Recent economic and stock market disruption brought about by COVID-19 has led many listed companies to tap their shareholders for additional funds. This process usually occurs in the form of an institutional placement, followed by a retail share purchase plan.
The institutional placement usually occurs over the course of one or two days, allowing financial institutions to purchase newly issued stock, usually at a material discount, directly from the company.
This is usually followed by the retail share purchase plan component of the capital raise, where retail shareholders are also offered newly issued shares, usually at the lower of the institutional price or 5-day volume weighted average price at the end of the offer.
It may initially seem like the advantage of the offers lie with the retail shareholder, after all, he or she either gets in at the institutional placement price or an even better price if that share prices falls during the offer period.
However, the reality is that the majority of advantages lie with those who can participate in the institutional placement, here’s why:
Larger offer sizes
The institutional placements usually are much larger in scale than the subsequent retail SPPs, allowing the institutions access to far more discounted shares than a retail investor; meaning that they enjoy most of the value differential between the issue discount and the stock market price. It also means that retail shareholders will see their proportional ownership of the company diluted by the newly issued shares.
Offer completes immediately and before retail SPP
The institutional placements in recent memory have occurred immediately before the retail SPPs, allowing the institutions first bite at the cherry. The institutional placement also concludes within a day or two of its announcement; allowing the institutions to capitalise on a discount far earlier than an SPP participant, be exposed for far less time and potential price movement, and immediately sell or short the equivalent amount of stock to lock in a ‘stag’ profit, even if the shares are not issued until the retail SPP shares.
Basically, an institution can immediately lock in the profit on their (larger amount of) discounted shares, while retail SPP participants usually have to wait around a month for the offer to end and up to an additional week to learn of their allocation – which gives the share price greater time to fall below their purchase price and doesn’t allow them to hedge of their exposure in advance.
If the share price falls off during the retail share purchase plan, there is a chance that the retail offer participants get a better price than the institutions. However, by this time the institutions could certainly have disposed of the exposure if they wanted or needed to. Additionally, if the share price falls at the end of the SPP period and trades below both the institutional offer price and the 5-day VWAP, the retail shareholder will end up paying more for the stock than the current market share price.
It can still pay for retail shareholders to participate in the share purchase plan, just because the institutions have some advantages, doesn’t necessarily mean it’s a bad deal for retail investors. During the recent round of new share issues, all the retail SPPs across the ASX/S&P 200 index that I can remember would have generated positive value for participating shareholders. It still pays to consider however, that while your deal might be good – the insto deal is usually better.
Sam Green is the Portfolio Manager at Emerald Financial, whilst also being an Equities and Derivatives expert for his clients at TradersCircle.
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