

Martin
June 18, 2020

I never received notification of the NAB plan. Nothing in my email. Since a full 75% of shareholders didn't apply, I'm wondering how many others there are like me.

Jack
June 18, 2020

Hi Martin, same here, although completed a long time ago, no notice from NAB on how much I have been allocated.

Jon
June 26, 2020

Me too, never received notification of the NAP SPP offer and I would have bought the maximum.
I've complained to computershare. What's going on?

Stephen Stibbard
June 09, 2020

Of course placements are easy and quick. But is this sufficient justification for placements with instos to the disadvantage of the company's owners/shareholders. If there is a sudden and urgent need for an injection of funds by a company this suggests that directors and management may not be as competent as they should be!
Lets hear from the Institute of Company Directors. What does it recommend?

Mark Palmer
June 07, 2020

I think it is an outrage that our capital (the discount provided) is given to institutions at retail owners expense. Look at the quantum raised/underwritten for Breville and the pittance left for retailer investors. If the company provides such a huge discount for institutions they should provide it equally to retail investors. I consider it a form of theft from retail investors.

Mick J
June 07, 2020

Retail shareholders need to use the ballot box so to speak. Go to AGMs, have the spine to stand up and say your piece, ask shareholders in the room for a show of hands to display their displeasure.
The problem with corporate Australia generally is that it has corrupted the system and seeks to give shareholder wealth to the top end of town. CEOs and Boards get paid obscene amounts of (unjustifiable) money and companies no longer have a show of hands at AGMs. The reason is to hide shareholder, not streamline the system.
Its about time the government we don't have at present did something about this but don't expect anything because its a business controlled entity also working for the top end of town.
Its a tough road for investors and perhaps we need to act in unison and threaten to abandon the equities market if the theft of shareholder wealth does not stop.

Stuart B
June 08, 2020

As you say, acting in unison is the only way for retail investors to gain any leverage over the big end of town. The shareholders association has to develop teeth, using a campaign that says "small investors matter".

Greg
June 05, 2020

I have participated in two raisings that had allocations this week. In both cases the retail component was not fully taken up, yet over subscriptions were scaled back and the excess shares given to the underwriters. The over subscriptions are required as retail shareholders have already been diluted by the institutional placement that occurred prior to the rights issue. The underwriters, in cahoots with the directors, are just sitting back and taking the shares if they are trading above the issue price. Retail shareholders get screwed.

Jan X
June 05, 2020

What angers me is that some institutions got shares even though they were NOT shareholders whereas retail investors, many of whom have held shares for a long time, were scaled back. Why say you can apply for up $30K, when you only get 28%. And, I agree they keep your $30 for several weeks, you can't use it (and interest is lost), and you don't learn how many shares you will get until the SPP closes. And, then to add insult to injury, they don't refund the balance for 2 to 3 days later. In this low interest rate world, the interest lost is insignificant but if rates were higher it would be a further loss to the retail shareholder. It is absolute daylight robbery!

All of my applications to COH, APT and NAB were scaled back. MSB recently had a cap raising but retail shareholders were not even invited to apply. But, I got my full $30k of Reece shares which was more than I held. Well done, Reece!

Murray McLean
June 05, 2020

Here we go again!
We have just spent One Billion dollars, yes that is a 'B', on the Royal Commission and this type of activity still persists.
Where are the so called guardians of all things 'right' and 'good', i.e., ASIC, ACCC, ATO, et al?
No appearance your Worship!
Common-sense, Bi-partisanship, and the Common-good disappeared years ago.
Replaced by, ever present and stronger, Greed is Good!

Stephen
June 04, 2020

I have applied for $30k in a number of SPP's. You send off the money and a month later you get 75% of it back but you could do nothing with that money in the interim. Crazy. Qube did the right thing and gave us a guaranteed allocation with an offer to double it. A renounceable rights issue is the fairest and equitable way to go. Who says it needs to take a month. Comptershare, Link and Boardroom obviously know how to set these things up quickly. We live in an electronic world and I assume most people receive all the details by email. We need to get the Government off our backs and say that a rights issue document must be no more than five pages long instead of hundreds of pages that most people do not read. It just needs a statement that says "You own shares in this company so you are or should be aware of what the company does, their dividend policy and their future prospects. If you are unsure, please refer to their website or third party sites that assist with this information."
Then they need to send out the document and close it off five business days later. Bpay takes 24 hours for them to receive the funds. Forget the mail for documents (it soon won't exist for letters anyway) and forget cheques (most companies have done this already). If there are refunds - unlikely if a renounceable rights issue - then they should be made the same day as the shares are allocated. Whatever the system they use, every shareholder should be given the same opportunity. The excuse that they need the money in a hurry is just not valid unless they are a hopeless company and there is no reason why a right issue could not be all over and done with in two weeks from start to finish. It is a series of electronic transactions that are the same for most issues with different figures and electronic transactions are essentially instantaneous.

Jeremy Dawson
June 04, 2020

I agree the number of new NAB shares I got is disappointing. However I got 363 new shares (having held 1299 shares), that is about 28%
What is not disclosed directly is how many new shares were issued in total (ie placements + SPP) compared to how many shares were held prior, but it looks like
88 mill new SPP shares (from the announcement)
212 mill shares from placement (news item, $3 billion placement at $14-15)
2875 million shares prior (actually this is at June 2019)
so this is an increase of 10.4% in number of shares.
(It shouldn't be so difficult to work this out!!)
So really, it is the retail shareholders who didn't apply who are stuffed

charles
June 05, 2020

How do you know what you got? I have not heard anything and no refund of application money yet received.

Dennis
June 05, 2020

Look at your share portfolio. My new shares were in the portfolio on Wednesday 3rd June!

Jack
June 05, 2020

Agree, Charles. Newcrest's SPP closed 10 days ago and there is still no update to my shareholding. They could have had the money for a month with no knowledge of how much we would be allocated and no ability to do anything else with the money. There should be timing response obligations.

Geoffrey Butler
June 04, 2020

Loyalty is a two way deal and it seems that NAB ignored the loyalty of existing shareholders. ASIC seems to be absent in looking after the interests of ordinary retail shareholders. Why do the Institutions get first preference?

Paul Ingleby
June 04, 2020

Just received notice from Nab that the $30,000 I submitted for the SPP has been scaled back to $7910.
I wonder why I bother!!
At the first opportunity I am out.
Had a gut full of this institutional preference and complicit Directors.

John Lawson
June 04, 2020

Great to see this issue being covered. I have written to ASIC, a number of Chairman on the totally unfair raising of capital using SPP.
How is it fair that a shareholder with 1000 shares is able to apply for up to $30k of stock under a SPP and a shareholder with a 100000 is limited to the same amount. This discriminates against the larger shareholder as well having the effect of diluting holdings.
The raising of capital should be by pro rata rights issues, this treats all shareholders equally and fairly. In a time such as now when companies need to go to the market for capital they can do so through the use of renounceable or non renounceable accelerated pro rata issues. QUB did this recently and successfully. Well done QUB
Further I am one for not allowing Institutional Placements at all but I know this is absolutely not going to happen.

Peter
June 04, 2020

When a listed entity undertakes a discounted capital raising and which provides unfair access to institutional investors, I interpret this as a lack of respect for retail shareholders, and as sign of incompetence by the board and senior management, that they have got themselves into the position that capital must be raised urgently. Whilst such raisings typically provide short term opportunity, they also indicate that the company is not worthy of a long term hold and that the shares should be opportunistically sold.

Peter

Marshall
June 04, 2020

I think length of ownership is poorly recognised in addition to the inequitable allocation between instos and retail. As an example we have held NAB shares for 15 years plus through thick and thin, always participated in SPP and rights issues (I clearly remember the one at $28.50/share) and always on DRP. So a very patient capital which surely is valuable for all companies but banks in particular. On applying for $30K and despite the increase on SPP size, you get wound right back to sub 30% allocation. I think some matrix of relative holding to total application plus length of holding is a fairer outcome.
It could be an alternative to make some of the insto raising settlement conditional on retail outcome although no doubt instos would say that this is unacceptable?

Anthony Asher
June 04, 2020

For a supposedly free, efficient and mature market, this is really an outrage. ASIC remains asleep at the wheel?

Aussie HIFIRE
June 04, 2020

I don't really disagree with any of what has been written here, but it misses the point.

The big concern for most corporates raising money is that they get the majority of the funds locked in as soon as possible. Offering it to institutions first allows that, a corporate can easily raise hundreds of millions or even billions of capital in a couple of hours after the market has closed and their funding is secured, the company has done what it needed to do.

There is also a lot less administration required, the investment banks handling the capital raise talk to a couple hundred institutional investors, sort out the billing and delivering, and you're done. When you raise the money from retail investors, you have to do a lot more admin, you have to send out a bunch of offering docs, you have to setup a facility to take the money in etc, it's a lot more work.

And the reason why investment banks get paid for underwriting the insto placement is that there is a lot more risk there. The company wants the money right now, and it's less certain that insto's will buy into it, so the bank gets paid for guranteeing they will deliver if inst's don't. Retail investors are more likely to participate, particularly if the offer size to them is a lot smaller.

It's not wrong to say that retail shareholders don't get the same offer as instos, but the above are a number of reasonable reasons why.

Jack
June 04, 2020

Yes, I understand the need for speed, but what you do not mention is the discount which the brokers know will be sufficient to make the placement. In some cases, it is 25% or more, and the brokers check with the instos before taking the risk. They then place the deal quickly, and are 'off risk' and taking their fees within a few hours. It's not the level of risk that you imply, and even if the market fell, there is a buffer in the price. And finally, the placement agreement has a 'force majeure' which allows them to step back if conditions change materially.

Aussie HIFIRE
June 04, 2020

The brokers should certainly have a pretty good idea of what discount will work, but there's a difference between hypothetical discussions with instos and them putting up cold hard cash when it's actually real, on top of which you wouldn't typically have the whole book covered and you've typically canvassed most of the bigger investors already so you're relying on smaller ones to cover the difference. It doesn't happen often that deals fall through, but it does happen and it's much more likely to happen in times of market stress. And if the market knows that the company couldn't raise money at that price, then the share price should fall to reflect the lack of confidence in the company so there will be pain for the banks.

And if the banks do exercise their force majeure or MAC clause to get out of a deal, they know that they're not going to get any more work from that company again, and probably from most other companies either as you can be sure that every other investment bank will be pointing out that they didn't stand by previous deals when the going got tough.

Obviously every deal will be different and there will be some deals where the risk is a lot less, and some where it's a lot more. Inevitably some of them are going to have the risk mispriced, one way or another.

David James
June 05, 2020

"...a lot more risk. The company wants the money right now, and it's less certain that insto's will buy into it" - despite being an incredibly volatile market in the last two months, how many placements weren't fully subscribed by insto investors this year? That will give us a pretty good indication of the underlying risk that investment banks were taking on to earn their $300m.

As for the effort/cost required to undertake a SPP when a placement has already taken place, it is a rounding error at best.

If over subscribed, why can't institutional investors also get scaled back after the SPP closes to pre placement proportions of the share registry? That seems equitable.

Aussie HIFIRE
June 05, 2020

The placements were fully subscribed presumably because the banks did a good job of sounding out insto's, looking at what discount would be required to get the deal done, and then executing on that with their balance sheet to back it up if things went wrong. The banks got paid $39 mill for the NAB issue but were on the hook for $3,000 mill if it went wrong. That's the price that the company pays for eliminating the risk. Nobody in their right mind is going to underwrite the deal for free.

It's very easy to sit there afterwards and say oh hey the deal went well so they got paid money for nothing. No, they got paid for what happened if things didn't go well. It's a form of insurance, and like all insurance you have to pay for it.

I'm glad that you think sending out the offering documents, setting up a BPay and cheque facility, processing all the hundreds of thousands of applications is a rounding error and presumably super easy barely an inconvenience compared to doing so with a couple hundred institutional investors, I'm sure everyone involved thinks the same.

And if you want to scale back the institutional investors after the fact, then they have a reduced incentive to participate in the offering in the first place and the company doesn't get the tick of approval from the market that they are now fully capitalised and secure. And they are scaled back within the institutional offer anyway, they might put in for fifty mill and only get 10 mill based on a number of different factors.

The simple reality is that all shareholders are not equal when it comes to raising money quickly. The big asset managers, hedge funds, industry super funds etc can all write a hundred million dollar cheque within two hours or even two minutes, and with a hundred phone calls the company now has the funding it needs. The average retail investor can probably write at most a hundred thousand dollar cheque and in most cases far less, most of them won't read their emails or listen to their phone messages etc and will want to have time to think about it. So the company doesn't immediately get the money it needs, it has to stuff around a lot more, and given it's advertised some weakness in that it needs to raise money the share price is likely to get weaker still because it's weak AND there is no guarantee that it will be able to raise the money. This is why companies raise all or almost all the money they need from the institutional market immediately, and have a much smaller retail allocation.

Richard Swann
June 04, 2020

As a retail shareholder I fully agree with the sentiments. However the bureaucratic maze that companies must fight through to carry out fair rights issues effectively rules them out especially when capital is required in a hurry. I would be taking aim at the regulators to make rights issues easier to get away.

Jack
June 04, 2020

And the ASX was quick to agree to double the SPP limit to $30,000 when in the majority of cases, it is meaningless, just in case the instos did not come to the party (at a 25% discount). And then one of the first with cap in hand for capital, Cochlear, has the same Chairman as the ASX. At least they upped to SPP allocation, eventually.

David Mee
June 18, 2020

Outlaw SPPs in their current form and return to rights issues. They are the fairest.

 

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Welcome to Firstlinks Edition 379

It is trite and obvious to say the future is uncertain, and while COVID-19 brings extra risks, markets are always unpredictable. However, investing conditions are now more difficult than ever, mainly because the defensive options for portfolios produce little income. We explore whether investing rules have changed with new input from Howard Marks.

  • 15 October 2020

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Weekly Editorial

Welcome to Firstlinks Edition 381

There is a popular belief that retail investors do not even achieve index returns due to poor timing of investing and selling decisions. The theory is that they buy after markets rise as confidence grows, then sell in panic when markets fall, and miss the recovery. This 'buy high sell low' tendency loses the advantages of long-term investing and riding out the selloffs. But the evidence for this belief is not convincing.

  • 29 October 2020
Investment strategies

Gemma Dale: three ways 'retail' is not the dumb money

There is a popular view that retail investors panic when markets fall, but in the recent COVID selloff, they were waiting in cash for buying opportunities. What's equally interesting is the stocks they bought.

Investment strategies

Unlucky for some: 13 investment risks to check

Risk isn’t something to be avoided altogether. To achieve returns beyond the government bond rate, some level of risk must be accepted. Assessing which risks to take and calibrating them is the investor's challenge.

Responsible investing

Four reasons ESG investing continues to grow

Although Australian investors are among the most ESG-aware in the world, with the vast majority wanting responsible and ethical investments, there are still some misconceptions to dispel.

Shares

Why caution is needed in Aussie small companies

Over the last 20 years, smaller Australian listed companies have outperformed larger companies but with greater volatility. Following a strong run in the last six months, the smaller end is looking expensive.

Financial planning

The value of financial advice amid rise of retail investors

Financial advice has moved well beyond simply recommending investments, with five major components to quality advice. Helping clients avoid potentially disastrous mistakes is often underestimated.

Economy

The 2020 US presidential elections

The US is days away from a presidential election with major repercussions for economic policy and investments in the US and the world. Views from First Sentier Investors and BNP Paribas Asset Management.

SMSF strategies

Can your SMSF buy a retirement home for you now?

It sounds appealing to acquire a property now through your SMSF with the hope of residing in the property once you retire, but there are issues and costs to check that may vary by state.

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