Why are Private Investors still being locked out of Placings?
As previous readers will know, I look for frictions in the capital markets which disadvantage the private investor and in so doing hinder the supply of capital to smallcaps. Here is an example of one which is widespread and which, with the widespread adoption of digital communications, seems particularly unnecessary.
I was talking to an AIM listed biotechnology company recently in connection with a possible fundraising. In these times when institutional fund managers are becoming increasingly risk averse in relation to smaller fundraisings, I asked about the composition of the shareholder base and was told that c.50% was held by management and institutions, and that by implication the balance was held by private investors. I observed that the latter would not usually be invited to participate in a placing and enquired whether it might be worth bringing to their attention a facility such as www.sophisticated-investor.co.uk to assist qualifying investors to participate in placings if they so wished. I was told that most of these holdings are held through nominees and that it is too cumbersome to work with the nominees to get this message to the beneficial owners. The broker to the company observed that after a placing, there are invariably irate communications from private shareholders who were not invited to participate.
With the ease, cheapness and speed of communication provided by the internet, not only does the above situation seem unfair to private investors, but it also represents a wasted resource when smallcaps may find it difficult to raise money from institutional investors - except on terms which are punitive for shareholders unable to participate.
I am a client of The Share Centre which provides a facility for clients to 'opt in for shareholder rights', which means receiving copies of most communications issued by listed companies. This seems to me to provide the best of both worlds, namely the cost savings offered by holding shares through a nominee and being able to be communicated with as though the shares were held directly.
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7 comments
The above comments confirm my view that by harnessing both organisation and modern communications there is no reason why any shareholder wishing to participate in placings shouldn't do so. The key is the investor being the client of a stockbroker which:
a) is one with which companies are likely to communicate when there is a placing,
b) has in place appropriate IT systems for: dealing with:
- dealing with suitability of investment requirements.
- communicating electronically with clients who are investors in the company conducting the placing and collating the resulting instructions.
ee,
Hope your recovery is proceeding well.
It would be most helpful if you could elaborate on the additional costs/effort incurred by making an open offer in parallel with a placing. In broad terms, under what circumstances is it practical/feasible and when isn't it?
Regards,
Mark
I can't really do that Mark, as I don't have detailed figures. However, using ....err....a recent example, it is clear that:
a) the total time taken is extended by a number of weeks
b) the management time taken up is increased
c) time being money, all sorts of costs and fees will also be higher
d) administration costs are increased
Nevertheless, I take the very clear view that (since the company is owned by its shareholders) existing shareholders should have the fairest possible crack of the whip to buy more shares on the same discounted terms as the new placees. This isn't always possible (most commonly for legal reasons relating to holders domiciled abroad) but IMO it should always be the case that any material offer of new shares should be made to existing holders as well as to new placees - and I take that view completely irrespective of the incremental costs.
It is certainly the case that a Placing & Open Offer structure is materially cheaper than a full Rights Issue (because Rights Issues are subject to more market uncertainty due to the additional time and are therefore always underwritten - whilst, under the P&OO alternative, the Placing itself effectively provides the underwriting certainty and so no additional fees are necessary).....so there is a case for preferring that structure to a Rights anyway.
Pure Placings however also have a role, especially when raising very small amounts of additional cash - because it simply isn't in shareholders interests to go through the rigamarole of asking if they want to buy additional shares on a one for 25 basis (or whatever) and producing a full prospectus in order to do so. Disapplication placings (which are pre-approved by the shareholders at an AGM for 5-10% of the shares) are a good example of such quick and easy fund-raisings.
HTH
ee
Thanks ee,
That is in line with what I had thought and will inform our stance within ShareSoc.
Regards,
Mark
Another thing to remember is that issuing companies are often faced with challenging market conditions to get shares away, and they might think they are facing a considerable challenge to do so. PIs who complain about being shut out seem to be assuming there is some conspiracy to rip them off given half a chance to do so, in favour of some other class of shareholder. The reality is that companies want to sell their shares, and might see themselves more in the position of a fruit and vegetable salesman with a vanload of apples to find buyers for all by lunchtime today. Companies holding placings are trying to sell their shares quickly and cleanly, and so they are really interested in serious-sized buyers who pre-identify themselves as potentially interested. They want to sell shares to any good buyer quickly, so just pre-qualify yourself and they really will try to get away some of their shares to you.
There was a time (half a dozen years ago, when I dealt more actively than I do nowadays) when since I was known as someone up to take shares regularly in placings, I'd be getting a morning phone call from my broker every fortnight or so to invite me into that week's small-cap AIM placing. They want to sell shares in what might be for them a difficult market, so if you identify yourself as a serious prospect dealing in size, they'll come to you. Often these were companies I'd hardly heard of and had had no previous interest in, certainly I hadn't pre-identified myself to the companies themselves, and I said no to the placing within ten or twenty minutes, but maybe there were annoyed PIs out there thinking that they were getting ripped off because institutions were being preferred in that morning's placing. The simple truth was that I potentially offered quick reliable offloading of a good number of shares, so I was on the list to get the call.
Key aspects of being suitable to invite into a placing include:
a) likely to keep unpublicly-communicated price-sensitive information secret for a few days, without dealing in that period, and
b) contactable, able to commit in material size (at least £50k or £100k) before say 10am and ready to settle on the same day as the placing (ie with cash ready in account or credit facility)
I wonder whether doubts over some private investors abilities in these areas are relevant to often shutting out PIs?
That a placing will take place is often communicated to institutions days before the placing, on the basis that those institutions are trusted as insiders who will not deal. That may be workable for a small finite number of identified institutions, but it seems less workable in the PI arena.
Obviously there is a group of PIs who are ready with their mobile phones and material cash available, but I suspect the number of that group is smaller than the number complaining that they are shut out, and often that group are already getting into placings via their well-connected personal broker. I have participated in several placings in the last few years - it is not true that all PIs are shut out. Often registering an interest, as a serious investor, in advance with a companys' FD "if you happen to be holding a placing in the near future, please contact me on the morning of the deal on this mobile number and I might well be interested" works well enough - make it easy for them and it can work. They can contact a limited group of previously-identified potential placees, but expecting the house broker to market to as yet unidentified internet dealers ain't practical. The whole point of a placing is that it's quick and cheap - if it is desirable to have a more formal process in which anyone can participate them a rights issue is the vehicle for that, but a rights issue is more expensive and usually at more of a discount.
I agree with all SirL's comments on that, and would add that the choice for companies isn't simply one of:
Cheap/quick/efficient placings versus expensive/slow rights issues
The central reason why Aminex (for example) has generally followed a hybrid structure of combining a Placing with an Open Offer to existing shareholders is to enable shareholders to get a fair crack at maintaining a reasonable stake on the same terms as the placees, but without compromising the main advantages of a placing - which are speed of execution and certainty of funds. As SirL says, if the company is aware of prior interest, every effort will be made to invite potential substantial new shareholders into the Placing - and the best way to ensure such invitations are made is to ensure that the company is aware of a potential interest.
ee