What is an ASX Capital Raise?
A capital raise is when a company asks for additional money from its investors. There are a number of reasons a company may do this, including to fund an expansion or transformation of existing operations, to make an acquisition or even to IPO.
A capital raise is when a company asks for additional money from existing or potential investors. The additional funds raised may be in equity, debt or convertible instruments with debt and equity features. Different capital raising methods, and the reasons that inspire them, can impact a share price differently.
Why raise capital?
At the end of the day, companies need capital to pay for their operations, be it producing goods or offering services. There are numerous ways companies can invest capital to create capital.
Listed companies typically undertake capital raises for one of three purposes: funding an acquisition, funding growth (like an expansion or a transformation of existing operations) or rebalancing its capital structure.
There are also different types of capital, like working capital, debt and equity. Alongside cash flow, a company’s capital structure is critical to its operations and financing for growth.
Raising capital involves companies estimating investor demand for the type of capital they would like to issue and seeking commitments from institutional investors. This can help determine pricing ahead of any offer made to other investors.
Different types of Capital Raising
Capital raising can be done in the form of equity, debt or securities with features of both.
An equity capital raise involves issuance of new shares. Debt capital raisings involve borrowing funds that must be repaid at a later date and on which interest must be paid. Capital can also be raised via the issue of convertible securities. These may initially operate like debt, requiring the company to make interest payments to investors. In certain circumstances, though, they may convert to equity.
Equity capital raisings are frequently employed by listed companies, with shares placements the most common form of capital raising. Other methods include IPOs, placements, share purchase plans and rights issues.
Although companies can fall short of their targets, it’s not uncommon for offers to be underwritten. This means the financial firm leading the offer will agree to buy any shares that are not taken up by investors. Any shares not purchased are referred to as the shortfall.
Dilution can occur when a company raises additional equity capital. This is because new shares are issued, increasing the total number of shares which may lead to a fall in earnings per share.
If an existing shareholder does not participate in the capital raising they will hold a lower proportion of the company after the capital raising. To prevent unnecessary dilution, there are limits on how much share capital an ASX-listed company can raise via share placements to institutional investors.
Share purchase plans which follow share placements allow retail investors to participate in equity capital raisings and avoid dilution.