All investors matter.
That was the title of an open letter, posted back in April by app-based retail platform PrimaryBid to the boards and managements of UK companies, then pouring out emergency capital raisings in a desperate effort to re-enforce their balance sheets at the height of the first Covid panic.
Retail investors were being excluded from these, even though they accounted for 20% of secondary turnover in the FTSE All-share index, with anywhere from 60% to 74% of that being buy orders.
Those equity raises typically priced at discounts to already beaten down share prices.
But as soon as they were completed – in some cases, as soon as they were announced – and balance sheet safety secured, share prices could soar by 20% or 30%.
Boards are very focused on protecting existing shareholders. But they need to manage a trade-off between perfect pre-emption rights and reducing exposure to market risk and volatility in a capital raising
– Nick Koemtzopoulos, Credit Suisse
The capital markets hedge funds made out, selling to retail brokers for a quick buck. So too did some executives. Retail buyers, who had been supporting companies in the secondary market, did not.
That exposed some early UK issuers, notably fashion retailer Asos as well as others such as Informa, WH Smith and Hiscox, to criticism for allowing new investors to average into their stocks on much better terms than were available to long-standing owners that could not participate in accelerated bookbuilds (ABBs) targeted at select institutional accounts.
Fair enough, rights issues are indeed long and complicated, and getting capital in was the priority. But the open letter pointed out that the technology now exists to automate a retail offering without pre-emption alongside a quick institutional placement and so allow small buyers at least to be allocated up to €8 million worth of shares – the maximum allowed by the European prospectus directive – at the same strike price set by an institutional order book.
Retail investors can register interest in a company, receive push notifications of a fund raise through a smartphone app, read the terms, subscribe if convinced and pay for allocated shares on their debit cards. This no longer takes weeks. It takes minutes.
Some very influential names signed the open letter: Peter Hargreaves, founder of Hargreaves Lansdown; Paul Killik, senior executive officer of Killik & Co; Anne Richards, chief executive of Fidelity International.
By catching the attention of corporations who wanted to maximize demand – and avoid criticism from loyal retail shareholders – it had by June secured a chance for the little guy to at least to take part in what has turned into an equity capital markets bonanza.
According to figures from Dealogic, ECM new issue volume across Europe, Middle East and Africa (EMEA) was up 31% in 2020 for the year to June 17, compared with the same period last year.
The bounce back in secondary markets since the panic of March and early April has been swift and strong thanks to quantitative easing and higher government spending, as well as to French and German government support for a new European recovery fund.
Yet to be approved, the recovery fund may be a breakthrough in using joint sovereign issuance to fund grants for the hardest hit countries, such as Italy and Spain.
“Europe screens well for global investors,” says Stephane Gruffat, head of EMEA ECM syndicate at Credit Suisse, “thanks to increased policy coordination and the ability, as economies reopen, to obtain cyclical exposure at attractive valuations relative to the US, which has an election coming in November amid rising geopolitical tensions.”
New issues are one of the few ways for portfolio managers to invest large amounts in a world of negative interest rates.
Credit Suisse calculates that the average performance of European ABBs since the Covid outbreak has been up 15%, with larger deals over $100 million pricing at an average 4.8% discount to the previous close and bringing a 6.1% first-day rise.
Some UK deals did far better than that.
ABBs are the centre of the action.
While the volume of EMEA IPOs has fallen by 42% during the first five and a half months of 2020 compared with the same period in 2019, and rights issues are also down 17%, ABBs are up 97%.
“Boards understand that it is better to get in and out of the markets quickly rather than sit on a rights issue for several weeks,” says Nick Koemtzopoulos, head of EMEA ECM at Credit Suisse, “and investors are supporting this. Some tell us that they prefer these ABBs and the streamlining of some of the intricacies of the equity capital raising processes in Europe.”
Intriguingly, UK issuers, usually the biggest single group, have been more prominent than ever, accounting for 29% of issuance for the year to date and fully 45% ($12.5 billion) of the $27.9 billion in primary issuance since Covid struck.
Perhaps the disastrous mishandling of the public health emergency by an incompetent and increasingly mis-trusted UK government whetted hedge funds’ and other investors’ appetite for bargain valuations.
On April 1, the UK was quick to raise from 10% to 20% the amount of their capitalization companies could raise through new issues without offering pre-emption rights to existing shareholders.
Amid the worst death toll in Europe, UK equity placements priced at wide discounts and share prices shot up on successful completion.
Facing liquidity strains and under pressure from their banks, companies rushed to raise new capital. Perhaps they didn’t realize that, even without offering allocations pro-rata according to current ownership, they could still have easily included a retail tranche.
Koemtzopoulos tells Euromoney: “Boards are very focused on protecting existing shareholders. But they need to manage a trade-off between perfect pre-emption rights and reducing exposure to market risk and volatility in a capital raising. They typically give priority to existing shareholders and wall cross some to price new issues. So, institutional investors are not being disenfranchised.
“The question is over retail investors that cannot participate in accelerated bookbuilds. We have seen more issuers using PrimaryBid, an app-based platform unconnected to the banks leading new issues, that typically allows access for retail participation in up to €8 million of a transaction.”
Compass sets new course
Some 22 FTSE companies had issued over £6 billion of equity, with retail investors unable to participate, from March 2020 until May 19, when Compass Group, the food services and catering company, announced a £2 billion capital raise through non pre-emptive new shares to reduce leverage and increase liquidity.
That represented just 11% of its issued share capital.
Dominic Blakemore, chief executive of Compass, stated: “The placing has been structured as a non-pre-emptive offer so as to maximize the efficiency of the process. However, we recognize the importance of pre-emption rights to all our shareholders and we value our retail shareholders.”
PrimaryBid worked alongside deal co-ordinators Goldman Sachs, Morgan Stanley, Barclays and Bank of America.
It was a breakthrough.
“This was the first time in history that a FTSE100 company has run a retail offer alongside an institutional placement,” Anand Sambasivan, chief executive of PrimaryBid, tells Euromoney. “We got the call from Compass Group. Their lawyer, Mark Austin at Freshfields, diligenced us, confirmed that we were regulated and fit for purpose, and it all worked perfectly smoothly.”
For Sambasivan, this was justification. He had written the open letter and lobbied the wider ECM community to include retail.
Since the Compass transaction, PrimaryBid has run retail offers for IWG, Taylor Wimpey, William Hill and Ocado, among others.
The drivers for these mostly institutional deals are now changing. No longer launching rescue capital raisings, these issuers see themselves as winners raising funds to take advantage of the new normal: Ocado to scale up distribution centres amid the growth in online groceries as more retailers licence its technology; Taylor Wimpey to acquire cheap land for development; William Hill to expand in the US.
Retail orders at the strike price constitute high-quality demand that de-risks a transaction
– Anand Sambasivan, PrimaryBid
PrimaryBid is a fintech newcomer that two years ago was working on £2 million deals for AIM-listed stocks, but now has blue-chip companies asking it to work on landmark equity transactions alongside their bulge-bracket investment banks.
“Company boards want to be inclusive. The fairness aspect really sells itself,” says Sambasivan.
And the technology has already been tested and proven on those smaller deals for AIM companies.
Sambasivan explains: “If we get brought in a day or two before a deal, even the night before, it doesn’t take too long to prepare. We built this technology to work for every deal. Once a transaction is live, it’s all hands off. Order collection is automatic. We can generate £20 million to £40 million of demand in a couple of hours. We had over £37 million of appetite for Taylor Wimpey’s £500 million equity raise.”
That got scaled back because of the €8 million limit on retail participation from the European prospectus directive.
Corporate issuers decide on allocation and can set their own preferences: to allocate shares pro-rata to all retail subscribers; to reward early subscribers; to favour existing shareholders or even a company’s own employees.
PrimaryBid takes those preferences and automates allocation.
Since April, the firm has sourced £143 million of demand for UK equity offerings, which has been scaled back to £50 million of allocations.
Having left the EU and so partly enabled its newfound policy coordination, the UK is now staring at a hard Brexit.
That may not be bad for everyone.
Sambasivan says: “Let’s see, come the end of the year, whether the UK diverges from that upper limit.”
PrimaryBid will be along those lobbying to raise the cap on retail participation once the EU Prospectus Directive no longer applies in the UK.
“Retail orders at the strike price constitute high-quality demand that de-risks a transaction,” says Sambasivan. “That’s why, even though we are working directly for the issuer and separate from them, the big investment banks are so interested in what we bring and very happy that we are there.
“And if we are regularly generating £50 million plus of demand on deals, this is helpful incremental demand.”
The expectation among ECM bankers is that the rapid rise in new issuance that has already transpired in the UK will soon be replicated in Europe.
PrimaryBid has a long-term partnership with Euronext and will launch in July in France from where it intends to passport its regulated status across nine countries.
Sambasivan says: “Our European partner banks believe that appetite will be very strong in Europe and with Shareholder Rights Directive II now coming into full effect, our proposition is even more compelling.”
With large issuers retaining its services, magic-circle law firms and bulge-bracket banks endorsing it, and leading institutional investors signing its campaign letters, PrimaryBid has been a big winner of this extraordinary period.
What comes next?
“We would like to work on IPOs,” says Sambasivan “and on offerings of investment trusts.”
Investment trusts want to find ways to access retail. Subscribing for an IPO as a retail customer can be quite cumbersome. For both, new technology and a fresh customer interface can make the process less paper-driven and lower the administrative overhead.
But the really large ECM deals will be rights issues, when big companies need to raise more than 20% of their registered capital. Those still lie ahead.
Sambasivan tells Euromoney: “The next innovation will be delivering hard pre-emption rights, collecting orders and then managing allocations based on prior ownership. There’s a lot of technicalities around that, but we believe that we can handle that in minutes.”
His personal highlight has been working with Goldman Sachs, JPMorgan and Numis on the £1 billion capital raise through new shares and convertible bonds for Ocado.
It was his frustration as an early investor in the iconic online delivery company at not being able to participate in a share placement that led Sambasivan to set up PrimaryBid.
“I still have the deck from our own series-A venture funding round, highlighting being unable to buy new shares of Ocado as an inspiration, because it is such a great consumer brand and a classic retail stock,” he says.
“It was particularly satisfying to work on that one.”