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Some shareholders have always been more equal than others

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By Sam Kerr
12 May 2020

The wave of accelerated capital raisings in the UK in response to the Covid-19 crisis has caused consternation in some circles because retail investors cannot access to these deals. While the principle of shareholder equality is without doubt a noble one, in reality larger shareholders have always had more access to equity capital markets deals than retail investors have.

Last month UK firms were given the green light by regulators to raise up to 20% of their share capital through a non-pre-emptive placing to repair balance sheets against the ravages of Covid-19.

However, this has led to protests from some senior financial industry professionals, including senior executives at Fidelity International, AJ Bell and Hargreaves Lansdown, who say that retail investors are being given short shrift as a result of these equity placings, sold through private placements mostly to institutional shareholders.

They say that these sales should include a retail tranche to allow individual investors the same access as institutional ones.

The complaint centres around the claims that retail investors are being diluted and that they are missing out on a discounted sale of stock. The first argument is valid although there it could also be said that their stakes so small in the first place that this is insignificant.

It is also true that investors are missing out on a discounted share price, but that is the nature of accelerated placings.

Peter Hargreaves, co-founder of Hargreaves Lansdown, who was among those protesting, knows this well after he sold £550m of his own shares in the company in February to institutional investors through an accelerated placing. The offering did not include a retail tranche.  

Almost all block trades are conducted in this manner and often occur overnight so the underlying share price is not heavily impacted by a large sale.

Investment banks often give large existing shareholders notice through what is called a “wall-crossing” process, as they have done on all of the Covid-19 capital raises.

Those shareholders are then often favoured in allocation of the new shares.

The issuer's need for speed in an emergency recap means that not every shareholder will get the same treatment  — the minnows miss out.

The order books in the larger block sales tend to contain over 100 accounts, but not many more than that. It would have been an exponentially higher number, and a lot more extra work and time, had Hargreaves relied on retail investors to take down his block.

It is true that in their rush to get cash through the door, the Covid capital raisers neglected their retail-level owners in some ways. But this was survival cash and any retail investor smarting from the missed opportunity must ask themselves: would they rather own stock in a better capitalised going concern even if they didn't pick-up extra stock at a discount, or would they rather have been wiped out by the economic ravages of the pandemic while every shareholder waited their turn? 

By Sam Kerr
12 May 2020