Investec at front of small and mid-cap UK equity raises

David Flin, Henry Reast and James Rudd

If debt primary markets have had a busy crisis, so too have primary markets in equities, though more selectively. With the FTSE 250 enjoying its best run for three years following the March market crash, small/mid-cap companies have been busy raising funds via non-pre-emptive share placings. As the rally progressed, Investec emerged as the leading sole bookrunner in small/mid-cap equity raisings.

Investec, listed in both London and Johannesburg, was founded in South Africa in 1974 and entered the UK market in 1992, when it bought Allied Trust Bank. It has grown steadily since then, acquiring merchant banks and a City stockbroker, and today has gross assets of £50.7bn ($63.7bn).

Today, the investment banking business revolves around the UK stock market, where Investec has chosen small/mid-cap corporates as its main focus. “We bring a bulge bracket service offering to the small/mid-cap market,” declares Carlton Nelson, Investec’s co-head of corporate broking.

The coronavirus lockdown, which started on March 23 in the UK, galvanised corporates into bringing forward any fundraising they might have been contemplating. In the equity market, they were given a helping hand by the UK’s Pre-emption Group, a market representative committee that determines best practice regarding the pre-emption rights of shareholders.

In normal times, the group will allow up to 10% of any new share issues on a non-pre-emptive basis – 5% for general corporate purposes and another 5% for specified acquisitions or investments. From the beginning of April, however, in light of Covid-19, it temporarily raised that threshold to 20%.

“Early on, in March, our sales team spoke to institutional clients,” Mr Nelson says. “The feedback was that if any of our corporate clients thought they might need to raise funds in the next six months, they should do it now, and as much as they could.”

The institutions, Mr Nelson explains, did not want to be the only ones feeling the pain. They wanted corporates to pull all the funding and relief levers at their disposal – whether accessing government schemes, cutting directors’ pay, furloughing staff or negotiating with their bank syndicates.

“Since then, the equity capital markets have become a good source of funds, with significant demand from non-holders,” he says.

If existing shareholders want to get their pro-rata allocation, they can; and these deals have primarily been taken up by them. Mr Nelson says that Investec will always seek to honour pre-emption, despite not being obliged to in these placings. “It’s more difficult for non-holders,” he says. If they do the work required to familiarise themselves with the company, will they get the allocation they need or will they be scaled back materially? In which case, the effort was not worth the while. “If the marketing is done appropriately, then it is worthwhile,” Mr Nelson insists.

Part of the knack in a successful placing is the ability to single out those non-holding investors most likely to buy the shares. “It’s a question of knowing where to go for capital,” says Henry Reast, an Investec director, investment banking. “We also benefit from reverse enquiries, letting us know of interest in certain stocks.” In some cases, identifying the right US and European investors to tap can be a big help.

One essential is a supportive shareholder base, and another is not to take the market by surprise. “This means that some shareholders might already have in their minds allocated a certain amount of capital to an anticipated raise by a portfolio company,” Mr Nelson says.

When targeting non-shareholders, a decent level of investor education is needed before the fundraise, so that they understand the investment case. The company must articulate clearly how it intends to use the proceeds. “Not being seen as 'greedy' helps to attract investors,” Mr Nelson observes. “If it is a front foot fundraise, the company needs to be clear about the opportunities it is pursuing, providing suitably granular detail on either the intended acquisition or the planned investment in the business to foster faster growth.”

On the other hand, if the new capital is required to strengthen the balance sheet, the company will need to show under various scenarios that it will then have sufficient capital to see it through the Covid lockdown and, typically, at least the following 12 months. Detailed information on the scenarios, stress-testing various assumptions, will support this type of fundraise, Mr Nelson says.

“Such due diligence has been done in greater levels of granularity than would have been the case in a pre-Covid world for similar raises,” he adds.

New shares have generally been placed at a slight discount to prevailing market prices. “There is a regulatory element here,” notes David Flin, an Investec managing director, investment banking. “In the main market, you can only issue at up to a 10% discount without shareholder approval. Our placings have all been priced within that limit.”

Occasionally, shares can be placed at a slight premium. In a small £11m April placing for Hollywood Bowl, the UK market’s leading 10-pin bowling operator, shares were priced at a 1.4% premium to the most recent closing price. Investec was sole bookrunner.

The premium was thanks to loyal and enthusiastic backing from the existing share register. “They enjoyed strong support from existing shareholders, who were willing to support the placing, backed up by new investors,” Mr Flin says.

In the first half of 2020, Investec led the field of sole bookrunners in small/mid-cap equity fundraisings of more than £5m in London’s main and junior markets. It led six deals worth £479m, according to Dealogic. That put it ahead of Jefferies (two deals worth £410m) and Liberum Capital (nine worth £197m) in second and third place.

Mr Flin reports that lockdown placings in general have been very well supported by their existing share registers, leaving little excess stock for new shareholders. One exception was a £141m placing for pub operator JD Wetherspoon, where executive chairman Tim Martin owned 32% of the company. Investec was sole global coordinator, broker and financial adviser.

While Mr Martin subscribed for a small number of the new shares, he didn’t “follow his money”, leaving a handy chunk for new takers. The deal was still priced at a tight 6% discount.

Another Investec sole mandate was for a £100m placing by Blue Prism, which designs software for robots. Though it’s not always easy to interest US investors in UK placings, this definitely caught their attention. “It was pleasing to see demand from shareholders and non-shareholders in North America,” Mr Nelson says.

Other sole mandates for lockdown placings include a £8m deal for Harry Potter publishers Bloomsbury, a £133m transaction for veterinary pharmaceuticals maker Dechra, and a £85m placing for Johnson Service Group, a supplier of textile rental services.

With everyone working from home, these placings were marketed remotely, predominantly via Zoom, using NetRoadshow.com for the international elements. “Zoom allowed us to do 10 to 12 calls a day, compared with five or six battling the traffic around London,” Mr Nelson says. “It has been a lot more efficient. Going forward, I believe marketing will be done in similar ways.”

The team has enjoyed joint mandates for a number of other, often larger placings and, in all, raised more than £1.1bn in equity for its clients after the UK went into lockdown. Investec was joint global coordinator, bookrunner and broker for construction group Costain’s £100m placing, designed to bolster its balance sheet.

“At the time of marketing, it was clear that one of the things the government could do [to support the economy] was to invest more in infrastructure,” says James Rudd, an Investec director, investment banking. “That provided a favourable backdrop.”

A similar joint mandate came from IWG (formerly Regus), a provider of serviced offices, which hopes to take advantage of opportunities in a new post-Covid world. In a “front foot” raising, it placed shares worth £320m at a discount of 8.1%.

In general, the placings have enjoyed decent performance in the aftermarket, and Mr Nelson reports a number of impending deals in the pipeline. “The speed that is required means you get very little advanced warning,” he says. “But the public markets have proved an exceptional way for companies to get the funding they need.”