A number of smart people have been hammering home the same message for a considerable time now, namely that the era of “investing for the long term” is over, finished, kaput!
Certainly, you won’t hear Warren Buffet argue the case against the “invest-for-life” scenario, nor anyone from within the finance, banking or super industries. After all, their livelihood depends upon people like you and I squirrelling away a little bit of money every month to fund our (hopefully) long and prosperous retirement.
However, whether just a factor of the economic cycle in which we currently find ourselves, or something longer term and more sinister, I am keen to learn and read about any research undertaken in this area and happy to follow up with some of my own.
As an example, last year and in 2010 a few of my little stocks needed to raise capital from their shareholders. Debt facilities from the major banks are not available to such companies – despite Quantitative Easing and a cry for liquidity, the banks have no interest in financing business and industry except at the big end of town.
This is a global phenomenon, but multiplied manifold in Australia – credit for residential property, go for your life; credit for business enterprise, talk to the hand!
So these (usually) young companies need to raise capital through share placements either to “sophisticated” or professional investors or to the existing shareholder base.
In my case, most of the placements were offered at a discount to the current vwap (5%, 10%, maybe more), but by the time the new shares had been issued (or a short time thereafter), the market price had dropped to a price below the offer price.
Effectively, no reward for the long-term, loyal holder.
That being the case, I recently decided to spend a few hours rummaging through a small sample of random shares from the ASX and to look at the experience of those who had engaged in capital raisings just in 2012.
As said at the start, if anybody knows of any considered and documented research in this area, I would be grateful for a link… not as straightforward an exercise using GOOGLE, HotCopper or the ASX websites as I had initially thought and hoped.
However, below are my findings: No. companies’ 2012 announcements reviewed* 190 No. companies in sample undertaking a CR 46 % of sample 24% No. CRs “in-the-money” as at Nov-16 19 % of number raising capital 41%
*Note: The companies were selected at random, incorporating large, mid + small cap companies across all sectors. It is notable, however, that a high proportion of raisings are for those companies in the energy, mining and materials industries
Whether this sample is statistically significant or not, I don’t know. I’d be interested to add to the list for those who have experienced/witnessed/participated in capital raisings for companies within your portfolio or eyesight.
What it tells me however, is that 1 in 4 of companies have held a capital raising in 2012 and of those that have undergone such, almost 2 out of every 3 share placements – even though offered already at a discount to the market price – are best left avoided.
You will be able to pick up the shares on the market at a better price than that offered to loyal shareholders.
And in half the cases (23 of the 46), this difference is significant – between 10% and 90+%
I find this fact staggering, dumbfounding even!
Whilst this could be due to the market cycle – if we are in a bear market – further research would be necessary to confirm this one way or the other.
However, what this does for me is to put doubt in my mind as to whether I will participate in any future capital raising of a company in which I am a shareholder.
On the contrary, this data would suggest I would be better off trading out of the stock at the time of the capital raising announcement and to buy back in at market in the 6-month period following the issue of new shares.
This fact would have to be worrying for all businesses and especially those considered speculative or in the small/mid-cap space.
If the evidence does suggest the current trading environment is one controlled by a number of institutions (a.k.a a pack of wolves), with the knowledge, expertise and wherewithal to drive prices down and profit at the expense of long-term holders – then why should any investor offer their long term loyalty to any company?
If there is no Return on Capital – why provide such capital?
Obviously, there are counter arguments and I welcome the input, opinions, feedback and possible research from other forum members to improve my own understanding in this area.
If there are any errors in my analysis below, happy to address that also.
