Associations lobby government to ‘level the playing field’ with capital raisings

By Miranda Brownlee

November 30 2020
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With SMSF and retail investors often missing out on ASX capital raisings, the SMSF Association and Stockbrokers and Financial Advisers Association have proposed a number of steps that could be taken to address the issue.

As part of a virtual forum for SMSF week, SMSF Association chief executive John Maroney said that SMSFs and other retail investors have missed out on many of the capital raisings following the global financial crisis and during COVID-19.

“Post the GFC, institutional investors were favoured at the expense of retail and SMSF investors, and history has repeated itself when companies looked to quickly raise capital as COVID-19 created economic uncertainty,” said Mr Maroney.

“It means retail and SMSF investors are disadvantaged twice. Not only are their shareholdings in these companies diluted, but they miss the opportunity to buy shares at prices that are often a hefty discount to the market price. Clearly, it’s not a level playing field.”

Mr Maroney explained that “the playing field was tilted even more towards the institutional market this year” when ASIC and ASX announced on 31 March 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. This measure is due to expire on 30 November 2020.

Stockbrokers and Financial Advisers Association of Australia chair Brian Sheahan said companies that go to the market for capital during a crisis are largely seeking to do one thing – recapitalise and strengthen their balance sheets.

“They are not usually looking to change their business model or make an acquisition. Shareholders are already invested in the business and should have the opportunity to participate. The risk to them is not an investing risk but missing out,” Mr Sheahan noted.

“What must be particularly galling for retail and SMSF investors is that once these companies have made the placements, then the market gives them a tick and the share prices start to appreciate.”

Wilson Asset Management chair and chief investment officer Geoff Wilson stated that of the $30 billion raised during and following the GFC, it was mostly by placements to wholesale investors at an average 17 per cent discount to the market price.

“By our reckoning, the retail end of the market was short-changed by $6 billion. This was totally unacceptable and similar dilution and lack of retail access has been occurring this year,” said Mr Wilson.

New Zealand had the same problem as Australia post the GFC, Mr Wilson explained, but in 2014 addressed the issue to achieve an equitable outcome for all investors by removing the “sophisticated investor” tag and introducing a term sheet that was available to all shareholders.

The SMSF Association and Stockbrokers and Financial Advisers Association are calling for three steps that could be used to address the issue, including requiring large ASX-listed companies to structure their offers to maximise access for all investors to a proportionate offer. This would include 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,” said Mr Maroney.

If a company does not offer SMSF or retail investors the chance to participate, Mr Maroney said they should be required to publicly explain why.

The associations would also like to see companies 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,” Mr Maroney added.

The SMSF Association also believes that developing a single digital retail platform that builds on advancements in financial technology could create a more efficient mechanism for fund raising from SMSFs and the 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 from which SMSFs are typically excluded,” he stated.

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