Perhaps surprisingly to some, it’s been a big couple of years for listed companies raising money.
As covered by Proactive, ASX-listed entities raised $10.2 billion in March, taking the figure for the 2022 financial year thus far to $216.5 billion, and $126 billion for the 2022 calendar year.
An ASX spokesperson confirmed to Proactive that 2021 and 2022 have seen a wealth of capital raised, if you’ll excuse the pun.
Capital markets dried up in 2020, just like everything else, but have rebounded strongly.
So what exactly is a capital raise and why do companies do them?
In the simplest terms, a capital raise is when a company seeks to raise money, also known as capital, in order to meet its business objectives.
Shaw and Partners WA state manager and director of corporate finance Davide Bosio says the size, frequency and reasoning for capital raises differ depending on the company’s profile.
“Companies typically raise capital to meet their growth requirements and/or working capital requirements,” he explains.
“Some companies, such as those in the technology and mining exploration sectors, are typically pre-revenue and therefore require capital on a more regular basis to drive their businesses and strategy forward.
“More established companies with earnings and profitability are often less inclined to raise new capital, however, they may look to capital markets as an opportunity to pay down or eliminate their debt, or to fund an acquisition.”
Pre-revenue is the term used to describe companies that aren’t yet generating any revenue but hope to in the future.
Tech start-ups, biotechs and miners often fall into this category; tech companies in their infancy require capital to build out their tech and prove its worth to customers, biotechs are often developing drugs in the hope they work and they can take them to market, and miners need to prove irrefutably that the ground beneath their feet contains enough minerals to refine and sell.
The process
There are many different ways for companies to raise capital, Bosio says, although the most common is through the placement of new shares.
“This is usually done with the assistance of a Lead Manager or broker who will manage the placement and introduce new investors to the company through the placement of new shares, usually at a discount to the previous share price,” he says.
This week, both Emmerson Resources Ltd (ASX:ERM) and Latin Resources Ltd (ASX:LRS) issued new shares, in return for $6.5 million and $35 million, respectively.
Initial public offerings involve the raising of capital, as to list on an exchange like the ASX it needs net tangible assets of at least $4 million for companies who aren’t generating cash.
Stelar Metals Ltd (ASX:SLB) started trading on ASX last month after raising $7 million to advance its battery metals projects, while Far East Gold Ltd (ASX:FEG) raised $12 million to progress its gold and copper in Indonesia and Australia
Other methods of raising capital can be done through companies’ existing shareholder bases, Bosio says.
“Rights issues and Share Purchase Plans (SPPs) are entitlement offers that are made to existing shareholders providing the shareholder with an opportunity to invest additional funds into the company,” he says.
Who’s stumping up the money?
For the average punter, Latin Resources’ capital raise of $35 million seems like a lot of money; the more modest raises of between $5 million and $10 million would buy most people an investment portfolio.
As Bosio explains, the most active investors in capital markets are classified as institutional, wholesale or retail investors.
“Institutional investors are typically professional investors managing capital on behalf of large corporates and/or superannuation funds, governments, family offices and ultra high net worth individuals,” he says.
“Institutions typically manage significant capital on behalf of their stakeholders and can invest considerable amounts into companies, particularly when capital raising opportunities are presented.
“Wholesale clients are those categorised as having significant investment experience, assets and income for the purposes of receiving access to capital market opportunities.
“These clients often deal through licensed Australian Financial Services Licence (AFSL) holders and are eligible to receive offers with limited disclosure which is typical of a placement offer of new shares.”
So how does the average punter get involved?
The more average, casual, ‘mum-and-pop’ investor is referred to as a retail investor. They aren’t considered professional investors and in all but a small number of cases do not have the financial means to be investing millions.
“Retail investors make up the vast majority of participants in the stockmarket, predominantly making their own investment decisions and trading using online or discount brokers,” Bosio says.
“Retail investors are able to access capital raising opportunities when an offer is made via a prospectus, like an Initial Public Offer, rights issue or SPP.”
- Daniel Paproth