Are placings always bad news?

Let’s set the scene. It’s 7am and the dreaded RNS comes out. The company you invested in is ‘pleased’ (it’s always pleased) to announce that it has magicked a significant number of shares into existence, diluting your holding and making your share of the eventual potential prize less than it originally was.

Now before we dive into the nitty gritty, it’s important to recognise that companies launch IPOs and RTOs and pay hundreds of thousands of pounds a year for the privilege of staying listed, specifically to raise capital from the London markets. The problem is that the business model is no longer working effectively. Let’s consider how it’s meant to work:

1. Company IPO’s at 10p and raises £10 million.

2. Company spends £10 million on exploration, market cap reflects discoveries and money sunk into the ground.

3. Share price rises to 15p, company places at 13p and raises another £10 million.

4. Company spends £10 million on exploration, market cap reflects discoveries and money sunk into the ground.

5. Share price rises to 20p, company places at 18p and raises…etc etc until an asset sale/JV/earn-in or similar.

The problem is that we have a dysfunctional market, whereby instead it goes like this:

1. Company IPO’s at 10p and raises £10 million.

2. Company spends £10 million on exploration, market cap falls because investors are wary of a placing.

3. Placing happens at 6p, company raises £5 million, less money than it needs and with more dilution than it wants.

4. Company spends £5 million on exploration, market cap falls because investors are wary of a placing.

5. Placing happens at 3p…long-term holders sell out and it becomes a trader’s share.

The placing dysfunction is compounded by placees — it used to be that brokers took part in and retained some shares in placings — nowadays it feels like shares are typically placed with the same hundred or so HNW individuals almost all of whom hold the stock for a 10% flip and then dump simultaneously.

This is intensified when warrants are involved; because if you can sell your placing shares for a small profit and keep the warrants for some free upside, why wouldn’t you? And this is becoming a bigger problem, because previously, shares were placed with people that brokers were confident would hold — and now they have little choice but to place with those looking for a fast profit. 

This creates a wider trading environment, where market participants are encouraged by the system to day trade rather than invest for the long term. Worse, those in the know (HNWs approached for capital by the brokers, company insiders, and even the brokers themselves) often illegally engage in insider trading, driving down the stock price before the placing knowing it will be at a discount.

I’m not accusing anyone in particular, but if the stock starts dropping for no reason, we all know why. And it’s also clear that some truly terrible companies only exist to generate free placing profits.

This creates an environment where investors considering buying shares are not looking at corporate successes, but instead considering the latest financial results for a cash position and monthly cash burn, to check when the next placing might be. This is sub-optimal for the markets in general — you want investors to buy shares simply when a company is doing all the right things and not based on dry mathematics. 

But we have the market we have, so this is completely understandable on an individual level.

Of course, I’ve considered reforms before which could help — companies seeking to issue fresh equity should suspend while doing so, the discount should be set to a maximum limit, a ban on shorting small caps etc — but we have the market we have.

So how can this be improved without picking up pitchforks and marching on LSEG? Well, to start with, some companies have terrible (or sometimes simply overvalued) assets/management and if potential funders will only offer capital at a certain price, then that’s life. Perhaps there are too many zombie companies that don’t deserve to be kept alive, and this is just the natural selection whereby these businesses will die a slow death and those left behind will have more capital to share between them.

But some businesses — like POW and GMET — have managed to attract capital from institutional investors while bypassing brokers. Helix Exploration saw a massively oversubscribed IPO and could clearly raise favourably. And some stocks have managed to place at a premium, including recently Blencowe.

But for the wider market, what’s really needed is a big, big win. A Greatland Gold-style 71-bagger, where investors on the floor see their investment double, again and again and again and again…because this will help replace the fear of a placing with fear of missing out. 

Of course, the wider sector is on the floor in terms of valuations, which hasn’t helped — but with sentiment recovering one hopes that all it takes is a rocket ship to fix the market model.

Or look for other sources of funding — family offices, CLNs, HNWs, offtake prepayments etc etc