Capital raisings, a source for outsized returns

From
Jacob Smart, Zenith Investment Analyst

Jacob Smart

Market participants, especially equity investors, can be forgiven if the words déjà vu spring to mind during this COVID-19 period. Although there are definite similarities between the Australian equity market drawdowns and subsequent recoveries of COVID-19 and the Global Financial Crisis (GFC), COVID-19 has proven to be the GFC in fast-forward. That is, during this period, we have seen the fastest bear market in Australian equity history.

As experienced during the GFC, the deterioration of the economy resulted in companies raising capital to shore up balance sheets. In its latest sector report, Australian Shares – Large Companies, Zenith Investment Partners found that this time around, companies with growth ambitions also took the opportunity to tap the market for additional capital.

As a result, April 2020 was a record-breaking month, with 37 placements raising a total of $A 13 billion.

According to Jacob Smart, Senior Investment Analyst at Zenith, to see a similar spike in the number and size of capital raisings from placements within a single month, you would need to go back to October 2009, where the number of placements topped 20 and in November 2008 total funds raised hit a month high of $A 7 billion.

“On 1 April 2020, the Australian Stock Exchange eased capital raising rules making it easier for companies to raise additional capital due to COVID-19,” said Smart. “With this temporary rule change, we saw companies such as Flight Centre and NAB, shore up balance sheets at a rate reminiscent of the GFC.”

But it was not just companies in trouble that issued placements during this period.

“Some company behaviour we saw was somewhat opportunistic, with companies that were unaffected or less impacted by COVID-19 also raising capital,” said Smart.

“Rather than fortifying their balance sheets, companies such as NextDC and Breville raised capital for growth initiatives such as acquisitions and investment.”

Given the attractive terms of the placements, participation resulted in high levels of excess returns for Zenith’s rated funds. Of the 57 placements between 21 February 2020 and 31 May 2020, Zenith’s rated managers participated in 43 which produced an average return of 33%.

Performance of investment styles

Smart notes that there are similarities regarding the performance of investment styles and market dynamics during the two crises.

During the GFC, the growth investment style exhibited a stronger degree of capital protection in the drawdown, whilst the value investment style significantly outperformed in the subsequent recovery.

Although the full effects of COVID-19 are not yet known, it appears as if history is repeating itself.

Unsurprisingly, value managers were prominent in the placements of more distressed companies such as Metcash, Kathmandu and Flight Centre. Whilst companies without balance sheet issues such as Ramsay Health Care, IDP Education and Cochlear were popular amongst the growth managers

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