Private equity in the hunt as listed companies rush for equity raisings

Private equity firms are taking an increased interest in the rush by listed companies to shore up balance sheets.

Private equity firms are taking an increased interest in the rush by listed companies to shore up balance sheets, as bankers and lawyers consider whether the COVID-19 capital raising round will surpass the $100bn global financial crisis bonanza.

The pandemic’s multi-pronged hit to large parts of the economy and their supply chains has already triggered a spate of raisings from ASX companies including Oil Search, Flight Centre, Cochlear, SCA Property, Reece, Webjet and oOh!media. Many other ASX candidates are lining up to also tap investors as challenging conditions persist.

The wave of capital raisings in the past four weeks has seen the year-to-date tally for equity capital market deals more than double to $US6.48bn ($10.2bn) as at April 9, from the same time last year, according to Refinitiv data. Other large companies are turning to debt funding to help navigate the crisis, including Qantas, which secured a $1.05bn loan last month.

Fears of a deep recession in Australia and the fallout from a prolonged period of business hibernation have already sparked debate about whether 2020 may top the post-GFC raising record.

“Capital raisings in the market are the GFC scenario played over again, but possibly bigger this time,” King & Wood Mallesons partner Mark McNamara said. He also noted that cashed-up private equity wanted to play a bigger role this time.

UBS Australasia joint boss Anthony Sweetman said it was “too early to tell” how widespread the 2020 capital raisings would be, given uncertainty about how the crisis would play out. ASX companies had entered this downturn in better shape, he added. “From a general perspective corporate Australia’s balance sheets are far stronger than they were in 2008-09. The banks are well-capitalised.”

Mr Sweetman also said many companies were still assessing the “knock on” impacts of COVID-19 on revenue and operations over the next six to 12 months.

Wilsons’ head of capital markets Robert Snow said there had been “quite deep consultation” between institutional investors and companies around their COVID-19 plans, including cost cutting, supply chain management and executive and board pay cuts.

“The (capital-raising) balance of power sits with investors. In this market institutions are anticipating there are going to be a large number of equity raisings and are being very selective,” he added.

“We may exceed the number of companies that raised during the GFC, but it is unlikely to go through the $100bn GFC amount as the banks accounted for a lot of that amount. We may see some people hang on to try and outlast the disruption, but it is a difficult dynamic.”

The spate of placements of new shares to large fund managers in the latest crop of raisings has also reignited angst among smaller shareholders who are not able to participate.

The ASX temporarily changed its rules in light of the pandemic, allowing companies to raise as much as 25 per cent additional capital instead of the usual 15 per cent in a placement, without shareholder approval. The change was subject to the company having a pro-rata entitlement offer or share purchase plan for retail ­investors.

Mallesons partner Lee Horan said the fallout from the COVID-19 crisis was “all-encompassing” in many sectors.

“The reach of COVID-19 is affecting good and poorly run companies,” he said.

The law firm has worked on the raisings of Flight Centre, oOh!media and Webjet in recent weeks.

Mr McNamara said boards should consider all options when raising capital, including private equity, which could contribute positively to formulating a strategy to weather the COVID-19 storm. “They are really engaged capital and they look to create value,” he added, but conceded that many Australian boards were still reluctant to court private equity in the event they became a takeover target.

In other markets, including the US, Mr McNamara said private equity holding minority stakes in listed companies was more common and was sometimes accompanied by an agreement where further stock couldn’t be bought or a takeover launched. “The pricing is narrowing at the moment,” he said of the cost of tapping private equity for capital compared to institutional investors.

US investment firm HMI backed oOh!media’s capital raising last month, which will see it emerge with a board seat, while Bain Capital participated in Webjet’s raising.

Webjet’s board rebuffed convertible note options put forward separately by heavyweight KKR & Co and Bain and pushed ahead with the deeply discounted equity offer, which the latter was involved in.

Deals that see private investment in public equity, known as PIPE transactions, where private equity owns a stake in a listed entity, have had a patchy ASX track record.

Globally and in Australia, though, private equity players are cashed-up and are scouring markets for deals.

The latest Preqin data showed the total amount of capital raised by private equity and venture capital funds in the March quarter amounted to $US133bn, up almost 12 per cent from a year earlier. The amount of capital free to be deployed sits at a whopping record of $US1.46 trillion.

The Australian Investment Council puts dry powder for the domestic market at more than $11bn.

Because of the composition of their investors, however, private equity will also be subject to a tougher COVID-19 threshold for gaining Foreign Investment Review Board approval. All offshore transactions of any size now require FIRB’s green light.

Wilsons’ Mr Snow said there was typically a preference by ASX boards to take capital from existing investors first, to protect against their dilution. “The underwriting dynamic for small caps is still quite difficult, although we have been approached by a number of private equity firms offering underwriting or recapitalisation support,” he added.