Capital raising is when a company asks for additional money from investors. Companies conduct capital raisings for a variety of reasons. These include funding, expanding, transforming operations, making an acquisition, or altering their capital structure.
Companies approach existing and potential investors seeking additional funds to undertake a capital raising. These funds may be in equity, debt, or a convertible instrument with debt and equity features. Different capital-raising methods (and the reasons behind them) can affect a company’s share price differently.
Why would a company launch a capital raising?
Companies need capital to pay for their operations, such as producing goods or services. Companies invest capital in a variety of ways to create value.
There are different types of capital, including working capital, debt, equity, and (for financial instructions) trading capital. A company’s capital structure will depend on the mix of capital types used to fund its operations. Alongside cash flow, capital is critical to operating a business and financing its future growth.
Companies employ capital for productive purposes intending to make a profit. They usually undertake capital raisings for one of three purposes: funding an acquisition, funding growth or expansion plans, or rebalancing the business’s capital structure.
The capital raising process involves companies estimating investor demand for the type of capital they would like to issue and seeking commitments from institutional investors. This helps determine pricing ahead of any offer made to a potential new investor.
What are the different types of capital raising?
Capital raising involves raising additional money. These funds may be in the form of equity, debt, or securities with features of both (such as convertible shares).
Equity capital raising involves the issuance of new shares. Debt capital raisings involve companies borrowing funds that must be repaid at a later date and on which interest must be paid.
Companies can also raise capital via the issue of convertible securities. Convertible securities may initially operate like debt, requiring the company to make interest payments to investors. In certain circumstances, however, they may convert to equity.
A closer look at equity capital raising
ASX companies frequently employ equity capital raisings when capital is required. Share placements are the most common form of equity capital raising.
Other methods include initial public offerings (IPOs), share purchase plans, and rights issues. the Corporations Act and ASX listing rules regulate capital-raising activities.
Share placements
A share placement involves allotting shares made directly from a company to investors. Only sophisticated investors and institutional investors can buy shares through share placements.
Companies frequently conduct share placements in conjunction with share purchase plans to ensure retail investors do not miss out.
Share placements offer several advantages for companies because they can be conducted relatively quickly and are often far more extensive than subsequent share purchase plans offered to retail investors.
Share purchase plans
Eligible current shareholders are able to buy a capped amount of shares at a predetermined price in a share purchase plan, usually at a discount to the current market price.
Corporate regulations limit the maximum application under a share purchase plan to $30,000 in value per shareholder.
Rights issues
A rights issue is an invitation to existing shareholders to purchase new shares in proportion to their existing holdings. Companies typically offer shares at a discount to the current market price. Shareholders can choose to accept the offer in full, in part, or to reject the offer. Rights issues give shareholders the option to avoid diluting their shareholding because they are conducted in proportion to current holdings.
And IPOs
An IPO involves a previously private company listing on the ASX for the first time.
Shares in the company are first offered to institutional investors off-market through an ‘underwriter’ – an intermediary who facilitates the sale of stocks and guarantees a minimum price and/or a minimum number of stocks sold to ensure a successful public launch on the ASX.
Private companies may choose to go public via an IPO for various reasons. These include raising equity capital, providing liquidity for shareholders, allowing early investors to exit, and increasing public awareness of the company. Companies typically use funds raised in the IPO to pay down debt, fund expansion or research and development, and pay out early investors.
What is dilution?
Dilution can occur when a company raises additional equity capital. This is because new shares are issued, increasing the total number of shares in the company. This means earnings per share (EPS) may fall, as earnings will be spread over a greater number of shares.
If an existing shareholder does not participate in the capital raising, they will hold a lower proportion of the company after the capital raising. Issuing new shares is the opposite of a share buyback (where a company buys back its own shares and cancels them).
To prevent shareholders from becoming unnecessarily diluted, there are limits on how much share capital ASX-listed companies can raise via share placements to institutional investors. Share purchase plans, which follow share placements, allow retail investors to participate in equity capital raisings and avoid dilution.
It is worth remembering that dilution is not always a significant concern. The ultimate effect on a shareholder will depend on how the money raised is used. If it is used to grow and expand the company, the share price may increase over the long term, benefitting all shareholders. In such a scenario, there may be some short-term pain from dilution but long-term capital appreciation gains.
Shareholders in companies that are conducting capital raisings need to take the time to investigate the reasons for it and intended use of funds. By doing the appropriate research, investors can make an informed decision on the potential impact of a capital raising and whether to participate in it themselves.
Which ASX companies have raised capital recently?
The number of ASX companies raising capital in 2022 is down significantly on 2021.
In the first half of 2022, 59 new company listed on the ASX, compared to 61 in the first half of 2021. The second half of 2021 saw 130 new ASX listings, but it is unlikely we will see similar numbers in 2022.
Equity capital markets have been battered by rising inflation, and the pipeline for ASX listings is down significantly compared to a year ago. Fewer companies are conducting secondary capital raisings this year, although some big names have raised funds.
In February, biotech behemoth CSL Limited (ASX: CSL) completed a $750 million share purchase plan, which came on top of a $6.3 billion institutional placement announced in late 2021. CSL has earmarked funds for the acquisition of Swiss biotech giant Vifor Pharma AG.
Oncology company Telix Pharmaceuticals Ltd (ASX: TLX) announced a plan to raise $200 million in January to fund late-stage clinical programs and pipeline expansion. The raise comprised a $175 million placement and a $25 million share purchase plan.
Although the placement to institutional investors was successful, the share purchase plan was cancelled in March as the market share price fell below the purchase plan offer price.
Hair and skin company BWX Ltd (ASX: BWX) announced a cut-price capital raise in June in order to reduce debt and replenish working capital. The capital raise comprised a $13.5 million placement to sophisticated investors and a $9.7 million 1-for-10 entitlement offer. With uncertain market conditions, the company is focused on balance sheet improvement and the divestment of non-core assets.
In July, Australian and New Zealand Banking Group Ltd (ASX: ANZ) announced a $3.5 billion 1-for-15 entitlement offer. ANZ planned to use funds for the acquisition of the banking operations of Suncorp Group Ltd (ASX: SUN). The bank expects the acquisition to provide pre-tax cost synergy benefits of about $260 million, with completion expected during the second half of the calendar year 2023.
Listed waste management company Cleanaway Waste Management Ltd (ASX: CWY) announced a $400 million capital raising in August to fund its acquisition of GRL, a licensed composting facility. The capital raise consists of a $350 million institutional placement and a $50 million share purchase plan.