Australia’s sleepy corporate regulator ASIC is doing little to stop thousands of retail shareholders being shafted in badly structured capital raisings compiled by global investment banks and complicit boards. Instead it is focusing on harassing and shutting “finfluencers” to shut them down.
The “finfluencer” situation is well explained in this Aussie Firebug farewell blogpost, but essentially it comes down to ASIC threatening to throw the book at bloggers who discuss financial products without having first secured an ASIC financial services licence, which can cost as much as $15,000 a year, including insurance.
At a time when financial advice is becoming increasingly expensive to procure, this over-the-top ASIC attack on free speech is reducing the information sources available to retail investors hoping to better understand the investment landscape.
Meanwhile, the really big scam in the Australian market remains the unfair structuring of capital raisings — and ASIC doesn’t appear to be doing anything to curb practices in this area.
For instance, ASX-listed online markets giant Carsales is currently embarking on a $1.207 billion 1-for-4.16 non-renounceable entitlement offer to fund the $1.17 billion acquisition of the remaining 51% stake that it doesn’t already own in US-based Traders Interactive.
When it bought the first 49% stake of Traders Interactive for $797 million in 2021, to its credit Carsales raised $600 million in fresh equity through a so-called PAITREO, which stands for pro-rata, accelerated institutional, tradeable, renounceable entitlement offer.
There have been 39 PAITREOs since 2011. This is the fairest way to raise money because while institutions have to commit within 48 hours, retail investors are usually given three weeks to either take up the offer, sell their rights on the ASX, or receive compensation after a company-run auction of the entire retail shortfall at the end of the offer.
Not only did Carsales drop the PAITREO structure for its current raising, but it also failed to provide any ability for retail shareholders to apply for additional shortfall shares.
In the avalanche of capital raisings after the 2007-08 global financial crisis, it was standard practice to offer retail investors unlimited “overs” in a pro-rata offer. The likes of Goodman Group, Fairfax, Billabong, Stockland, Suncorp, Bluescope Steel, Wesfarmers, Dexus, Santos, Mirvac and Amcor all did this.
However, this benefitted the alert retail shareholders who applied for additional in-the-money shares and disadvantaged the unsophisticated, disorganised, poorly advised and less well-off investors who did nothing and got diluted without compensation. But at least the profitable shortfall benefit stayed within the retail class as a whole, rather than being scooped up by the big-end-of-town Wall Street underwriters and their institutional clients.
These days, unlike Carsales, most companies doing a non-renounceable pro-rata offer (see full list) are limiting “overs” to as little as 15% of the entitlement, but at least retail participants can get some access to the retail shortfall.
The biggest victim in Australia’s anything-goes capital raising system is the retail investor who does nothing when offered an opportunity to invest in a new share issue. The PAITREO was invented in 2011 to fix this problem.
The latest $1.2 billion Carsales raising is underwritten by Wall Street giants Goldman Sachs and JP Morgan, who are being paid a tasty 2% fee for the privilege. That’s a whopping $24 million of shareholder funds going straight out of the company, on top of the $12 million these same two firms pocketed underwriting the $600 million PAITREO last year.
The Carsales board of directors clearly doesn’t have a majority of directors who care about the fair treatment of its 20,000 retail shareholders. The latest raising was priced at $17.75, a hefty 14.5% discount to the previous close, and the stock closed at $19.65 yesterday, meaning it is 10.7% in the money ahead of the July 13 close of the $363 million retail offer.
In other words, 20,000 retail investors have to contribute $363 million or an average of $18,150 each in order to fully capture the collective $39 million paper profit on offer, because these 20.45 million new discounted Carsales shares are currently valued by the market at $402 million.
However, history shows that a majority of retail investors don’t participate in capital raising offers, even when they are well in the money. They are not sophisticated enough to act in their own best interests. And because retail investors have been banned from applying for additional shares, this means a fair chunk of that $39 million paper profit will be scooped up by the Wall Street underwriters and their sub-underwriting clients.
ASIC knows this, the directors of Carsales know this, and the Wall Street underwriters know this. So why doesn’t ASIC forget about harassing “finfluencers” and instead mandate that any retail shortfall in a pro-rata entitlement offer has to be auctioned off through a competitive bookbuild in order to compensate the non-participants for their forfeited property rights?
Even some of the big boy shareholders have been diluted without compensation as the accelerated $842 million Carsales institutional offer was only 90% subscribed. Despite written requests, there was no information provided as to what happened to that $84 million institutional shortfall, which is now $9 million in the money. Was it priority allocated to existing institutional shareholders, taken up by the sub-underwriters or offered to mates of the board and Wall Street underwriters? And precisely who was involved in devising the allocation policy and overseeing its fair application?
Presumably we will get the same opacity from Carsales when the outcome of the rushed $363 million retail offer is announced to the market next Friday, but don’t be surprised if it finishes more than $100 million short. The bigger the shortfall, the more Goldman Sachs, JP Morgan and their sub-underwriting clients profit, so they have no incentive to effectively market the offer to maximise participation.
The take-up might have been higher if there were more “finfluencers” out there urging everyone on TikTok to check if their grandparents were acting rationally by taking up the badly structured, overly discounted Carsales offer.
Saldy, this deal was deliberately designed to dilute thousands of non-participating retail shareholders without offering any compensation for the transfer of tens of millions in value to the big end of town. Stand by for some fireworks at the October 28 Carsales AGM in Melbourne, but don’t expect to hear a peep out of ASIC.
