In the search for clues as to how new financial technology might alter equity capital markets (ECM) and eventually transform the way companies raise money, sometimes it pays to peer down from the heights of multi-billion dollar rights issues, accelerated book builds and syndicated IPOs.
So far, radical change is mainly evident in the way start-ups and smaller companies raise equity.
New investing platforms such as SyndicateRoom have sought to democratize the process, giving retail investors access to start-up fund raising and breaching the wall that used to protect the juiciest pickings for a club of connected insiders.
SyndicateRoom brought a crowdfunding approach to early stage investing, ensuring that retail investors coming through its site fund only start-ups sponsored by professional angel investors – so ensuring an element of selection and filtering – and get to buy exactly the same class of shares on the same valuation terms as these professionals.
However, while incentivized by tax breaks, early stage investing is a notoriously high risk hobby. It is ideally suited to those with the wealth, patience and risk tolerance to build portfolios, knowing most start-ups will fail and the survivors will keep coming back for further funding, which investors must either provide or accept dilution.
PrimaryBid is another newcomer to watch.
Since starting in 2016 with a focus on more established and so lower risk companies already listed on AIM, its track record of bringing new retail money into secondary share placings and IPOs from such companies deserves attention.
It has helped companies raise £37 million, working on 20 deals, most in the £1 million to £2 million range and typically arranged by banks and brokers syndicating to small clubs of institutional investors.
At the top end of ECM, as covered by GlobalCapital and tracked by Dealogic, retail investors are the dumb money meant to support deals in the secondary market that bookrunners circulate in primary for their highest commission and spread, effectively paying institutional customers to dump after the initial pop.
At this lower end of the ECM, the traditional view was that attracting retail money was more trouble than it was worth.
PrimaryBid’s experience challenges that view.
The company takes two approaches. It offers companies’ brokers and banks the option of adding an additional retail component to an institutional fund raising, which it then facilitates taking payment directly and instantly off retail customers’ debit cards.
The company has attracted an interesting mix of investing customers. The minimum bid it accepts is for £1,000, but some individuals are investing in the tens of thousands of pounds a time, with the highest single ticket being for £100,000.
For AIM-listed companies raising just a couple of million in a secondary placement, this suddenly becomes significant.
Anand Sambasivan, co-founder and chief executive of PrimaryBid, and a former investment banker at Credit Suisse and Bank of America, tells Euromoney: “It turns out that much of this retail money is often patient, long-term capital provided by investors that really do their homework on companies. If you follow the bulletin boards you see how, when an AIM company releases a regulatory notice of a fund raising, within minutes the discussion lights up.
“Individual retail investors may be tough for small companies and traditional brokers to reach, but in aggregate this represents a desirable allocation as well as bringing additional price tension and liquidity.”
Pressed for an example, Sambasivan recalls: “We took part in March in a £1.5 million capital raise for Versarien, a graphene company, that was a mainly institutionally held and quite illiquid stock. We said we were confident we could generate £300,000 of additional demand on a deal originally seeking to raise £1 million.
“We were heavily oversubscribed in just hours with demand for £800,000 and we delivered new capital equivalent to something like 40-days average trading volume.”
The whole deal was increased by 50% in response, allowing the company to scale up manufacturing and marketing of its new graphene brand, Nanene.
Sambasivan says: “The limited secondary market had not disclosed the true extent of primary liquidity potentially available to the company.”
Dave Mutton, who joined PrimaryBid as chief operating officer in 2016 and had previously been head of UK business development for Amazon, explains. “We do know-your-customer and anti-money laundering checks on our investors who can sign up to follow a company and be pinged on their smartphones if it seeks to raise money.
“We can feed this kind of interest to companies, so they get a better sense of potential demand. And if enough investors express interest to us to invest in a company at a specified valuation, we can approach the company directly or its bankers or brokers and suggest a secondary placement.”
PrimaryBid gets payed a standard fee portion of the proceeds companies raise through it. Investors, many now repeat customers, do not pay for access to new issues. The management team’s ambition is to establish PrimaryBid over the next 12 to 18 months as the main, regular conduit for retail distribution of new share placements by AIM-listed companies.
The company, which launched in beta in 2015, but really kicked into gear from last March, has worked on just 20 out of 500 deals on AIM in that time and is essentially a bet on that market. AIM-listed companies are currently raising funding to the tune of about £4 billion a year. Pre-crisis they were raising more than £20 billion annually.
Some of them, though, are large deals. In November, PrimaryBid was able to bring an extra £2.8 million of demand to a £24.1 million deal for Sound Energy, a Mediterranean oil and gas exploration company.
“We have been talking to a couple of companies on the main list as well as talking to other exchanges,” says Mutton. “And we have been talking to a couple of institutional investors about taking reverse enquiry for new equity capital directly to companies.
“Speed is one of our key selling points. Conventional new equity offers can take several weeks to complete and attach high costs, whereas we have shown that we can open an offer to retail investors on Thursday or Friday and have it oversubscribed over the weekend.”
Ideas are tumbling out.
Sambasivan says: “An underwriting fund would be quite compelling. Underwriting has been something that institutional investors traditionally got paid for, but there is no reason not to outsource some of that to retail.”
Watch this space.