Copying and distributing are prohibited without permission of the publisher.

Watermark

Crisis Talk — with Investec’s Carlton Nelson on funding mid-caps through the pandemic

Carlton nelson
By Sam Kerr
15 May 2020

As UK mid-cap companies face the worst disruption that most of them will have experienced, many are turning to their corporate brokers for advice on how to survive the coronavirus crisis. Carlton Nelson, co-head of Investec's corporate broking business, has worked on a number of Covid-19 capital raising deals for UK companies and shared his experiences of an unprecedented crisis — its effects on the business that needs to be done and how it is executed.

Investec’s corporate broking team advises corporate clients ranging from small to mid-cap growth companies to those on the FTSE 100. In April, Investec acted as sole advisor, broker and bookrunner for four UK deals and joint broker and bookrunner for one UK deal with the combined value of £282.5m raised. 

GlobalCapital: Have you ever experienced anything like the Covid-19 crisis?

Carlton Nelson, Investec: I've never experienced anything quite like this. 

I joined Investec around 12 years ago, in March 2008, and Lehman went under just a few months after that when the great financial crisis hit in earnest. The parallels and comparisons between the current crisis and that one are interesting but, ultimately, they are different. 

For example in this crisis, it has been good to see banks supporting their clients wherever possible in ways that perhaps were not possible a decade ago. 

In addition, government schemes have been introduced quickly and in UK equity capital markets, we saw regulators loosen rules on pre-emption quickly, in order to facilitate a faster recovery.

Given the UK’s slower path out of lockdown, as outlined by the government this week, do you foresee more UK mid-cap equity raises?

Ultimately, I think more capital raises are inevitable, even before [prime minister] Boris Johnson's speech [on Sunday, May 10] we had a number of placings in our pipeline and I think our colleagues across other brokers will have the same over the coming weeks.

There are a number of these fast placings, for under 20% of issued share capital, like those that have been done in the past few weeks, to come I expect. 

We launched a placing and open offer in Costain at the end of last week and I think we may well get more rights issues, along with placings and open offers, over the course of the next few weeks and months. 

A lot of work has to been done in the background to get these larger fundraises ready. It takes a bit longer to get the preparatory work for those done, but I expect we will see far more of these raises soon. 

We are spending a lot of time talking to all our clients about what the recovery will look like and how the government's plan for exiting the lockdown will affect them. 

There are differing views on what the shape of the recovery will look like, and there are a number of companies having to go back, look at models and rework their assumptions on what this might mean for their recovery. 

If not already done so, companies will have to work out whether their balance sheet can support a potential lengthier exit from lockdown.

What deal has been the most memorable for you during this wave of Covid capital raisings?

We were very proud to get the £100m placing in Blue Prism [which makes automation software for robots] done a few weeks ago.

We placed shares to investors in both the UK and US, and the reception was a testament to the work that the company has done in the run-up to Covid-19. 

We were also very pleased with the response to our £141m raise for JD Wetherspoon; and that both of these deals were done on a sole basis. 

One of the other interesting deals outside of Investec was the fundraise by SSP, because it was one of the first companies to raise capital through an accelerated placing and served as a blueprint for the way these sub-20% placings should be done. 

Speaking to our institutional client base after that deal the feedback was that this was the way to raise equity as efficiently and cleanly as possible without an elongated offer period.

What is it about the UK investor base that makes it amenable to such equity capital markets ingenuity?

UK and international fund managers have been hugely supportive of UK companies through this period. It really has been fantastic to see. I think one of the things that really helps the UK market is that institutional investors have strong relationships with regulators, either directly or through corporate brokers like us. 

We have had a number of conversations, alongside other banks, with the regulators and the stock exchange to catch up on what has been working well, what has not, and what is on the horizon. 

We all do this to make sure equity markets are as efficient as they can be. We pride ourselves on thinking the London Stock Exchange and the UK equity market as a whole is a very efficient market. That has been tested now and it has very much proven so.

When did you start to have calls with clients about equity raises to heal corporate balance sheets in response to Covid-19 disruption?

Some of our corporate clients have exposure to varying degrees to companies in the Far East. That means Covid-19 was flagged as a concern earlier than for many of our more UK-centric clients. 

Our first UK fundraise was for IMImobile on April 9 and for a good month or so, as companies began to prepare for an inevitable lockdown, capital raises were brought into sharper focus. 

The ability to do these cash raises quickly means that we can do a deal almost as soon as we get the green light. We think it’s important to get the deal executed quickly and efficiently. To be able to do so for up to 20% of share capital is really helpful for companies and can be executed within a matter of a few weeks at times.

Have there been any specific challenges in doing these sorts of deals under global lockdown?

I have been hugely encouraged by the way that our own team and the whole investor base has quickly adopted the different types of technology that have enabled us to carry on doing deals, almost regardless of lockdown. 

We are clearly working differently and I think we have found efficiencies we may bring forward wherever possible, particularly on marketing roadshows.

Even in the UK, we could spend up to four or five days travelling round the UK and getting stuck in traffic jams, with 45 minutes needed between one hour meetings. They were busy days and sometimes you would only speak to six investors. 

Now we can do 10 to 12 calls in a day and expedite the marketing roadshow significantly, which has been an important factor with speed of the essence. 

One challenge, especially from a corporate broking perspective, has been to try to gauge the mood in a room remotely. It is always helpful to see the body language in person when you are trying to build a book and see where sentiment, and ultimately demand, is. It is great though that the fund managers have been willing to have meetings through Zoom, Teams and other technology platforms.

What do you make of the argument that placings with no pre-emption are unfair for retail shareholders? Is this a case of needs must?

It is a very interesting debate and one we have with each of our clients that is contemplating a fundraise. UK companies in particular are keen to do whatever they can to honour pre-emption. We also seek to always honour pre-emption in our allocation policy wherever relevant. 

The question now is whether we can reach out to all of the shareholders and when speed is of the essence. That is clearly difficult to do.  However, there are innovations that might ameliorate that process and we will incorporate wherever practical. 

We also have a reach into the private client broker network and hope that will help some of our corporate clients be able to reach out to their retail base a little more. This is likely to remain in focus for a while. 

Nevertheless, the Pre-Emption Group raised its threshold to 20% to allow for greater capital raising to be done quickly in order to support these companies in this crisis. Companies are not taking advantage of that deliberately to the detriment of retail shareholders, but it is unfortunately the way companies have to operate under these conditions.

How have you found your new, remote working conditions?

I have been surprised at how well it has worked. I have a family in the background who occasionally drop into a marketing meeting by mistake, but I think that is just the new reality and everyone we are speaking to is in a similar situation. People have been pleasingly resilient and patient. 

These are long days though and everyone is working that little bit harder because we are working when you would typically be commuting. However, it comes down to efficiencies and getting the work done and I think that has not abated at all. 

It will be interesting to see how much of this is adopted in the future. There are certain working practices that point towards a better work-life balance that are important to recognise and perhaps adopt.

By Sam Kerr
15 May 2020