Raise disclosure to end ‘unfair’ capital raising regime

First published in the Financial Review on 18 July 2020. 

Self-managed super trustees who have missed out on the recent spate of attractive capital raisings in the wake of the COVID 19-induced recession have every reason to reflect on that old maxim, “those who do not learn history are doomed to repeat it”.

Except it’s not trustees who have failed to heed history’s lessons – it’s the regulators who need to review the lessons of recent history and improve the regulatory framework around capital raisings.

Once again, it seems SMSFs, and retail investors more generally, have got the short end of the stick when it comes to capital raisings at a time of economic upheaval.

Post the global financial crisis, research shows that, of the $100 billion raised by S&P/ASX 200 companies between January 2008 and December 2009, less than 10 per cent went to the retail end of the market. In the COVID-19 world, of 20 capital raisings to April 18, 75 per cent of the $8.5 billion raised went to fund managers and institutions.

This means that when the economic recovery comes and share prices rise, SMSFs in many instances will miss out because the current regulatory approach to capital raisings discriminates against them.

And this time around, there is another reason for retail shareholders to take umbrage with the regulatory regime.

On 31 March, by when the economic carnage inflicted by the pandemic was fully evident, ASIC and the ASX announced temporary emergency capital raising measures to help companies raise urgently needed capital, especially by allowing the 15 per cent placement capacity to be lifted to 25 per cent, a decision that disadvantaged existing retail shareholders.

Such was the public outcry that on April 22, the ASX announced changes to these emergency measures in a bid to address these concerns, with the result that the entire emergency package was due to expire on July 31. However, the ASX has since announced that capital raising relief will extend to the end of November.

Missing out

SMSFs have once again missed out on the opportunity to participate in capital raisings, many of which were at a serious discount to the market price.

Indeed, with the median capital raising during COVID-19 being, on average, at a 15 per cent discount to the last traded price, this is a significant penalty. To rub salt into the wound, it also means their current shareholdings have been diluted.

SMSFs are a significant investor in ASX-listed companies (at 31 December 2019, their collective stake stood at $221 billion), the dividends from which help generate retirement income for SMSF members.

But companies, in their need to raise capital quickly, have opted for share placements via an investment banking industry that puts domestic and international institutions at the head of the queue.

The need for companies to quickly access the capital markets during an economic event of this magnitude cannot be ignored. It can mean the difference between failing or surviving. But surely modern technology can be used to speed up the process so as not to discriminate against SMSF investors.

Ideally, capital raisings should deliver a win for all. Companies increase their capital and shareholders get equal access to more shares at discounted prices. So how can it be done so that retail and SMSF investors aren’t denied those benefits?

Three initial steps should be:

  • Large ASX-listed companies should structure their offers to maximise access for all investors to a proportionate offer, including setting aside a certain allocation for retail-focused brokers to offer to retail and SMSF clients.
  • If retail/SMSF shareholders own 30 per cent of company, the raising should come as close as possible to represent 30 per cent of the offering to them.
  • If a company does not offer SMSF/retail investors the chance to participate then they need to publicly explain why.

Companies should clearly disclose their post-allocation to all investors. Allowing investors to scrutinise these decisions will place more pressure on companies to act in the interests of all shareholders.

The SMSF Association also believes developing a single digital retail platform that builds on advancements in financial technology is the next crucial step.

The purpose of this platform would be to create a more efficient mechanism for fund raising from SMSFs and other retail investors. Participants could register on the platform, helping facilitate an even quicker process for companies and brokers to access all shareholders.

Not only would this be effective for capital raisings but may be useful for larger-scale infrastructure investments that SMSFs are typically excluded.

Numerous inquiries, such as the Financial System Inquiry, failed to address the inequities between institutional and SMSF/retail investors, with the current crisis again highlighting the price the latter pay for this.

The government and regulators should address these concerns by helping to create a more level playing field for all investors.

Opinion piece written by
John Maroney, 
SMSF Association