Are investors getting a raw deal in pandemic capital raising?

Disappointing retail participation in National Australia Bank’s $3.5 billion capital raising in April highlights a flawed system that favours the big end of town.

National Australia Bank (ASX: NAB) individual shareholders were initially only offered $500 million of the total, the majority earmarked for institutions, before overwhelming demand saw this amount lifted to $1.25 billion.

But even so, the number of investors who took up the offer was low.

“NAB shares were 8.5 per cent above the offer price when the SPP closed on 22 May but 75 per cent of shareholders or some 460,000, didn’t bother applying at all,” says Stephen Mayne, shareholder activist and a former director of the Australian Shareholders Association

He believes mum and dad investors are potentially missing out on billions of dollars each year due to unfair capital raising allocations.

The number of such initiatives has neared record levels so far this year, local companies tapping equity markets for more than $10 billion by the end of April as they rush to buffer balance sheets against plummeting consumer demand.

The split between institutional placements — where shares are offered to other companies, often at highly discounted prices — versus retail share purchase plans has long been controversial.

On one hand, many companies would argue that a need for expediency justifies going the institutional rather than retail route to raise capital.

“It’s often an issue of life and death for company boards,” says Graham Hand, editorial director of Firstlinks.

“It’s easy to sit back two or three months after the pandemic started and say ‘it wasn’t as bad as we thought’ but on the day when the government closed the borders, if you’re on the board of a travel company you’ve got to make a decision immediately.”

In some cases, corporate participants are offered large parcels of shares at discounts of around 11 per cent and 12 per cent to the current share price.

Hand concedes it can look like institutions get some very sweet deals in institutional placement, “but then, they are stumping up a lot of cash very quickly.”

How to level the playing field

Setting a minimum amount that each individual investor applicant will receive could be one way to help address the problem of low retail participation, says Peter Burgess, deputy CEO of the Self-Managed Super Fund Association.

He expresses concern at the level of the scale backs — where an investor may apply for a certain number of shares but instead receive only a small fraction of the shares, instead receiving the balance of their money back in cash several weeks later.

“But we’re seeing these being scaled back, and so whether there could be some minimum requirement, so that retail investors have a guaranteed minimum allocation as part of a share purchase plan,” says Burgess.

“We’re seeing larger placement amounts allocated to institutional investors at the expense of retail investors, including SMSF investors, and a the same time it’s their shareholdings that are being diluted,” says Peter Burgess, deputy CEO and director of policy and education, SMSFA.

Mayne believes this is something that needs to happen in the current system of capital raising, where currently the only limit applied is the ASX listing rule that an SPP can’t exceed 30 per cent of the ordinary issued capital on the day shares are issued.

‘Administrative incompetence’

Mayne has been cataloguing the recent spate of corporate capital raising and notes that in many cases, the retail investor response rate to “in the money” offers is remarkably low.

“The Australian Securities and Investments Commission’s 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,” Mayne says.

“Administrative incompetence” on the part of financial advisers, brokers and accountants who don’t pass on the details to their clients could be one reason for low retail uptake.

“This has diluted retail shareholders out of billions of dollars over the years,” Mayne says.

“Sadly, the biggest losers in Australia’s anything-goes capital raising system are the retail shareholders who ignore an in-the-money offer.”

‘Right of first refusal’

Judith Fox, CEO of the Australian Stockbrokers Association, says the old arguments favouring institutions over retail investors for capital raising initiatives no longer stack up.
Comparing the current rash of capital raisings with those during the GFC, she says in many cases companies didn’t have their “backs against the wall” but were planning ahead.

“And the technology is very different now, brokers can reach out incredibly quickly to their clients, and know exactly who a shareholder is so they can get their offers out there very quickly,” Fox says.

Brian Sheahan, chairman at broker Morgan’s Financial and the Australian Stockbrokers Association, also highlights how far technology has moved on since the large capital raisings of the GFC period.

He believes the fairest place to start in levelling the playing field for retail investors is to give existing shareholders a right of first refusal in capital raising initiatives. For instance, if shareholders own 25 per cent of a company’s shares, the same proportion of retail shareholders should be offered shares in the SPP.

In the case of the NAB offer mentioned earlier, institutions received six-times as many shares as the retail shareholders, despite the bank’s share registry’s 50/50 split between individuals and institutions.

Sheahan suggests the remuneration structure is another sticking point.

“The fee paid for the institutional component was $39 million — if you think of the average size of the clients NAB has, large institutions getting potentially hundreds of millions of dollars each in allocations,” he says.

“Versus the average $20,000 per transaction you’d get from a retail investor, there’s a lot more work involved to get that money in.”

This is a topic that has attracted some controversy in recent times. These stamping fees were part of the crackdown against brokerage costs for the sale of listed investment companies and listed investment trusts.

“When you look at that, and the obligation to act in the best interests of clients, it doesn’t take Einstein to work out that’s not a fair system,” Sheahan says.

He suggests another fundamental reason why the retail level of participation in capital raisings is lower comes down to the timing of such initiatives.

“When you go through these periods when banks are raising capital raising, it’s when there’s economic uncertainty, so people are more likely to keep their hands in their pocket,” Sheahan says.

“And this could also be because many people aren’t advised.”

 For more detail about Stephen Mayne's research into SPPs visit Firstlinks.com.au