Few will dispute that fairness should be fundamental to share markets. A level playing field is necessary to inspire the confidence of all market participants.
Yet the traditional off-market placement – now alarmingly considered the default capital-raising option by many companies – often prejudices existing shareholders that aren’t major clients of investment banks.
As a director of Belvedere Share Managers, I encounter this all too often. Belvedere is a small funds management business, so it’s not a top-10 client of any investment bank. We are rarely the first to be called when a lead manager is seeking to place stock.
Take Peet Limited, which in April 2013 raised $124 million via an institutional placement without Belvedere’s participation. With the stock issued at an 18-per-cent discount to the market price, our shareholding was diluted. This is a transfer of value from Peet’s existing shareholders to the clients of the company’s lead manager.
The biggest attraction for Belvedere in ASX BookBuild is that our wholesale fund, the Belvedere Australian Alpha Fund, will have access to capital raisings from which we were formerly excluded. So will our investor clients in the individually managed accounts we offer.
No longer will we need to be a favoured client of an investment bank to obtain stock in a capital raising. The process will be much more transparent.
Historically, our decision about whether to participate in share issues has taken place in an information vacuum. This problem has been particularly acute for initial public offerings, in which fund managers are asked to commit clients’ capital with minimal knowledge of the likely pricing.
Under the ASX BookBuild process, a live price will be visible, streamlining a fund manager’s decision to participate. This will reduce the time spent valuing a prospective investment without awareness of the approximate pricing – or whether we’ll be allocated stock at all.
Transparent rules will govern allocation too. If a fund manager bids at or above the final price, a pro-rata allocation will be guaranteed. Discretionary allocations will be a thing of the past.
Companies must be made aware that the traditional off-market placement favours larger investors over smaller ones. In my view, company directors have a fiduciary duty to ensure they’re not allocating stock in a way that penalises certain groups of shareholders.
I firmly believe that it should become the first option a company considers. Fair access to capital-raising has been a long time coming, but it’s finally here.