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DAX, IPO, Initial Public Offering, private equity, Frankfurt Stock Exchange, Alvin DonovanDeutsche Boerse, investment banking, investors, equity capital, capital raise, public listing
DAX, IPO, Initial Public Offering, private equity, Frankfurt Stock Exchange, Deutsche Boerse,
investment banking, investors, equity capital, capital raise, public listing, alvin donovan
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Whether you are a company thinking about an Initial Public Offering (IPO), seeking private equity investors, thinking about a capital raise there are a few important things to consider.
Having been around the investment banking and public listing arena in the USA, Australasian markets, or the Frankfurt Stock Exchange (Deutsche Boerse or DAX) has taught me a few things.
The purpose of this article is discuss how to raise capital with a special purpose private placement from private equity investors for IPO or capital expansion.
In the capital raise market today there are two types of equity investments. One is called a conventional raise or fixed price placement. The other is called a Special Purpose Placement which we call SPP or variable pricing placement.
We answer some frequently asked questions regarding Special Purpose Placements
Why not offer “normal” equity…this looks complex?
SPPs are really quite simple, with the attendant process no more complex than standard professional placements, and a whole lot simpler than rights issues, and other underwritten issues.
The advantage is that an SPP is pre-committed (for a period up to three years) with the issue being
triggered and controlled by the company. In volatile and uncertain equity markets this pre-qualification and pre-agreed issue discount rate is superior in most circumstances.
A typical fixed pricing placement requires no less due diligence, and does not have any certainty as to quantum, timing to complete and discount to the prevailing share price pre- issue.
Isn’t this dilutive for current shareholders?
No. In fact, an SPP really suits a growing dynamic company, where the draw down of funds is aligned with
acquisitions and growth. With the certain knowledge of a SPP backing acquisitions and projects, the sponsored company is in a superior commercial and fund-raising position than from traditional raisings.
By contrast, a proposed action requiring funds should be positive for the medium term prospects
of a listed company but typically both shareholders and negotiators already know that funding for a new initiative is rarely certain under conventional equity raising scenarios.
This is why favourable news when announced to the market can in fact have the inverse (negative) impact on a share price. This occurs because an equity issue is anticipated and the outcome is not certain.
Recently, placement discounts for conventional raisings have been as high as 15% to 30%! The SPP discount is typically 10%. An SPP substantially addresses these concerns before they become issues.
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Is the SPP Transferable?
Yes, with a mutual agreement. A pre-approval of the project or company means that the investor favours keeping the commitment with those they have backed and underwritten.
What about Compliance and Continuous Disclosure Issues?
SPP disclosure requirements are no different to the day to day issues addressed by all listed companies. The regime and disclosable matters are no different to the hurdles and requirements surrounding conventional equity raisings. This facility is predominantly used internationally by superior growth
companies.
For example, at least 100 SPP style facilities have been utilised by listed companies over the last three years. Groups such as Queensland Gas and Fortescue Metals have used them to great effect. The SPP
works for companies listed on almost any recognised stock exchange.
What are chances for Market manipulation?
As the sponsored enterprise dictates the timing and quantum of the SPP draw down, the prospect for adverse price moves and manipulations is demonstrably lower than the conventional alternative.
Indeed, more often than not, experience has proved that share price movements are neutral to positive during the exercise of a draw down pursuant to the SPP.
How much flexibility is there in the terms?
As the SPP is tailored to each particular situation, there is flexibility on matters such as duration, pricing periods, trading volumes, draw down percentages, transferability etc. Even the timing of commitment and draw down fees will be negotiated to ensure the terms are fair, reasonable, and superior to
conventional raisings and underwritings.
Once an SPP is fully deployed, can another be put in place?
Yes, subject to the due diligence processes and pre-qualification processes. Indeed, the experience of many internationally listed companies proves that a number of these successful companies have used multiple SPPs, some as many as four.
Once the SPP is drawn down, doesn’t the resulting new stock overhang the market?
No, a potential stock overhang post issue is considerably diminished than (say) a standard professional placement. Think about it…the stock is in the hands of one party who has committed to a three year SPP. They have backed the company with visible, tangible commitment. They are likely to do more draw-downs, and own more stock. They only make money when the share price appreciates
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