Equity Capital Markets: 7 Trends Shaping the Landscape

Toby Norgate and Shyan Sivaratnam

CORPORATE AND COMMERCIAL

In brief: Throughout 2023, Australia has seen volatile interest rates, a rise in inflation and the fear of recession. At the same time, Australia is seeing the nation's largest transfer of intergenerational wealth and boasts the fifth-largest pension pool in the world. These competing circumstances impact investors and capital markets. This article identifies seven current trends in Australia's capital markets.

1. Secondary capital raisings remain world leading

What's happening?

The Australian Stock Exchange (ASX) saw the highest number of secondary capital raisings of any securities exchange globally for the third consecutive year, with 1,060 secondary raisings in 2022 and 2023 has continued that trend.  Secondary capital raisings are offers to existing and new institutional and retail shareholders structured as placements, rights issues, share purchase plans, dividend reinvestment plans, and employee share and options issues.The strength in secondary raisings can be explained not only by the clear availability to capital in Australia for high-quality companies, but also by a facilitative regulatory regime under which: 

• ASX Listing Rules permit secondary raises to be progressed quickly; 
• many types of secondary offer can be made without preparing a full prospectus or other hefty disclosure documentation; and
• ASX companies can issue up to 15% of their register within 2 days without requiring shareholder approval (and smaller companies can increase this amount to 25% if shareholders vote to grant directors this discretion).

The significant volume of secondary raises is likely to be one driver of a finding that on average Australian companies have improved their balance sheet positions over the last couple of years.

What are some examples?

Star Entertainment's $800 million rights issue and placement raise, and Flight Centre's $180 million placement are examples of large secondary capital raises undertaken in 2023. These raises follow the monumental $95.8 billion capital raise undertaken by BHP in 2022.

What's next?

The record levels of activity in the ASX secondary market are likely to continue as existing shareholders and other investors continue to provide support.

2. IPO activity on ASX low but there are signs of optimism

What's happening?

Australia's initial public offering (IPO) market has been undeniably slow. The number of IPOs reported reduced from 241 in 2021 to 107 in 2022 and 2023 has seen even lower numbers. The total amount raised through IPOs has dropped from $12.7 billion in 2021 to $1.1 billion in 2022 and a reported $150 million during the first half of 2023.  Interest rate increases have contributed to a general decrease in company valuations and share prices. Economic unpredictability also creates difficulties for companies seeking to raise capital through an IPO, as it can make it more difficult for investors to reach consensus on growth prospects. 

What are some examples?

Virgin Australia is one of the bigger companies to defer their planned 2023 IPO to 2024. Cuscal was set to issue the year's second largest IPO but  deferred their anticipated $514 million float soon after their international roadshow. These deferrals come after the underwhelming performance of 2023's two largest IPOs, Redox and Nido Education. Both companies have experienced disappointing trading outcomes since their ASX listing. 

What's next?

There is optimism within the industry that IPO activity will increase. This could be partly explained by the high success rate of the IPOs that have come to market. Although smaller in number and size, 92% of companies that completed IPOs in 2023 reached their target fundraising amount while only 73% of companies that launched IPOs in the first half of 2022 could say the same.  As Australia's colossal superannuation sector is traditionally a large source of IPO subscriptions, the continuing growth in total super fund assets relative to market capitalisation could fuel an increase in IPO activity. The ratio in Australia currently sits at 1.4:1, which is greater than the United States of America (0.7:1) and the United Kingdom (0.9:1).  Stabilising interest rates and financial market volatility would also provide tail wind for IPOs. The S&P/ASX 200 volatility index, which is seen as a sign of market readiness for IPOs, has recently shown reduced volatility.   Whilst many mineral and resource companies are still proceeding with capital raising activities, it may take a few big players in the market to do the same before the IPO window opens for other industries. The capital raise recently announced to accompany the back-door listing of Chemist Warehouse through Sigma Healthcare may assist.

3. Placements accompanied by offers to shareholders 

What's happening?

During pandemic times many listed entities were criticised for capital raisings that significantly diluted existing shareholder's interests without allowing them to invest on similar terms. As a consequence more listed companies are structuring their capital raises to involve existing shareholders.   In 2023, many companies are complementing their placement offers to new investors with either a share purchase plan (SPP), rights issue, or another form of entitlement offer to existing shareholders. SPPs are offers made to existing shareholders inviting them to invest up to $30,000 each. Rights issues invite shareholders to invest on a pro-rata basis proportionate to their existing holding. The popularity of these offer structures is facilitated by regulation allowing involvement of existing shareholders without the need to register a prospectus. 

What are some examples?

Companies undertaking capital raises through a placement and SPP in 2023 have included APA Group, South Harz Potash Limited, Talon Energy Limited, Aussie Broadband Limited and Decmil Group Limited.   Companies in this same period combining a placement offer with another form of entitlement offer include Antipa Minerals Limited, Develop Global Limited, Star Entertainment Group Limited and Healius Limited (who has recently proposed a $187 million entitlement offer).

What's next?

Given that this trend has grown from a desire to involve existing shareholders and give them an opportunity to minimise dilutionary effects of a capital raise, we expect the practice to continue. 

4. Convertible debt continually popular  

What's happening?

2023 has seen Australian companies increasingly consider convertible note issues as a capital raise option. Convertible debt has traditionally been a common way for pre-listed startups to raise money, but is also popular for ASX-listed companies.  Convertible notes can be appealing for investors as they give the investor optionality on whether to take equity or take back the money they provided (which can sometime have risk mitigation benefits). In the current environment convertible notes can give investors exposure to the higher interest rates available for debt.   Convertible notes can also offer greater flexibility for issuers. The ability to convert debt to equity (which can sometimes be exercisable at the issuer's option) can be particularly attractive for companies facing uncertainty on their ability to repay traditional debt.

What are some examples?

From 1 January to 23 May 2023, 20 convertible note issues were offered by ASX-listed entities including Syrah Resources Limited's capital raise seeking up to $150 million.

What's next?

Expecting this type of raise to continue, ASX has provided recent guidance on how the ASX Listing Rules apply to convertible notes. In particular ASX states that convertible notes must be "appropriate and equitable" and said :

"if an entity can confirm based on legal advice from a suitably qualified and experienced lawyer that the terms of a proposed convertible note are market-standard and that none of the features noted in section 5.9 of Guidance Note 21 are present, ASX would not expect the entity to seek advice from ASX regarding whether the terms comply with listing rule 6.1".

ASX otherwise expects issuers to seek in-principle guidance where convertible note issues contain highly dilutive or coercive features.  Convertible notes can nonetheless be appealing alternatives to traditional debt and equity raises for issuers and investors respectively. While uncertainty in the equity markets continues we expect to see more convertible note issues.

5. 'VC Winter' puts squeeze on pre-IPO raising 

What's happening?

In what has been labelled the VC winter we have seen pre-IPO investment rounds slow from recent highs. This is taking place while a difficult market for IPOs is forcing pre-IPO capital raising.  2020 to 2022 saw venture capital (VC) investment in Australia ride the coat tails of an astonishing advancement in technology during the global pandemic. Over that period the weight of money poured into VC funds, helped build a more powerful ecosystem, contributing to the growth of Australian technology.   The increase in investment was largely driven by: 

• historically low interest rates;
• the success of Australasian technology unicorns such as Canva, Xero, Atlassian, and Airtasker creating a re-rating of risk levels for early-stage innovative businesses; and
• the increased involvement of larger institutional investors in VC investments such as big superannuation funds participating in funding rounds run by incumbent venture capital managers.

However as interest rates have risen over 2022 and 2023 money has become more scarce.  To meet capital needs, companies that have put IPOs on hold have been undergoing pre-IPOs capital raises to investors. These have not always been straightforward, except in certain industries. Artificial intelligence (AI) has seen a recent rush of investor interest.

What are some examples?

Exemplifying the current interest in AI-based companies, CurveBeam AI's pre-IPO placement successfully raised $25 million, which was $10 million more than the initial target of  $15 million. CurveBeam AI then listed on the ASX.Canva has pushed back prospects of an IPO until 2025 or 2026 but is following the trend of issuing pre-IPO shares. In an effort to appease investors without providing more certainty on their IPO timeline, Canva plan to allow employee and VC investors to cash out between now and listing.

What's next?

Companies making pre-IPOs in the hope that the IPO market will soon open may need to provide other forms of liquidity for investors.   Companies with AI-based products and services should pay close attention to general disclosure requirements and particularly to recent ASIC guidance on disclosure.   Amongst other things, ASIC has said it will pay close attention to issuer's disclosure on AI to ensure there are no misleading statements in offer documents and that all information is provided that investors would reasonably require to make an informed assessment on the issuer's true financial position and prospects.   With growing anticipation around potential for IPOs and recent VC deals, it would be unsurprising to see more companies undertake pre-IPO raises.

6. ESG influencing capital markets

What's happening?

We are seeing investment decisions influenced by how companies address environmental, social and governance (ESG) issues.   Amidst the largest transfer of intergenerational wealth, young investors are embracing ESG-conscious investing. Super funds and other large institutional investors are also offering environmentally-sensible investment options for members, which are becoming increasingly popular.   The rivers of money being directed into environmentally and socially responsible investment options, create an incentive for companies to highlight eco-friendly, ethical or sustainable business endeavours when seeking capital. Where such statements are false or misleading they have been labelled 'greenwashing'.  ASIC's recent enforcement priority announcement includes misleading conduct relating to sustainable finance (including greenwashing). Directors of issuing companies may be held liable for misrepresentation of environmental credentials, particularly if they cannot demonstrate a proper basis for their statements.

What are some examples?

Nexba is an example of a company taking advantage of purpose-driven investors. By commercialising a patented, non-artificial, sugar-free sweetener formula, this healthy drink business raised $6 million at a $20 million valuation and then again at $45 million.   ASIC has recently commenced proceedings against Vanguard Investments Australia Ltd (Vanguard) and Active Super on greenwashing claims. ASIC alleged that the Vanguard Ethically Conscious Global Aggregate Bond Index Fund was inherently false or misleading to the public in its title and claim that investors' money will be invested in ESG-friendly organisations. Even though Vanguard published disclaimers that they do not use a comprehensive ESG screening process for issuers' business activities, ASIC alleges that many investments were not screened against Vanguard's ESG criteria at all. 

What's next?

ESG factors will continue to be important for Australian companies and investors. The Australian Government recently published a Statement of Expectations for the Australian Prudential Regulation Authority (APRA) to improve transparency of climate-related financial risks and apply climate-related reporting standards to large Australian companies by 2024.   ASIC's recent Report 763 ASIC's recent greenwashing interventions, urges companies not to provide net zero statements or targets without a reasonable basis. Additionally, it advises against using terms such as 'carbon neutral', 'clean' or 'green' in circumstances where there is no reasonable basis. We expect ASIC to continue to take action whenever it identifies instances of greenwashing.  We also expect to see further incentives to display green credentials driven by increased European requirements including the adoption of a carbon price levy on high emission products from 2026.  Australian exporters will need to address these measures if they wish to continue exporting to Europe.

7. Energy and resources attract capital

What's happening?

The resources sector - representing approximately 30% of total ASX market capitalisation - has dominated Australia's capital markets throughout 2023. The sector has been responsible for most new listings on the ASX as well as raising the most capital.   Mining exploration and lithium (driven by expected growing demand for electric vehicles and rechargeable batteries) have been leaders in amounts of capital raised. The energy sector has also been able to attract large sums of capital as big investors help finance Australia's transition to clean energy (consistent with our trend number 6 "ESG influencing capital markets"). 

What are some examples?

Eight of the 22 resources companies that have launched IPOs in 2023 are acquiring or exploring for lithium. Among them, Chariot Corporation Ltd listed in October with an initial market cap of around $51 million.

What's next?

As of the date of this article, there is no indication of the resource sector slowing down. Out of the 14 companies with upcoming listings named on the ASX website, 10 are resource companies.  With this continuing appetite for capital raising, resources companies should take note that ASIC has recently conducted a review of mining companies' disclosure. It has cautioned resource companies to take the same level of care and diligence when releasing information to their marketing and investor relations channels as they would with regulated disclosure documents.   Australia's energy companies will likely continue to raise funds to produce renewable energy as its importance continues to be emphasised and clarified by the Federal Government in its increased 2030 emission reduction targets. Clean energy spending promises coming out of the recent United Nations Climate Change Conference will only add [renewable] fuel to this trend.

Source: Equity Capital Markets: 7 Trends Shaping the Landscape - Insights - Colin Biggers & Paisley (cbp.com.au)