Rumblings over the fairness of capital raising

Expansion of on-market bookbuild favoured

One antidote the ASA favours to change that is the expansion of the new on-market bookbuild service that went on the main trading platform of the Australian Securities Exchange last October. This facility, made possible by advanced technology, allows all brokers and eligible retail clients more open access to capital raisings, floats or share placements.

“Companies which use this service should be able to save on fees to intermediaries and also offer new shares to a wider pool of investors including eligible retail investors once the system is better understood and more established," the ASA states.

This is rather than the usual pattern of having the process and pricing controlled by investment banks and their chosen brokers and clients. The argument – naturally favoured by the investment banks – is that underwriting of an IPO or capital raising provides necessary certainty for the client. The catch is how often this works to the financial advantage of a select group of investors with little transparency about how the allocations are made.

The discounts offered to provide that certainty can also be extremely costly to existing shareholders.

Under the on-market bookbuild, all brokers can bid for allocations on behalf of their clients. The company and lead manager assess that level of demand and at what price. The most likely result is a proportion of shares going to retail investors who would otherwise not be able to participate – and at a price the market will pay.

Ben Bucknell – formerly of Macquarie Bank and now CEO of On-Market BookBuilds – has been busily selling the benefits to companies all over Australia. He developed the IP with $1.86 million in matching funding from Commercialisation Australia, and the rest funded privately by him and supporters.

One banker calls it a version of crowd sourcing for equity funding. And he points out that traditional underwriting – in the sense of a bank or broker taking on the risk of a guaranteed price – has been fading in favour of non-underwritten capital raisings anyway, due to risk and cost

“I think it adds to the depth of the market, and the power of pricing and distribution is taken solely out of the hands of the banking intermediaries," he says.

“The mechanism is potentially a significant threat to the big guys."

So far though, it’s been restricted to smaller-scale capital raisings and IPOs. Four companies have used it since October with the latest a copper and gold explorer, Stavely Minerals . This is for a $5 million-to-$8 million IPO closing on April 16 and run by Morgans as lead manager. The difference is that anyone can bid through any broker for an allocation.

Geoff Wilson, of Wilson Asset Management, was an early convert, with WAM the first listed company to use the facility to raise $25 million for one of its funds. The amount raised was 67 per cent more than planned because it was so heavily oversubscribed.

Access to all the stockbroking community

“It exceeded our expectations,’ Wilson tells The Australian Financial Review. “It provides access to potentially all the stockbroking community rather than a normal placement and it’s a way of communicating with the market in a very effective and efficient way. As time goes on, people will become more accustomed to it."

The big investment banks remain unpersuaded. They argue that they offer a complex package of advice, positioning, underwriting and distribution that provides crucial certainty for companies.

“The on-market bookbuild will never be more than a niche product," says one dismissively.

“Maybe it will have some relevance to issuers who are not in a position to attract strong underwriting. You get what you pay for."

Bucknell is not alone is suggesting such criticism comes from vested interests seeing a threat to their lucrative business model. He says the cost of capital raising for smaller companies is proportionally higher thanks to the size of the discount. But he argues the benefits also apply to large companies and large capital raisings. Can he convince CFOs?

The development and application of the technology is a world first among global stock exchanges – with patents sealed or pending in dozens of countries. Definitely worth watching.