I received an email this morning in relation to our application for shares in the soon to be listed Sealink. Intelligent Investor Funds has been allocated 25,000 shares, an amount so small that it won’t move the needle even if the stock doubles on debut.
Apart from wasting a small amount of our time reading the prospectus and attending a management briefing, there is nothing to complain about. The stock looks cheap. The business looks well managed. And the amount being floated is tiny – 15m shares at $1.10 a piece.
Our tiny allocation was justified in an interesting manner, though. The broker told us that a significant number of instos received less than 100,000 shares and that, paraphrasing, even the clients that pay the most brokerage received less than 200,000 shares.
It won’t surprise you, I’m sure, that the more brokerage you pay, the more shares you get in an attractive looking float. And we have no right to complain. The float is obviously underpriced – to the detriment of existing shareholders, not us – and we have no more right to a windfall gain than anyone else.
But this behaviour is rife, and it’s far more insidious when it comes to capital raisings. Brokers, who are supposed to be helping a board and existing shareholders raise capital, have a huge incentive to get a sweet deal for their largest and most profitable clients. When Vision Eye Institute undertook a deeply discounted capital raising in December last year, we were the company’s second largest shareholder (behind Ed Bateman’s Primary Health Care). Despite a number of angry phone calls, we were allocated less shares in the capital raising than David Paradice’s eponymous funds management firm, which didn’t own a share prior to the deal being announced.
We were stitched up. But not as much as existing retail shareholders, who were given no option to top up their rights at all.
I have a pretty simple rule when it comes to capital raisings and floats. If the brokers are ringing us, the deal is a dud (we’ll be giving the Galileo Japan recapitalisation a miss). If there’s a good deal on offer, the chances of us getting a meaningful crack at it are next to nothing.
We’ll just have to stick to doing our own research and buying the stocks that no one else wants to own. It’s not quite so easy, but has been profitable nonetheless.
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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.