ASX bookbuilding blocks for success

One of the curious aspects of the proposal for an ASX-operated bookbuild facility for capital raising that the ASX unveiled last week is the way in which the investment banks are characterising it as an assault on their franchises while the ASX is trying to manage down expectations.

ASX's Elmer Funke Kupper went out of his way on the ABC's Inside Business this weekend to talk down the implications for the big investment banks that dominate capital raisings, focusing on the potential of ASX BookBuild for small and mid-cap companies to raise funds more efficiently rather than on the large company raisings that the major investment banks dominate.

The reality is probably somewhere in between the opposing the views.

In the near term ASX BookBuild is no existential threat to the major investment banks. Large companies will still want to control and micro-manage their capital raisings, particularly when they and/or markets are under pressure, and they will want to manage the allocation of shares to new investors in particular. Large companies needing to raise capital won't want to experiment with new and untried processes.

In the longer term, if the new platform proves itself to be a more efficient and transparent way to raise funds, the platform could make incursions into traditional investment banking territory.

The bigger pure advisory firms like Greenhill Caliburn, Gresham and Lazard (often employed as advisers by boards concerned about the potential conflicts of interests of the investment banks to monitor and oversee the execution of capital raisings by full-service banks) will see the proposal as a potential mechanism for muscling into territory that has been owned by the big full-service investment banks.

The ASX is clearly conscious that the investment banks will view the proposal, which is still subject to a consultation process, cynically and ASX BookBuild has been designed with a continuing central role for investment banks, full-service or otherwise, in mind.

The process requires a lead manager, allows for priority or discretionary allocations, envisages underwritten raisings and gives the companies and their lead managers the ability to cap individual allocations in order to manage their registers and avoid predators or undesirable shareholders using the process to gain significant stakes.

The appeal of the proposed platform is that it could address the perceptions – sometimes a reality – that retail shareholders are disadvantaged in capital raisings relative to institutions; that investment banks are conflicted because they want to reward their institutional or hedge fund clients with stock and that the interests of companies and pre-existing shareholders can be harmed by the pricing of an issue.

The proposed ASX platform would have greater price transparency, would bring the whole of the market – including retail investors via their brokers – to bear on a raising and therefore should produce finer pricing and would reward the highest bidders for being price leaders and maximising the price of the raising. The allocation process would be more transparent and less subjective.

The platform probably wouldn't be used by large companies during the sort of conditions experienced in 2009 and 2010 when the financial crisis forced a large number of companies to raise large amounts of capital under duress.

Price and equity were of far less importance in that period than simply raising the funds and the investment banks did a very good job of securing capital in the midst of uncertainty and real risk.

Companies that are more concerned about ensuring they have the right sort of register and committed shareholders than absolutely maximising the price are also more likely to stick with the existing processes than use the proposed new platform and its algorithms. Companies don't like hedge funds, traders or potential predators being allocated stock in a placement.

Even the major investment banks, however, are interested in the potential of the platforms to produce finer pricing when selling the entitlements to renounceable rights issues by bringing the full market and the transparency of the proposed system to bear in order to maximise the prices obtained for those shareholders unwilling or unable to exercise their entitlements.

ASX BookBuild is not revolutionary. It is an evolutionary development from the systems and processes that the investment banks have developed and use, offering more transparency, access to the broadest range of potential investors and a more templated approach to pricing and allocations.

Ultimately it is another tool for company boards to consider when they look at the range of capital raising options with their advisers, generally an investment bank or some other accredited market participant.

How significant an incursion ASX BookBuild might make into traditional investment banking territory will ultimately be up to those boards and, assuming it is introduced, whether or not it can demonstrate that it produces better pricing of issues without any of the unintended consequences for issuers that the investment banks say could occur if capital raisings are opened to the full universe of potential investors.