An awful lot of companies need cash now. The government is providing whopping amounts via its various loan, grant and furloughing schemes – the stimulus announced so far comes to something in the region of 8% of UK GDP. But for all too many, it just isn’t enough.
So, while boards are presumably wishing they’d spent less time muttering about the value of efficient balance sheets and more time creating a cash buffer over the past decade, they are looking elsewhere.
Some of these efforts are charming – managing to raise cash and neatly engage stakeholders at the same time. For example, Boisdale, the London restaurant group, is offering punters the opportunity to buy discount vouchers: pay £100 now for what the firm calls a “Boisdale War Bond” and you can redeem it for £200 worth of food when the restaurants reopen – presumably while encased in some kind of cough-proof Perspex box.
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How retail investors are being excluded
Others are not so charming. Listed companies have long been allowed to issue new shares to the tune of 5% of their outstanding share capital every year without jumping through many time-consuming admin hoops. The Covid-19 nightmare has led to these rules being relaxed – one way or another, companies can now make that number 20%.
This looks like it makes sense; if you are running out of cash in a crisis, time is of the essence. You don’t want to faff about with lawyers, accountants and brokers for too long. You just want to get to your existing investors fast – preferably before they have committed all their cash elsewhere – explain to them what you need, ask them how much they are prepared to pay and just get on with it. I’m all for it too – the more companies that survive the summer, the better.
But when you issue new shares, two things happen. First, you automatically dilute the stake of shareholders who don’t participate in the offering (as new shares are issued, each share represents a smaller part of the company). Second, in order to get people to participate you will need to offer a hefty discount to the current share price – partly to reflect the dilution and partly to make participants feel like joining in is a reasonably low-risk activity (whether it is or not).
You have to keep your regular investors sweet – just in case you need to come to them again. With that in mind, it will seem obvious to you that all shareholders must be offered the opportunity to decide whether they want to buy the new shares or not, regardless of the relaxation of the rules. Anyone excluded would have strong grounds for complaint.
Well, guess what? You have strong grounds for complaint. Since early March, some £2.7bn has been raised by firms under the new regime (names in the frame include WHSmith and Asos among others). Most have excluded retail investors. Why? Getting to the thousands of ordinary individuals out there is considered too hard. In these unprecedented times, say companies, the complicated admin will slow things down and that just won’t do.
I am bored to tears with the word “unprecedented” being used as an excuse for just about anything. But it is even more irritating in this context because while it isn’t quite nonsense, it isn’t quite true either.
Companies have been using their ability to issue 5% of their share capital to bypass the retail investor for years. That’s not been awful – these raises are mostly small beer – but it isn’t ideal (and by the way, nor is the practice of completely new issues bypassing retail investors).
New technology makes ignoring small shareholders much harder
Enter Primary Bid, a newish company that can take away most of the complications. As a retail investor, you can download its app and, thanks to its deal with the London Stock Exchange, you should be on the list to get an immediate push notification when an offering is under way.
You can then see all the same documentation as institutional investors, use your debit card to apply for shares and have them settled to whichever investment platform you use. Not slow, not complicated.
The firm is still small (53 deals so far, and all Aim-listed companies) but the investment platforms are keen – most of their bosses signed an open letter this week, supported by Primary Bid, to the boards of UK-listed companies complaining about retail investor exclusion.
The cynical would say that of course the platforms would sign – they want as many shares as possible held and dealt on their sites (that’s their bread and butter). But I think there is more goodwill to it than that. Nonetheless, as a retail shareholder, it doesn’t really matter why they are on your side – it just matters that they are.
Shareholder capitalism needs engaged shareholders
This seems particularly important now. Shareholder capitalism requires not just shareholders but reasonably engaged shareholders. The UK has the former in droves (thanks to pension scheme auto-enrolment, most working people are shareholders). It doesn’t have as many of the latter group as I would like.
At present, about 15% of the UK stockmarket is held by individual shareholders. In 1963, that number was 50%. I bet retail investors would have got the call-up from Covid-wrecked corporations back then!
Still, these numbers might be beginning to turn. This crisis is bringing more investors into the market – or at least making them more active in the market.
The letter I mentioned above notes that more than 20% of trades in the UK market in March came from retail investors, with over 60% of those trades being buys. At the same time, platforms are seeing huge increases in new account openings and inactive accounts powering up.
At Interactive Investor, 5% of accounts that have done nothing for over two years are suddenly active again, while Isa account openings are up 119% on the year and overall customer trades trebled in March year-on-year.
Some of this will be down to boredom and domestic housekeeping, of course. But if new people are coming to the shareholder party, this seems a very bad time to keep them from the heart of the action (granted, party metaphors might not be the correct ones to use in 2020, but you get the idea).
Given that technology is making this possible – and there are other companies working on it too – all share issues, crisis or not, should include the offering of pre-emption rights to existing shareholders, big and small, retail and institutional. No arguments.
• This article was first published in the Financial Times
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
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