Pre-emption rights refer to the principle that all current shareholders are offered first refusal on new share issues by a company. But it is rare that this theoretical right is extended to small, private shareholders. Over the last couple of weeks, a number of companies, from recruiters Hays to Auto Trader and airport and station catering company SSP have all moved to raise capital. But none of them have asked retail investors if they want to participate, going straight to their large, institutional investors.
Rights issues dilute existing shareholders, which is why pre-emptive rights give them the chance to up their investment and avoid or reduce dilution. But going to smaller shareholders is inconvenient for boards. They much prefer a quick, easy fix in the shape of a handful of larger shareholder taking up the rights issue.
But private investors then get a raw deal. Rights issues are often attractively priced to raise the money quickly. However, a fintech company hopes to introduce a new app, named Primary Bid, designed to solve the problem for both companies and small private investors by allowing them to take part in a rights placing at the touch of a button.
Primary Bid takes the order from potentially thousands of small private investors and pool them. If there is enough demand, Primary Bid then puts in a single, large application with the rights issue’s brokers. Last year the app raised £10 million from private investors who wanted to participate in a placing in just 90 minutes.
James Deal, Primary Bid’s CEO and a former JP Morgan Cazenove executive, says the app has now signed up around 11,000 private investors after a promotion to Investors Chronicle readers.
He believes that companies should now more than ever start to give more priority to loyal private investors, ahead of the opportunistic hedge funds often approached for placings. It is also private investors who are often able to take a much longer view that have been keener to keep investing during the current Covid-19 crisis that has devastated stock markets.
Primary Bid was founded four years ago now but has taken time to build a user base large enough to raise big enough sums to tempt companies issuing rights to deal with. Several fund managers have supported the app and it has the blessing of the London Stock Exchange. Anand Sambasivan, a former banker at BoA Merrill Lynch and Credit Suisse is the majority shareholder and co-founder.
So far the placings the app has participated in have been relative small fry issues by AIM-listed companies and small caps. But Mr Deal, who also holds 15% of the company, is confident momentum is building:
“It’s a familiarity and awareness thing. It’s difficult to get people to sign off on something new.”
One breakthrough development Primary Bid hopes to manage in the near future is the back office integration with major investment platforms so private investors can easily use funds held with their primary online stock broker and funds platform to buy shares via Primary Bid. At the moment users need to use their debit card to add funds that can be used through the app.
The next few weeks and months could prove to be a major breakthrough for Primary Bid, with significant number of larger companies expected to move to raise new equity. Market conditions should make companies and their brokers more amenable to working with the app.
“We’re marketing hard. We feel like we’re running on a go-kart track when it wouldn’t take much to take us to Formula One level.”
Private investors with the available funds will be keeping a close eye on developments in the hope that, like many crisis before it, this one leads to the evolution of new businesses like Primary Bid. Investing in attractively priced rights issues could be a great way for investors to boost the recovery rate of their portfolios.