S2 - raising equity Flashcards
what are the equity concepts
Ordinary shares
represent the equity share capital of the firm
Share in the rising prosperity of a company
Owners of the firm
Right to exercise control
Vote at shareholder meetings
Right to receive share of dividends distributed
Entitled to copy of annual report
No agreement to receive original investment
Amount received depends on how well company is doing
advantages and disadvantages of share issues
Advantages
no obligation to pay dividends
Capital doesn’t have to be repaid
Disadvantages
high cost
Direct costs of initial issue
Return requires to satisfy shareholders
Loss of control
Dividends cannot be used to reduce taxable profit
what is authorised capital
authorised capital
Shrives plc
Authorised capital of £5m split with £1m of preference. Shares, £4m of ordinary shares
Issued preference shares at par but the issued ordinary share capital is only £2.5m
Left £1.5m as authorised but unissued ordinary share capital
par value
Face value, not what they’re sold for
what are the causes of advanaces in UK financial markets
Deregulation of financial markets**
removal of domestic restrictions on financial markets
Changes in technology
communications and IT
Lowering costs and breaking barriers
Emergence of high frequency trading
Financial innovation
creation of new financial instruments leading to new business for banks, exchanges
Particularly financial derivatives
Disintermediation
Institutionalisation
what are primary and secondary markets
Primary markets
allow for the issuance of new securities (equity and debt) from the issuer to investors
Key part of a viable primary market is an efficient and liquid environment
Price discovery and price formation can occur quickly and rationally
Secondary markets
market where something is traded after having initially been sold by the original owner or issuer
Major stock exchange like the FTSE is both a primary and secondary
what are capital markets
banking sector - retail banks, investment banks, international banks
Long term savings institutions - pension funds and insurance funds
Risk spreaders - unit trusts, investment companies and exchange traded funds
Risk takers - private equity and hedge funds
government bailed out the banks and didn’t allow them to collapse in 2007
what is raising money through equity finance on stock markets
limitations for domestic companies
Advantages of multinational companies in comparison
Local arrangements highly variable - especially on specific stock exchange requirements
Ultimately about ownership and control
Alternates of full stock exchange listing for equity finance - venture capital funds
what is floating on the main market
The United Kingdom Listing Authority, UKLA
Separately apply to the London Stock Exchange for securities admission to trading - LSE own set of admission and disclosure of information standards
Prospectus
A marketing tool
Three years of audited accounts
Details of indebtedness
A statement as to the adequacy of working capital
Statements by experts
Major contracts entered into in the past two years
A description of the risks facing the firm
Shareholding: of more than 3 per cent to be named
A mass of operational data is required.
The expected market value of the company’s shares is to be at least £50m
Cost of advisers to the new issue will be at least £500,00
what conditions and responsibilities are imposed
At least 10% of their share capital is in public hands
Directors may find their room for discretion restricted when it comes to paying dividends.
Loss of some privacy and autonomy
Rules concerning the buying and selling of the company’s shares by its own directors
Suitability
Management team must have the necessary range and depth.
A track record
Timing of the flotation
A healthy balance sheet, sufficient working capital, good financial control mechanisms and clear accounting policies
what is offer for sale
shares are offered at a fixed price
Offer for sale by tender
Public and institutions bid price for shares
Minimum reserve price set by company
Issue price is highest that will dispose of all the shares
what is placing
Stock exchange introduction
the company’s shares are listed but no new money is raised
Must already have a wide spread of shareholders and meet requirements
what is rights issue
post floatation rights issues
Rights issue
existing shareholders given the right to subscribe for new shares
Pre-emption rights
Shareholders can sell the rights if they don’t want to subscribe for the new shares
what is AIM flotation v one on the official list
Rules are kept as relaxed as possible so membership and capital raising costs are low.
Nominated advisers act as an unofficial ‘sponsor’.
The (administrative) cost of capital raising are typically 9–10% of the amount being raised.
AIM was designed so that the minimum cost of joining is £40,000–£50,000. Frequently, more than £500,000 is paid.
Need to be public limited companies
Accounts
Produce a prospectus (or AIM document)
Do not have to disclose as much information
what are business angels
Invest between £10,000 and £250,000
Start-up, early stage or expanding firms
Majority of investments are in the form of equity finance but they do purchase debt instruments and preference shares
Usually do not have a controlling shareholding
Aim is to make a return of five to ten times
Play a significant role in strategy and management
Most angels take a seat on the board.
Angel networks
Tax breaks (EIS Scheme)
what is venture capital
Venture capital (VC) funds provide finance to companies at an early stage of development with high growth potential.
Not just rich individuals, for example Venture Capital Trusts (VCT’s) are a popular tax efficient savings vehicle accessible to all (£731m in 2018 Tax Year Invested)
Private equity: management buy-outs and the like of companies already well established
Medium- to long-term investment
Package of debt and equity finance
Expect a return between five and ten times initial equity investment in five to seven years
Firms receiving equity finance are expected to produce annual returns of at least 26 %
Less keen on financing seedcorn, start-ups and other early-stage companies than expansions, MBOs and MBIs
Investment must be at least £250,000 – the average is £5m.
For the youngest companies, the VC funds may require returns of the order of 50–80 per cent per annum.
For well-established companies, the returns required may drop to the high 20s.
Private Equity can support a range of opportunities and is usually involved in large scale fund raisings, sometimes in the billions.
Lego Family, Blackstone £6bn funding to takeover Merlin Entertainment.
Many questions have been raised on the “public good” of Private equity Companies. Some 2019 research has highlighted though that Private Equity deals are two-edged in that regard.
