What is a capital raising?

What is a capital raising?

A 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, or transforming operations, making an acquisition, or altering their capital structure. 

To undertake a capital raising, companies approach existing and potential investors seeking additional funds. These funds may be in the form of equity, debt, or a convertible instrument with features of both debt and equity. Different methods of capital raisings (and the reasons behind them) can have differing impacts on a company’s share price.

Why would a company launch a capital raising?

Companies 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 intention 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 capital types it uses to fund its operations. Capital is a critical component of operating a business and financing its future growth.  

Companies employ capital for productive purposes with the aim of making a profit. They usually undertake capital raisings for 1 of 3 purposes – funding an acquisition, funding growth or expansion plans, or rebalancing the capital structure of the business. 

To do so, companies will estimate investor demand for the type of capital they would like to issue and seek commitments from institutional investors. This helps determine pricing ahead of any offer made to retail investors.

What are the different types of capital raising?

Capital raisings involve 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 raisings involve the issuance of new shares. Debt capital raisings involve borrowing funds that must be repaid at a later date, and on which interest must be paid.

Capital can also be raised via the issue of convertible securities. Convertible securities may initially operate like debt, with the company required to make interest payments to investors. In certain circumstances, however, they may convert to equity. 

Equity capital raisings are frequently employed by ASX companies when capital is required. Share placements are the most common form of capital raising used. Other methods of raising equity capital include initial public offerings (IPOs), share purchase plans, and rights issues

A share placement involves the allotment of shares made directly from a company to investors. Only sophisticated, professional, or experienced investors can buy shares through share placements. To ensure retail investors do not miss out, share placements are frequently conducted in conjunction with share purchase plans. 

Share placements have a number of advantages for companies because they can be conducted relatively quickly and are often far larger than subsequent share purchase plans. 

Share purchase plans allow eligible current shareholders to buy a capped amount of shares at a predetermined price. Retail investors can buy additional shares under the share purchase plan, while institutional investors buy shares through the share placement. 

A share purchase plan allows existing retail investors to buy new shares in the company, 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. 

A rights issue is an invitation to existing shareholders to purchase new shares in proportion to their existing holdings. Shares are usually offered at a discount to the current market price. Shareholders can choose to accept the offer in full, in part, or to reject the offer. Because rights issues are conducted in proportion to current holdings, they give shareholders the option to avoid dilution of their shareholding. 

An IPO involves a company listing on the ASX for the first time. Shares in a previously private company are offered to the public for the first time. Private companies may choose to go public via an IPO for a variety of reasons. These include raising equity capital, providing liquidity for shareholders, allowing early investors to exit, and increasing public awareness of the company. Funds raised in the IPO may be used to pay down debt, fund expansion or research and development, and to 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 that earnings per share may fall, as earnings are 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). 

In order to prevent shareholders 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, provide retail investors with an opportunity to participate in equity capital raisings and avoid unnecessary dilution. 

It is worth remembering that dilution is not always a significant concern. The ultimate effect of a capital raising on a shareholder that is diluted will depend on what the money raised is used for. If the funds are 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 gain in the form of capital appreciation. 

Shareholders in companies that are conducting capital raisings need to take the time to investigate the reasons for the capital raising 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.

Which ASX companies have raised capital recently?

A host of ASX companies raised capital in 2021. There were more than 190 new listings on the ASX, which collectively raised more than $10 billion in equity capital. 

Existing listed companies also went to market to raise funds, with many big names conducting equity capital raisings. 

In December, CSL Limited (ASX: CSL) conducted Australia’s largest primary equity raising ever with a $6.3 billion institutional placement, followed by a share purchase plan targeting $750 million. Funds raised will be used to acquire Swiss biotech giant Vifor Pharma Ltd. 

Earlier in the year, fellow biotech firm Mesoblast Limited (ASX: MSB) raised $138 million via a private placement to a US investment group, which provided critical operating capital. 

In the financial sector, Bank of Queensland Limited (ASX: BOQ) conducted a $1.35 billion capital raising in early 2021. Monies raised were used to fund the acquisition of Members Equity Bank Limited (ME Bank). 

Macquarie Group Ltd (ASX: MQG) also tapped investors for additional capital in 2021, looking to seize on emerging opportunities within its portfolio. Macquarie raised $1.5 billion via an institutional placement, which was followed by a $1.3 billion share purchase plan. 

In the consumer sector, grocer Costa Group Holdings Ltd (ASX: CGC) raised $114 million via an institutional entitlement offer, followed by a $50 million retail entitlement offer. Monies raised were 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 capital to fund an acquisition, purchasing a controlling interest in Go-To Skincare for $89.49 million. An $85 million institutional placement was followed by a $9.97 million share purchase plan. 

 

This article last updated on 19 January 2021. Motley Fool contributor Katherine O'Brien owns CSL Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended CSL Ltd. The Motley Fool Australia has recommended BWX Limited, COSTA GRP FPO, and Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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