Why retail investors are shunning capital raisings

For companies, the usual funding sources are drying up. Bank funding is difficult to secure, and going to shareholders for help has become more difficult.

Several recent efforts to raise money show retail investors aren’t taking up their entitlements, even when the companies trying to raise capital are well-known brands.

This leaves private equity as the only section of the market still willing to put money in.

Toy maker Funtastic is so worried about selling its $4.5 million retail allocation (of a $25 million capital raising) that it has asked Australian entrepreneur Gerry Harvey to sub-underwrite the issue (promise to buy the shares should retail investors not take up the offer).

Billabong closed the retail component of its $225 million entitlement offer on Friday, after only 51% of retail shareholders took up their entitlements, forcing underwriters Goldman Sachs and Deutsche Bank to buy the stock.

And in June, SEEK abandoned its $125 million retail subordinated note offering as it was “not satisfied it would achieve acceptable terms at this time”.

Why are retail shareholders shunning capital raisings? The outlook of retail investors is “pretty negative” at the moment, explains Dale Gillham, the director of share market education and investment advice firm Wealth Within.

“You only have to look at how much cash they have,” he says. In the last quarter of 2011, Australian households saved $20 billion – 10 times as much as they did in 2005 before the global financial crisis. To boot, the number of households that directly own shares has been falling, from 39% in 2002 to 34% today. “The average investor doesn’t want to put that into the share market, unless there’s a really good deal,” Gillham says.

Retail investors are always cautious about the share market, as many feel they do not sufficiently understand it. “It’s all about risk – they don’t understand the risks.”

However, it is a good time to invest, he adds, quoting Warren Buffett: “Buy in doom, sell in boom.”

Any companies that aren’t a household name are likely to have difficulty appealing to the retail market. Gillham gives the example of Myer, which, when it floated in 2009, was shunned by institutional investors but well-subscribed by retail shareholders.

“Brokers were marketing it heavily,” says Gilham. “Myer is a well-known brand, with huge brand loyalty. [That meant it was popular with retail investors] even though from a technical investment point of view it wasn’t attractive.”

Former government entities, such as Telstra and Queensland Rail, were also popular with retail investors.

“For retail investors, the first thing they look at is institutions involved … if big institutions are involved in buying midcaps, you will get some participation from retail investors. But not a lot, as they really don’t understand it.”

How can companies tap into the mum-and-dad-investor dollar given the risk adversity and lack of knowledge about the share market among this group?

“By having a nice story to tell,” Gillham says.

“Unfortunately right now, there’s very few good stories.”