Introduction
A capital raise is when a company approaches existing and potential investors to seek additional capital (money) by issuing equity or debt.
Find out more about what capital raises are and why companies do them here.
Equity capital raises
Equity raising is the process of raising capital through issuing new shares in the company. This allows the investor to take partial ownership in the business and unlike with debt, the funds raised do not have to be repaid.
The price at which the shares are issued depends on a number of factors, including:
The risk of the issuing company;
The growth prospects;
Market conditions; and
Various other factors.
Investors are able to monetise their investment either through dividends, capital gains (when the investor sells the shares at a higher price), or takeovers.
This is the area that Fresh Equities currently works in. Fresh seeks access to placements, Entitlement Offers and Share Purchase Plans which are all examples of Equity capital raises.
Why investors invest in equity capital raises
Ownership & control. Equity investments allow investors to own a portion of the company through buying a share in the company.
Timing of investment. Investing in an equity capital raise is beneficial for investors as the company is usually in a lucrative point in their growth cycle. When companies raise it is typically for growth, and establishing a position in the company before growth is factored into the share price could be profitable for investors.
Discount to market price. Equity capital raises are typically offered at a discount to the current share price, with the most common discount being ~14%.
Investing in illiquid companies. When companies raise capital, investors are able to take a bigger position in the company, usually at an advantage to those buying on market. Particularly in illiquid companies, there may not be a sufficient quantity of shares available on market for investors to establish a meaningful position. The cost of purchasing shares on-market could also be more expensive as a result of a fluctuating market price and brokerage costs.
Types of equity capital raises
Placements
The most common form of equity capital raising that Fresh participates in is a placement. A placement is a method for listed companies to raise equity capital through creating new shares and offering these on the market to select investors.
Check out our article on placements here.
Entitlement Offers
An Entitlement Offer is an equity capital raise conducted by a company, wherein existingshareholders are offered the opportunity to purchase an additional parcel of shares, based on a pro-rata entitlement of their holding.
For example, a 1-for-3 offer would allow existing shareholders to purchase an additional share for every 3 shares that they own.
This can allow investors to maintain their percentage ownership of the company as every shareholder is offered the same pro-rated allocation.
Entitlement Offers can take a couple forms, namely non-renounceable and renounceable:
A renounceable offer is one in which investors may “sell” their rights to purchase additional shares, on the market. This allows investors who do not wish to participate a chance to benefit from the offer, whilst also allowing investors who wish to increase their position or establish a new position an opportunity to do so.
A non-renounceable offer does not have this option, and shareholders can either choose to take their allocation or leave their holding as is.
Share Purchase Plans
Shareholder Purchase Plans are equity capital raises conducted by a company, wherein the company offers existing shareholders the opportunity to purchase an additional parcel of shares in fixed dollar values, up to a maximum of $30,000 worth under ASX regulations.
The amount an SPP entitles you to purchase may differ across offers and can be based on your initial holding, but they cannot exceed the $30,000 limit. SPPs allow investors to increase their holdings by a similar amount.
Occasionally, companies may launch SPPs alongside a placement. This is to allow both new and existing shareholders the chance to participate without existing shareholders having to compete for the same amount of shares.
Entitlement Offers vs. Share Purchase Plans
The main difference between Entitlement Offers and Share Purchase Plans is their impact on small vs large shareholders. SPPs put larger shareholders at risk of dilution, as the absolute maximum they can take up, which is $30,000, may represent a smaller percentage of their holding than someone with a much smaller position. On the other hand, Entitlement Offers can allow investors the opportunity to increase their holdings by the same multiple, but can put smaller shareholders at risk if they do not take up their full holdings and larger holders do.
Fresh’s involvement in Entitlement Offers - Shortfall Placements
Fresh typically participates in Entitlement Offers through what is known as Shortfall Placements. Often, not every investor wants to take the full amount offered in an Entitlement Offer, and when this happens the leftover amount is known as “shortfall”. If a company wishes to raise the full amount offered, they may choose to place this shortfall as a separate placement to new sophisticated and professional investors. When this happens, the company will issue a placement under the same terms and conditions as the Entitlement Offer (excluding renounceable rights) and will remove the restrictions on how much each individual is able to take up.
If you would like to learn more about Entitlement Offers and SPPs and how you can get involved in these types of offers, give our client team a call on (03) 9661 0441 or email clients@freshequities.com.
Some articles you might find useful:
What is a capital raise?
What is a placement?
What is convertible debt?
What is a wall-crossed offer?
How does fresh equities get access to these deals?
Who can use Fresh Equities?
