RON CAMERON, SENIOR ADVISER
Thinking of undertaking a capital raising in the near future?
If you are a larger company, you have probably had a protracted series of intense discussions on the topics of debt versus equity, placement followed by share purchase plan (SPP), entitlement offer, renounceable versus non-renounceable, pricing, underwriting, sub-underwriting, even project nicknames to disguise identities as the myriad of emails fly through cyberspace between the company, investment banks, legal teams and an endless stream of advisers. For the micro-mid cap companies the process is the same but on a much simpler scale.
Elaborate timelines are constructed and milestone dates for delivery of each piece of the puzzle are enshrined, to ensure the process keeps to schedule.
Finally the day arrives, everything is ready, the market announcement is released… but where are the investors?
Quite often we are approached at the last minute to undertake a shareholder engagement campaign for companies that have had a less than enthusiastic start to a capital raising.
In all their careful planning, they failed to appreciate the one thing that often makes the difference: timing.
While there are no publicly available studies on this, our work at FIRST Advisers supports the idea that there is a clear seasonality to the optimal times to raise capital from retail investors. This seasonality transcends sectors and reflects the level of interest from retail (and indeed institutional) investors in stumping up funds ahead of other ‘life’ priorities.
Our experience shows the best times of year to capture the retail dollar is late March/early April and mid-late October.
- Retail shareholders have just pocketed their dividend cheques, so they are, at least temporarily, ‘cashed up’.
- There are no scheduled school holidays (they normally occur mid-April and early October), depending on the Easter weekend.
The worst time to solicit the retail dollar is any holiday period (mid-December to late January, Easter and any scheduled school holiday break).
- Retail investors’ spending priorities are not focused on their investment portfolios.
- Documentation is either ignored or shelved in favour of other leisure pursuits.
- A significant number of retail investors may be absent from the process, particularly if they are away from home and the documentation is delivered by mail.
The SPP Effect
Another consideration, specifically in relation to SPPs, is the structure of the options available. Our experience from over 300 capital raising campaigns on behalf of clients clearly shows the fewer dollar options for retail investors, the lower the level of funds raised.
For example, let’s assume that the retail investor decides to participate in an SPP offer but can only afford to invest a maximum of $4,000. If the only options presented by the company are; $1,000, $5,000, $10,000 and $15,000 the investor is most likely to choose the $1,000 option, effectively eliminating $3,000 worth of capital injection into the company. Multiply that by a mere 100 shareholders and the lost opportunity is $300,000. This is particularly relevant for a junior resource company where spending this additional amount on drilling and evaluation could be the difference between success and failure of a project.
We recently conducted a shareholder engagement campaign for a client who offered options to participate at increments of $1,000 from $1,000 up to $15,000. They raised an additional $1 million and lifted the average retail participation level from $5,000 to $6,300, compared to a previous SPP that offered fewer options.
In short, more retail options, more capital.