Thursday 26 August 2010

Private Placings need review

The new coalition government is proving to be quite a refreshing change from the recent past. With a mantra of reviewing and shrinking regulation rather than adding on the layers in the manner of the old Government though.

Also populist, they seek to bash bankers where they can whilst running an macro economic policy which is designed to save the banks at the expense of all else (Labour did this too, it seems no one has the courage even in power to challenge the economic consensus).

Well, there is one area which really needs sorting out and this is the private placings market. This year may be the busiest ever for private placingss. What they are is a company issuing new shares to private investors at a discount to the current price. The private piece means that current retail investors don't get a look in. In fact what you find is that current investors watch the share price fall for no reason, then a placing is done at a discount to the new lower price, the share normally then hovers around the issue price for a few weeks before some good news (who knew that was coming, eh? ) is released. See the chart for IAE - one of my favourite shares for an ISA - for a classic example. I have not marked the private placing point, can you guess? Retail investors get thoroughly roughed over in favour of wealthy individuals and institutions.

What is so wrong with this is that there is a mechanism for open offers in which all investors can participate, but these are said to be too expensive for smaller companies. This makes no sense, if these are too expensive then so are IPO's and yet these companies are listed.

There are many ways to fund companies and as Capitalists we are not in favour of banning things here in general. What is need is a rule to ensure that say only 10% of share capital can be issued in a private placement, after that it has to be an open offer. This would stop insiders in the City abusing the situation. Also companies need stronger guidance about discussing publicly their funding needs, up to a year in advance, so that shareholders know if a big dilution is coming - then they can decide whether to hold or participate.

The City needs to realise too the importance of allowing retail investors some success in the markets, as at the moment volumes and liquidity are low. People are getting wise to the impossible challenge of playing a house game so stacked against them. Hedge Funds and High Frequency trading are topics I will come back too soon.

The Government should realise that a bit of transparency and fairness will do the City of London's international reputation the power of good.


Rhone Ranger said...

Be careful not to mix private placements (a US term for debt, often private, unlisted bonds) with placings (ie, non pre-emptive issue of equity).

And there are more than rules on pre-emption, the Companies Act has long since enshrined this, no?

The problem is when you place upto 10% of a company's equity in a small company, this can have a big effect on the price.

Sebastian Weetabix said...

I have never understood why private placings are permitted for a listed company at all. They have always struck me as nothing more than insider trading. It should be banned. If a company is listed on the exchange placements should be open to all investors, not a select favoured cabal.

CityUnslicker said...

RR - Coffee not strong enough this morning.

10% a chunk , but smaller co's are going for 30-50%, pure bloodbath, hence IAE as the example.

SW - tend to agree, but sometimes open offer is too expensive and companies too small to arrange. Plus getting II's onboard is ok - but surely has to be limited as current position is pure abuse.

Anonymous said...

Duh - call me dim guys but doesn't this work:
Company declares it will be selling shares into the market over, say, three months to within a range of 20-30% of new shares.
Everyone knows the dilution will happen and everyone has fun deciding when to buy or sell for maximum effect.

John Thomas said...

I agree CU but should also not "off balance sheets items" be included in published accounts so that any potential investor knows the true facts, for example Granita, banks have always been able to hide certain things from their balance sheets and the public gaze and of course tax. What happen to this universal approved method of doing bookeeping touted many years ago, or have companies said we don't want that, if so I wonder why?

CityUnslicker said...

Semper - Open offers work fine, everyone knows the game which you describe. What is wrong is retail investors suffering dilution whilst those behind the scenes are manipulating the price.

In terms of financing, I think companies could be a lot more open about what they need for the coming year, giving more tranparency to shareholders.

As such, John Thomas has a good point.

Anonymous said...

"The Government should realise that a bit of transparency and fairness will do the City of London's international reputation the power of good"

Four or Five guys teleconferencing every day, in total privacy, to set the AM and PM price for something that trades globally in the £trillions PA, surely amounts to a conspiracy to defraud, an international price fixing cartel. - - - - >

Where leverage via paper (plus other means)is used to achieve cartel objectives

In most industries, supermarkets, retail energy, etc, etc, Jail-time would be served up for this behaviour, and fines.

So why are bullion banks at the LBMA, and the LBMA, and the BofE, and the BIS immune from this legislation/oversight?

Does the blanket immunity claimed by the BIS extend to all players?

Has that claim of blanket immunity ever been legally challenged in any jurisdiction?

All in the name of transparency, you understand.

And can any currency that loses 96% of its purchasing power over the last 100 years be truly called a "reserve currency" by anyone other than complete morons?

Anonymous said...

I am in entire agreement with your points raised in the blog.

You might also stress that the initial price fall, pre private issue, is usually caused by insider shorting to force the company to issue a larger percentage of shares to achieve the required £sum, thus diluting existing holders.

These happenings are far too frequent.

CityUnslicker said...

Anon - Totally agree your point re the LMA fix, way past time that this should be ended. But those setting the price hold most of the long AND short positions - very odd.

Anonymous said...

This goes to the heart of western finance global control, control that is now crumbling.

The same players are active, in the same positions, on COMEX.

At least there, it is visible.

The same players, (plus a few others) are shown on BIS, table 19, derivatives, doing precisely the same things, and more!

Major US Federal players have resisted, since their inception, legislation on derivatives.

The BIS has praised the evolution of derivatives, in print.

The entirety above, and probably a lot I've missed, adds to something a lot more than...

"Very Odd", wouldn't you say?

That something is coming under increasing attack.

I would be very interested in your thoughts concerning that which you see developing as a result, both of this attack, and the increasing exposure that these machinations are receiving lately.

Many thanks.

Private Placement Memorandum said...

I would be interest for placement of the private placings are permitted for a listed company at all so The rate of high for this processed i think..