Why Use a Banker When an App Can Do the Job?

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(Bloomberg Opinion) -- Britain’s FTSE 100 index has experienced its first rapid-fire share sale that includes retail investors. If technology can allow Compass Group Plc to include small shareholders in a 2 billion-pound ($2.5 billion) fundraising — by selling to them via an app — other companies will feel the pressure to follow. The role of the investment banks as gatekeeper to the big equity deals is gradually being chiseled down.

Compass is in the catering business, a corporate casualty of the Covid-19 crisis. Its underlying revenue dropped nearly 50% in April. The group is seeking to raise more than 10% of its current market value to cut its too-high debt. That would normally oblige it to do a time-consuming and expensive rights offer, making shares available to all of its existing shareholders to protect them from dilution.

But the British rules were relaxed in April and companies like Compass can now sell shares to whomever they like, which has usually meant the institutional investors they know best. That has been controversial as existing small shareholders have been getting diluted with no chance of doing anything about it.

Compass’s tiny retail offering in its new fundraising — capped by regulators at 7 million pounds — makes no difference to whether it will raise the 2 billion-pound target. But it respects the principle that small shareholders have the same rights as big ones.

The deal nevertheless underscores the oddities of the current regime. First, the retail part of the sale isn’t for existing shareholders exclusively. In that sense, it just mirrors the main offering to institutional investors. It doesn’t prevent new shareholders from diluting existing ones, it just provides a new distribution channel.

The small size of the offering limits the number of people who might get burned if the shares fall later. But either the offering is suitable for retail, in which case the cap is perhaps illogical, or it is not. 

Placings like these appear superficially advantageous for those involved. After all, the terms need to be attractive versus buying in the market otherwise there would be no point in anyone participating. And if retail investors can buy shares in the market, then it’s logical to let them buy shares in a placing.

The danger is that hype builds around these deals and the shares, often sold cheaply, end up being seen as a one-way bet by naive investors. The reality is that the companies raising equity in a hurry right now are doing so mainly because they’d be in difficulty otherwise. The performance of the stock sold in these types of placings has been very variable.

Why Use a Banker When an App Can Do the Job?

But the direction of travel is clear. Technology is wedging itself into the process of selling shares and allowing broader participation and a fairer distribution of dilutive stock. That will benefit smaller institutional shareholders and family offices as well as retail investors. For the big investment banks, their role will gradually become more about giving good advice ahead of these deals and less about shifting the shares.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

©2020 Bloomberg L.P.

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