At 11:50am on Wednesday, June 17, an app notification flashed on Peter Leatherdale’s mobile phone. It said Taylor Wimpey was seeking to raise £500m for a land-buying offensive. Did he want to buy its new shares at the discounted offer price?
A longtime shareholder of the UK housebuilder, Mr Leatherdale saw an opportunity to double down on the company, pick up shares at a discount and avoid having his current holding diluted by the large share issue.
Using the app PrimaryBid, he put in an offer for several thousand pounds worth of shares. “It may be long overdue, but getting involved in placings for companies is a new opportunity for investors and one that one has got to take,” says the former stockbroker.
Mr Leatherdale is among thousands of individual investors taking advantage of a new-found ability to participate in an area of equity fundraising that has for a long time been cornered by big institutional investors.
When cash-strapped listed companies need to raise capital quickly, they can issue new shares. If the funds sought remain below a certain level — usually 5 per cent of the company’s total market value — they do not have to offer these shares first to existing shareholders (a right known as pre-emption).
Companies take advantage of this exemption because they favour the predictability and simplicity of institutional capital. Appealing to mutual funds, pension funds, banks or insurance companies allows them to raise money more quickly and jump through fewer hoops than making an approach to thousands of individual shareholders.
But technology is helping small investors get a seat at the table — and is doing so ahead of an expected wave of share placings over the coming months. As the economic damage caused by the coronavirus crisis becomes clear, more companies will head to the market for accelerated equity raising to shore up their finances.
With a few taps of the thumb and a debit card, private investors can now access secondary offerings on their mobile phones. But while some are calling for these deals to be further opened up to the masses, others warn that such share placings conceal pitfalls that make them better suited to the skills of the sophisticated investor.
Companies seek cash
Since lockdown began in mid-March, many UK-listed companies have been on a fundraising drive. Ocado and William Hill, as well as Taylor Wimpey, are among those to have drawn in more than £15.5bn in capital in 127 raises to shore up balance sheets. At least £5bn has been explicitly related to Covid-19, according to data from brokerage Peel Hunt, and it expects the spree to continue as more companies turn to capital markets.
“There will continue to be a large number of equity raises. That is absolutely inevitable,” says Charles Hall, head of research at Peel Hunt.
The Financial Conduct Authority gave struggling companies a helping hand in April by lifting the pre-emption exception from 5 per cent to 20 per cent of market cap, and relaxing the rules on creating a prospectus or having shareholder meetings, to speed up the process.
But companies which have excluded independent investors have been roundly criticised by brokers and investor groups for offering cheap shares to institutions, which made considerable returns, while diluting the holdings of other shareholders. “If companies have retail investors as shareholders, who will by definition be diluted by new share issues, it is right to give them access to the fundraises,” says Charlie Musson, head of communications at investment platform AJ Bell.
The calls for retail investors to be included in share raises have grown louder. In a survey by Interactive Investor, 96 per cent of respondents said private investors should have the same rights as institutions in equity raises. More than half wanted to participate to avoid being diluted through deeply discounted placings.
In May, about two dozen senior executives from the investment industry, including Anne Richards, chief executive of Fidelity International, Hargreaves Lansdown founder Peter Hargreaves, and Andy Bell, head of AJ Bell, wrote an open letter to the boards of UK-listed companies demanding they respect the rights of small shareholders in future equity fundraisings.
There are several reasons why companies tend to turn to institutional capital from investment banks or large pension funds for accelerated offerings. Retail money is less predictable, and companies cannot tell in advance exactly how much they are going to raise.
“It’s much easier to phone M&G or BlackRock and get £500m, much harder to phone Brewin Dolphin and Charles Stanley and ask what their individual clients want,” says Steven Fine, chief executive of Peel Hunt.
Businesses prefer to avoid the extra hassle involved in capturing ordinary investor demand on secondary offerings. “Companies complain about how long it takes, but certain groups of investors are being excluded from raising at a very attractive price,” says Peter Parry, policy director at the UK Shareholders’ Association.
The technology solution
Founded in 2016, PrimaryBid takes advantage of a loophole in UK pre-emption law allowing individual investors to contribute up to €8m to accelerated share issues. This limit was raised from €5m in 2017.
Though such fundraising has long been open to investors, there was no way for them to access it in the short timeframe during which these raises were available on the market — often just for a few hours. PrimaryBid allows individual investors a bite at this €8m apple.
The company was founded by former investment bankers James Deal and Anand Sambasivan, who believed the €8m opportunity was being overlooked. “If companies want any kind of liquidity they need to look beyond institutions,” Mr Deal says. PrimaryBid appeals to a company’s desire to show it cares about investors. “I said to companies, ignore retail at your peril.”
When a raise goes live, the company notifies all its app users, who decide whether to participate in the offering. The platform is available to all investors and there is no cap on a single offer within the €8m limit. How shares are allocated when the raise closes varies from company to company: some prioritise existing shareholders, while others opt for first come first serve. After a shareholder’s offer is accepted, PrimaryBid transfers the new shares directly to a user’s existing brokerage account.
Since 2016, PrimaryBid has participated in 74 corporate raises, 4 of them for FTSE 100 companies, and 23 raises since mid-March. It takes a percentage of the money it raises, and returns 10-20 per cent to the investment bank that managed the raise.
At the moment it has few competitors, since the limited sums available to clients — and the complexity of the process — have failed to attract the interest of traditional brokers. However, as fundraising intensifies and expectations grow that the €8m cap could be lifted in late 2020 or 2021, brokers are turning their sights to PrimaryBid’s market share.
Value and volatility
Extreme volatility and low interest rates mean investors are hungry to find value in the stock market. But experts warn that as fundraising continues, it might deliver less consistent returns for PrimaryBid investors. While picking up shares at a discount can seem like an irresistible bargain, it is only a good deal if the share price goes up as a result of the raise.
A company’s share price normally drops in early trading the morning after it announces an equity raise, because the market interprets the need for cash as a sign of fundamental weakness. Investors can pick up shares on the secondary market at the same, or a greater, discount.
During the pandemic, however, the share prices of vulnerable companies rebounded when they raised funds because the market saw it as a sign of a strengthened balance sheet and good management.
However, brokers say that the most desperate companies have already raised capital.
Mr Fine says that companies raising capital now fall into three categories: urgent, preventive and opportunistic. “The urgent phase has somewhat passed and we’re into the preventive and opportunistic phase.”
In Taylor Wimpey’s recent raise, shares fell after the company announced it had raised £515m. While the placing was completed at 145p a share, discounted from 152p, the shares dropped to 114.6p in early trading.
“This suggests that shareholders who did not get the new shares have lost,” says Meziane Lasfer, a professor of finance at Cass Business School, due to dilution and a falling share price, but also that they could have picked up the shares on the stock exchange for the same or a better price than those who participated in the raise.
“There is risk that retail [investors] will have come to the party a bit too late,” says Mr Parry. “You can’t help but feel retail investors are jumping in and buying shares at inflated prices.”
Mr Leatherdale has participated in several PrimaryBid raises for companies that he already holds in his portfolio. Investors must be prepared to make a decision on whether to buy, often in the space of a few hours.
“I’m sure it puts some people off because you’ve got to be quick. The offers close as soon as they’re subscribed, more or less,” says Mr Leatherdale. “If I’d been out fishing one of those days I couldn’t have done it.”
More than half of those surveyed by Interactive Investor said they would need a day or less to make a decision, but only 21 per cent said they would be comfortable making a decision in under five hours. PrimaryBid customers often have much less time than that.
Others have raised concerns about the broader suitability of emergency equity raising for small investors. “I don’t think retail investors should participate in lifeline capital infusions,” says Saul Cohen, chief executive of Round, a US wealth manager. “They don’t have the sophistication to analyse these deals. There is a lot of regulation to protect retail investors for a reason.”
Institutional investors are better resourced to make investment decisions and are often given several days to decide whether to participate in a share offering. “People investing in shares without a prospectus might be making a decision based just on price,” says Tim Jacobs, an equity dealer at investment platform Hargreaves Lansdown.
If the offer price is below the current share price, that doesn’t automatically mean it is a bargain. “Consumers show a bias towards investing in brands they know,” says Holly Mackay, founder of independent investment website Boring Money. “More experienced investors will know the pitfalls but of course we all like to think we’re getting a deal . . . the newer providers understand the role of psychology and dopamine more than the incumbents.”
While PrimaryBid is in talks to operate directly on many of the UK’s largest investment platforms on a commission basis, the platforms say that protecting unsophisticated investors remains a concern. It is likely that PrimaryBid offerings will only be made available to existing shareholders on many of these platforms.
What is more, investors may still not be able to avoid dilution. When a PrimaryBid offer is oversubscribed, many investors get less than they wanted. Mr Leatherdale received only half the number of Taylor Wimpey shares he requested.
“Every deal is different,” says Mr Deal, noting that most raises now allocate shares on a pro-rata basis. “If we have three to four times more demand, then you get one-third or one-quarter of what you put in for.”
The impact of any dilution depends also on the percentage of independent investors a company has to begin with — and some are favourites with the retail investors. “When Ocado raises, investors are really knocking on the door,” says Partap Rai, who works on business partnerships at Interactive Investor. “If a company like Lloyds was doing a raise, it’s a huge retail brand and there would be a whole lot more noise about it,” he says.
PrimaryBid allows companies to avoid criticism by giving investors a seat at the table, but the €8m cap means that their new holding is usually very small. Critics say it helps companies pay lip service to their smallest investors as they raise vast sums, as Compass did when it raised £2bn in May. “It’s better than nothing,” says Mr Deal.
How to invest
To avoid being caught up in the adrenaline of a raise, wealth managers say investors should be cautious about buying companies that they do not already own shares in and believe in. “If we hold something, the investment case is solid and there is a capital raise we will generally take part,” says Wayne Berry, director of investment management at Brewin Dolphin.
Investors looking to avoid dilution should try to keep investment proportional. If a company is looking to raise 10 per cent of its market cap, an investor should be cautious about buying more than 10 per cent of their existing holding. Mr Berry says: “Don’t bet the farm.”
Investors can also gain exposure to accelerated raises through wealth managers, who are not limited by the €8m cap and can participate on behalf of their clients. However, even discretionary managers say they are being passed over in the current fundraising climate.
“Companies don’t have to give existing shareholders pre-emption rights so that has been quite annoying,” says Mr Berry. “Compass was the biggest one that has done this.”
On paper, individual shareholding has markedly declined since 1962, when individuals owned 54 per cent of UK shares, compared with 10.2 per cent in 2007, according to the Office for National Statistics. But the total number of investors has held relatively constant as institutional ownership has swelled. Experts note that institutional money in the form of pension funds and investment funds is effectively individual investor money.
“Part of [the growth of institutions] is the rise of sophisticated ways of investing that are beyond the means of the average investor,” says Professor Arman Eshraghi, chair of finance and investment at Cardiff Business School.
While a large chunk of the UK equity market is owned by overseas investors, about 90 per cent is owned by investors indirectly, says Prof Lasfer of Cass.
In December, the transition period following the UK’s departure from the EU will come to an end and it is likely the €8m cap on investor participation will be increased. At a time of heightened worries about investor protection, following the fallout from the London Capital and Finance scandal and the blanket ban on mini-bonds advertising, it is unlikely the cap will be scrapped entirely.
But investment groups say that regulators should take the training wheels off equity raises for investors. “It is a case of caveat emptor,” Mr Parry says. “It is up to the buyer to do their own research.”
Proponents of increased investor inclusion say that individuals are the “single largest source of untapped capital” in the UK. “There’s regulation that stands in its way but we believe it’s being tackled,” Mr Fine says, adding that companies would be wise to take DIY investors seriously. “Retail is far more stable than you’d think.”