The uncertainty about the impact of the pandemic on the business operating environment sparked many capital raisings on stock exchanges around the world. Australia led the world with more than $30 billion raised from the beginning of the year to 4 August 2020. The change to ASX listing rule 7.1, which increased the amount of capital companies could raise in institutional placements from 15% to 25% of issued capital, was a significant measure to provide additional flexibility for ASX-listed companies to efficiently raise capital. The ASX has since extended its temporary capital raising relief to 30 November 2020.
Investors have done well from new issues
Overall, participating in capital raises during the COVID period has yielded strong returns for investors. Recent data by fintech Fresh Equities showed that the average non-weighted return for the 205 placements completed in May and June was 59% to 1 August 2020.
So why are companies seeking to raise capital in the middle of a global pandemic? Some examples include:
- To boost liquidity as revenue streams temporarily dried up during the pandemic
- To shore up balance sheets or to help companies bolster their regulatory capital positions, and
- To pursue opportunities for potential new business ventures or acquisitions that may arise.
During the market downturn in the first half of 2020 investors helped recapitalise companies that were affected by the pandemic. Since the beginning of 2020, Australian Ethical has participated in more than 30 capital raisings with over $60 million in new capital invested. Overall, we have helped recapitalise around 30% of the ASX-listed companies that we own in our actively managed portfolios, with about half of that capital going to companies in the healthcare and IT sectors (areas we are overweight as a result of our Charter).
We also underwrote some capital raises, which meant that if a company was looking to raise $5 million (for example) and only raised $4 million, we agreed to make up the shortfall.
Here are three companies we helped recapitalise in 2020 and their purposes for issuing.
Somnomed – short-term liquidity
Somnomed manufactures and sells devices for the oral treatment of sleep-related disorders in Australia and overseas. The company’s revenue was negatively impacted during lockdown because the diagnosis and referral of patients for its sleep apnoea product was disrupted. Somnomed raised capital to boost its short-term liquidity during the lockdown period and as a long-term holder of the stock, we were happy to participate in the institutional placement.
NAB – balance sheet repair
We invest in two of the major banks, NAB and Westpac. On balance, we believe responsible and well-regulated banks can do good. For instance, while both NAB and Westpac make loans to the fossil fuel industry, they are also significant funders of renewable energy. More than 75% of Westpac’s lending to the electricity sector goes to renewable projects and for NAB the figure is 69%.
We currently assess that Westpac and NAB are implementing their commitment to lend in line with the economic transition our society needs to limit global warming to 2°C. We participated in NAB’s institutional placement of $3 billion announced in April after the bank revealed nearly $1 billion in loan impairments, largely attributable to the COVID crisis.
Janison – new opportunities
Janison is an ‘ed-tech’ company that provides digital learning and assessment platforms that are designed to replace pen and paper. Janison’s technology enables students to take exams at home or on a device in a classroom, positioning it well for the surge in demand for online test taking. We helped the company raise additional capital to pursue new opportunities overseas and at home in Australia, where Janison has recently been selected by the NSW Department of Education to deliver the state’s selective school tests.
As an ethical fund manager, we invest in sustainable companies with good growth prospects that we believe will provide long-term benefits to society. Participating in capital raises is one way we achieve that goal.
Deana Mitchell is an equities analyst at Australian Ethical, a sponsor of Firstlinks. This article is for general information and does not consider the circumstances of any investor.
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