I upset a few people with my comments in Sealink Surge Due on Debut. Tuesday afternoon was spent fielding calls and emails from very unhappy brokers. Despite their consternation, it hardly registered with Bristlemouth readers: ‘So they look after their big clients at the expense of other shareholders, tell me something I don’t know’.
True. It’s hardly top secret information. But still something should be done about it. Any substantially oversubscribed capital raising is a mispriced capital raising. Why do we even have this process where a board sits down with a dubiously incentivised investment bank to set the price at which they will sell shares in your company? Why not just auction the new shares off to the highest bidder?
Why not indeed. The ASX Bookbuild process, due to launch on 8 October, provides a mechanism for companies to do exactly that. There are a few nuances, but the basic principle is that companies will have the option of letting the market set the price at which they raise new capital. That should, at the very least, result in a much smaller discount than the current placement process. And there’s no reason it can’t be a premium. If the capital raising is going to increase the value of the company or demonstrate the value on offer (as was the case with the Vision Eye Institute Capital raising) then investors may well be prepared to pay more than the last traded price to get themselves a piece of the action.
The investment banks and, presumably, a few of the funds that have been beneficiaries of the old way of doing things have been kicking and screaming. Let them. There is very little downside and a lot of potential upside for the rest of us.
The most coherent argument made against ASX Bookbuild is that a company needs certainty when raising capital. For certainty, you need an underwriter that guarantees that the capital will be raised at the stated price. Underwriters bear risk, and therefore require return, so you can’t cut them out of the picture.
The ASX Bookbuild process has a few mechanisms that enable a company to keep an underwriter in the game, but the argument doesn’t hold up in any case. True underwriting died a decade ago. If you see an underwritten capital raising these days, it simply means an investment bank has done the rounds and found enough institutional investors to guarantee they will take the placement, ensuring the investment bank won’t be left with any stock. If they can’t find the investors, they won’t underwrite the deal. The recent Ingenia capital raising was underwritten. The current Galileo Japan raising is not.
So I hope ASX Bookbuild is a raging success. You should encourage the directors of any company you own to ensure it is so.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.