Capital raising is when a company seeks additional money from investors. Companies conduct capital raisings for a variety of reasons. These include funding, expanding, transforming operations, making an acquisition, or altering their capital structure.
Companies approach existing and potential investors seeking additional funds to raise capital. These funds may be in equity, debt, or a convertible instrument with debt and equity features. Different capital-raising methods (and the reasons behind them) can affect a company's share price differently.
Why would a company launch a capital raising?
Companies need capital to pay for their operations, such as producing goods or services. Companies invest capital in a variety of ways to create 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 used to fund its operations. Capital is critical to operating a business and financing its future growth alongside cash flow.
Companies employ capital for productive purposes, intending to make a profit. They usually undertake capital raisings for one of three purposes: Funding an acquisition, funding growth or expansion plans, or rebalancing the business's capital structure.
The capital raising process involves companies estimating investor demand for the type of capital they want to issue and seeking commitments from institutional investors. This helps determine pricing ahead of any offer made to potential new investors.
What are the different types of capital raising?
Capital raising involves raising additional money. These funds may be in the form of equity, debt, or securities with features of both (such as convertible shares).
An equity capital raising involves the issuance of new shares. Debt capital raisings involve borrowing funds that must be repaid later and on which the company must pay interest.
A company can also raise capital via the issue of convertible securities. Convertible securities may initially operate like debt, requiring the company to pay interest to investors. In certain circumstances, however, they may convert to equity.
A closer look at equity capital raising
Equity capital raisings are frequently employed by ASX companies when capital is required. Share placements are the most common form of capital raising.
Other methods include initial public offerings (IPOs), share purchase plans, and rights issues. The Corporations Act and ASX listing rules regulate capital-raising activities.
Share placements
A share placement involves allotting shares directly from a company to investors. Only sophisticated investors and institutional investors can buy shares through share placements.
Companies often conduct share placements in conjunction with share purchase plans to ensure retail investors do not miss out.
They have several advantages for companies because they can be conducted relatively quickly and raise more funds than subsequent share purchase plans offered to retail investors.
Share purchase plans
They allow eligible current shareholders to buy a capped amount of shares at a predetermined price, 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.
Rights issue
A rights issue is an invitation to existing shareholders to purchase new shares in proportion to their existing holdings. Companies typically offer shares 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 allow shareholders to avoid diluting their shareholding.
IPO
An IPO involves a previously private company listing on the ASX for the first time.
Shares in the company are first offered to institutional investors off-market through an 'underwriter' – an intermediary who facilitates the sale of stocks and guarantees a minimum price and/or a minimum number of stocks sold to ensure a successful public launch on the ASX.
Private companies may choose to go public via an IPO for various 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. New shares are issued, increasing the total number of shares in the company. This means earnings per share (EPS) may fall as earnings are spread across more 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).
To prevent shareholders from 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, allow retail investors to participate in equity capital raisings and avoid dilution.
It is worth remembering that dilution is not always a significant concern. The ultimate effect of capital raising on a shareholder will depend on how the company uses the money raised. If it uses the capital to grow and expand, its share price may increase over the long term, benefitting all shareholders. In such a scenario, there may be short-term pain from dilution but long-term capital appreciation gains.
Shareholders in companies that are conducting capital raisings need to take the time to investigate the reasons for it and the intended use of funds. By doing the appropriate research, investors can decide on the potential impact of capital raising and whether to participate in it themselves.
Which ASX companies have raised capital recently?
Global markets battled economic headwinds in 2023, including uncertainty around inflation and interest rates. Capital raisings were down, with just 1.1 billion raised in IPOs on the ASX in 2023, significantly below the 5-year average of $5.4 billion.
The listing of Redox Limited (ASX: RDX) was the ASX's largest IPO in 2023. The company raised $402 million in July, achieving a market cap of $1.3 billion.
The secondary capital raising market was somewhat more robust, with $34.5 billion raised. In September, Orora Ltd (ASX: ORA) raised $1.35 billion via a $450 million institutional placement and $895 million rights issue. It used the funds to pay for the acquisition of Saverglass, a premium bottle maker headquartered in France.
Energy infrastructure business APA Group (ASX: APA) raised $675 million via an institutional placement and $75 million via a share purchase plan in August to fund its acquisition of energy assets in Western Australia's Pilbara region.
Treasury Wine Estates Ltd (ASX: TWE) also tapped the secondary capital market to fund acquisitive activity. In October, the winemaker raised $825 million to pay for the acquisition of vineyards in California.
Embattled casino operator Star Entertainment Group Ltd (ASX: SGR) sought to shore up its capital structure with an $800 million equity raising in October, part of a $1.2 billion debt refinancing deal.
Pathology and diagnostic imaging provider Healius Ltd (ASX: HLS) also raised equity capital to pay down debt with a $187 million institutional and retail entitlement offer conducted in November.
Frequently Asked Questions
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Capital raising is a strategic financial manoeuvre companies undertake to secure additional funds from investors. The primary reasons for capital raising include funding significant acquisitions, fueling growth and expansion projects, and rebalancing the company's capital structure to optimise financial health.
The availability of capital is critical for businesses aiming to invest in new opportunities, innovate, or enhance their operations. By capital raising, companies can access the funds needed to maintain and grow their operations, making capital raising a pivotal aspect of corporate finance and business development.
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The process can have mixed effects on a company's stock, depending on the reasons for raising capital and investor perception. If it raises capital to invest in growth opportunities, expand operations, or acquire valuable assets, it can be seen positively by investors, potentially leading to an increase in the stock price in the long term. This is because the funds are used to create value, expand the business, or improve its financial health, enhancing shareholder value.
Capital raising can, however, lead to dilution of existing shareholders' equity if new shares are issued, which might negatively impact the stock price in the short term. Nonetheless, if the capital raising process is managed and communicated effectively, and funds are used wisely, it can bolster a company's financial position and prospects, potentially benefiting the stock over time.
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Increasing capital stock through capital raising brings several benefits to a company. Primarily, it provides essential liquidity required for strategic initiatives, such as expansion projects, acquisitions, or the development of new products and services. This influx of capital can enable companies to seize growth opportunities they might otherwise miss due to funding constraints. Additionally, diversifying the capital structure by including equity, debt, or convertible instruments can optimise financial leverage and reduce the cost of capital, improving overall financial stability and flexibility.
For shareholders, while there may be concerns about dilution, the strategic use of the raised capital to grow the business can lead to increased company value and, consequently, shareholder returns in the long run. Hence, when done for the right reasons and managed effectively, increasing capital stock can be a powerful tool for driving a company's growth and enhancing its market position.
