Businesses need capital to pay for their operations, such as the production of goods or services. Companies invest capital in a variety of ways with the aim of creating 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 types of capital it uses to fund its operations. Capital is an essential part of operating a business and financing its future growth.
Businesses employ capital for productive purposes with the aim of making a profit. They typically undertake capital raisings for 1 of 3 purposes – to fund an acquisition, fund growth or expansion plans, or rebalance the company’s capital structure.
To do this, companies will estimate investor demand for the type of capital they wish to issue and seek commitments from institutional investors. This allows prices to be determined before any offers are made to retail investors.
What are the different types of fundraising?
Fundraising consists of raising additional funds. These funds can be in the form of stocks, debt securities or securities with both characteristics (such as convertible stocks). Capital increases involve the issue of new shares. Loan fundraising consists of borrowing funds that must be repaid later and on which interest must be paid.
Capital can also be raised through the issuance of convertible securities. Convertible securities may initially function as debt, with the company required to pay interest to investors. Under certain circumstances, however, they can be converted into shares.
Equity raises are frequently used by ASX companies when capital is needed. Equity investments are the most commonly used form of capital raising. Other equity raising methods include initial public offerings (IPO), stock purchase plans and rights issues.
A stock placement involves allocating shares of a company directly to investors. Only knowledgeable, professional or experienced investors may purchase shares through equity investments. To ensure retail investors don’t miss out, stock placements are frequently conducted in conjunction with stock purchase plans.
Stock placements have a number of advantages for companies as they can be made relatively quickly and are often much larger than subsequent stock purchase plans.
Stock purchase plans allow current eligible shareholders to purchase a capped number of shares at a predetermined price. Retail investors can purchase additional shares through the share purchase plan, while institutional investors purchase shares through the share offering.
A stock purchase plan allows existing retail investors to buy new shares of the company, usually at a price below the current market price. Corporate bylaws limit the maximum claim under a stock purchase plan to $30,000 in value per shareholder.
A capital increase is an invitation to existing shareholders to purchase new shares in proportion to their existing holdings. Stocks are usually offered at a price below the current market price. Shareholders can choose to accept the offer in whole, in part or to reject it. Because capital increases are carried out in proportion to current assets, they give shareholders the possibility of avoiding the dilution of their shareholding.
An IPO involves a company listing on the ASX for the first time. Shares of a previously private company are offered to the public for the first time. Private companies may choose to go public through an IPO for a variety of reasons. These include raising equity, providing liquidity for shareholders, allowing early investors to exit and increasing the company’s awareness among the public. Funds raised from the IPO can be used to pay down debt, fund expansion or research and development, and pay early investors.
What is dilution?
Dilution can occur when a company raises additional equity. In effect, new shares are issued, increasing the total number of shares of the company. It means that earnings per share may fall as profits are spread over a larger number of shares. If an existing shareholder does not participate in the capital increase, he will hold a lower proportion of the company after the capital increase. The issuance of new shares is the opposite of a share buyback (when a company buys back its own shares and cancels them).
In order to prevent shareholders from unnecessarily diluting themselves, there are limits to the amount of share capital that ASX-listed companies can raise through share placements with institutional investors. Stock purchase plans, which follow stock offerings, offer retail investors the opportunity to participate in equity raising and avoid unnecessary dilution.
It should be remembered that dilution is not always a major concern. The ultimate effect of fundraising on a diluted shareholder will depend on the use of the money raised. If the funds are used to grow and expand the business, the share price may increase over the long term, benefiting all shareholders. In such a scenario, there may be some short-term pain due to dilution, but a long-term gain in the form of capital appreciation.
Shareholders of companies that raise capital should take the time to investigate the reasons for raising capital and the intended use of the funds. By doing the proper research, investors can make an informed decision about the potential impact of a fundraising and whether to participate.
Which ASX companies have recently raised capital?
A host of ASX companies raised capital in 2021. There were over 190 new listings on the ASX, which collectively raised over $10 billion in equity.
Existing listed companies have also taken to the market to raise funds, with many big names doing equity rounds.
In December, CSL Limited (ASX:CSL) achieved the largest primary fundraising ever in Australia with a Institutional investment of $6.3 billion, followed by a stock purchase plan targeting $750 million. The funds raised will be used to acquire Swiss biotech giant Vifor Pharma AG
Earlier in the year, another biotechnology company Mesoblast Limited (ASX:MSB) raised $138 million through a private placement to a US investment group, which provided essential working capital.
In the financial sector, Bank of Queensland Limited (ASX:BOQ) led a $1.35 billion in fundraising in early 2021. The funds raised were used to finance the acquisition of Members Equity Bank Limited (ME Bank).
Macquarie Group Ltd. (ASX: MQG) also appealed to investors for additional capital in 2021, seeking to capture emerging opportunities within its portfolio. Macquarie bred $1.5 billion through an institutional placement, followed by a $1.3 billion stock purchase plan.
In the consumer sector, grocer Costa Group Holdings Ltd (ASX: CGC) raised $114m via institutional rights offering, followed by $50m retail rights offering. The money raised was used to fund the purchase of the business and assets of citrus grower 2PH Farms Pty Ltd in central Queensland.
BWX Limited (ASX: BWX) also raised equity to fund an acquisition, buying a majority stake in Go-To Skincare for $89.49 million. A Institutional investment of $85 million was followed by a $9.97 million stock purchase plan.