Last updated 2 years ago
What is a capital raise?
A capital raise is when companies approach investors to provide additional capital to the business in the form of either debt or equity.
A capital raise is when a company approaches existing and potential investors to ask for additional capital (money) in the form of either equity or debt.
Equity raising is when a company raises funds by issuing new shares. This allows the investor to take partial ownership in the business and, unlike with debt, the funds raised do not have to be repaid.
The price at which the shares are issued depends on a number of factors, including:
The risk of the issuing company;
The growth prospects;
Market conditions; and
Various other factors.
Investors are able to monetise their investment either through dividends, capital gains (when the investor sells the shares at a higher price), or stock buybacks.
All qualified investors are able to participate in listed equity raises via Fresh Equities.
Conventional Debt gives the issuer, also known as the borrower (the company in this case), the permission to borrow money from the lender (investor) with the obligation of future repayment usually with interest. The lender charges interest to compensate for the time value of money, as well as the risk of repayment.
In some cases, the debt will be secured against an asset owned by the borrower in order to provide a degree of repayment certainty in the case of non-payment/default.
Convertible debt is similar to conventional debt in that it gives the issuer permission to borrow money from the lender with the obligation of future repayment, usually with interest.
Unlike conventional debt, convertible debt has a hybrid nature and gives the investor or the company the ability to convert the debt into ordinary equity at a future date in lieu of repayment.
This type of security offers several advantages to the investor including downside protection provided by the fixed income, with an added potential exposure to upside in the company’s equity value.
Why do companies raise capital?
Companies typically raise capital from investors for 3 primary purposes: acquisition, re-balancing the capital mix and growth.
Raising capital for acquisition is a common strategy for companies to enhance value for shareholders. This strategy either allows companies to apply funds to enhance the value of an existing asset, or to acquire an external asset with benefit to the existing business.
For instance, a mining company may raise funds to support a drilling campaign and expand their resource inventory. Alternatively, the company may choose to purchase another deposit with the funds to supplement an existing resource or operation.
An example of this was Northern Star’s (ASX:NST) 50% purchase of Kalgoorlie Consolidated Gold Mines (owner of the Super Pit Gold Mine) from Barrick for US$775m in late 2019. This transaction was partially funded via a A$765m placement. Fresh clients successfully participated in this placement.
Re-Balancing the Capital Mix
Companies may also choose to raise capital to rebalance their capital mix. This is common for companies with outstanding liabilities who choose to use raise proceeds to pay off debt.
An example of this was Peninsula Energy’s (ASX:PEN) raise in mid 2020 with intentions to fully repay the company’s US$16.8m term debt which was expected to save shareholders ~US$2m per annum in interest costs. This has allowed the company to continue existing operations debt free. Fresh investors successfully participated in this transaction.
Companies may also require additional capital to grow operations and/or for working capital. This is common for companies undertaking projects with large upfront costs and long execution timelines.
An example of this was Zip Co’s (ASX:Z1P) raise at the end of 2020 with the successful completion of a placement to fund global growth. Zip’s Managing Director and CEO, Larry Diamond, explained the additional growth capital will “capitalise on the successful acquisition of QuadPay in the US, scale Zip’s operations in the UK, lead the active pursuit of global growth opportunities and support the launch of Zip Business in Australia.” Fresh investors successfully participated in this transaction.
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