In July, the UK Secondary Capital Raising Review made recommendations that would make it quicker, easier and cheaper for UK-listed companies to raise money from investors. How would these recommendations impact private equity firms?
1. Enhanced pre-emption regime, larger cash placings
The review recognises pre-emption rights (offering shareholders new shares in proportion to their existing shares) as an important protection for shareholders in the UK capital markets. Its recommendation is to formalise the role of the Pre-Emption Group (PEG). This group publishes a “statement of principles” that sets out when shareholders should support companies by waiving pre-emption rights so shares can be placed quickly.
The PEG is expected to change these principles to support non-pre-emptive fundraisings of up to 20% of a company’s existing issued share capital, instead of the current 10% level. The extra 10% would only be for financing acquisitions or specific capital investments, while the first 10% could be for anything. In general, fundraisings should be done on a soft pre-emptive basis (offering to existing shareholders where practicable).
Shareholders should support companies that need to raise larger, more frequent amounts of capital in appropriate circumstances.
2. Cutting regulatory red tape around capital raisings
The review recommends not requiring prospectuses for offers of up to 75% of a company’s existing share capital to its existing shareholders. It also recommends that the FCA stop requiring the appointment of a listing sponsor for secondary capital raisings, except where some other aspect of the listing rules requires a sponsor.
3. Disclosure documentation
Companies should be able to skip publishing prospectuses in favour of opting into an enhanced continuous disclosure regime, so at fundraising they would only need to publish new information. The overall package of information would have to be recognised as of a sufficient standard for legal comfort to be given, especially for offerings outside the UK.
The review also suggests that for secondary fundraises, companies should agree standard terms and conditions with institutional investors.
4. Involving retail investors in raising capital
The review recommends companies consider how to involve retail investors as fully as possible in all capital raisings, including placings of up to 20% of issued share capital without a prospectus. The prospectus requirements for public offers currently inhibit this, although companies have recently worked around it by, for example, making a separate offer to retail shareholders below the €8m prospectus threshold.
5. Transparent and digital shareholdings
The Companies Act should be amended to help companies identify their ultimate owners, making it easier for them to involve retail shareholders in their offerings. A Digitisation Task Force should be created to help UK securities holding structures go digital, giving companies more transparency on the decision-makers and ultimate owners who control their shares, and enabling end investors to exercise their rights as shareholders more easily.
6. Quicker and easier pre-emptive issues
Other recommendations to make pre-emptive issues easier include shorter offer periods of seven rather than 10 business days, shorter notice periods of seven days for general meetings (except AGMs), and cutting limitations under typical shareholder allotment authorities and in the Companies Act.
7. Impact and timing
If these recommendations are adopted in full, they will significantly change the landscape for listed companies’ secondary capital raisings and should enable them to make substantial recapitalisations faster. Cutting out some of the barriers companies face to raising further capital on listed markets will also cut down the differences between private and public capital raising and grow the attractiveness of London as a listing (including exit) venue.
Bigger non-pre-emptive offerings could make it easier for private equity investors to invest in listed companies, and investors should protect companies from dilution by being ready to respond to faster timetables for pre-emptive offerings.