Compass fundraiser means ordinary investors may finally get access to exclusive share issues

Catering giant's deal with PrimaryBid means Joe Public can take part in big City fundraisers

Ordinary investors have been frozen out by the City

AFP via Getty Images

19 May 2020

Catering giant Compass today raised £2 billion from investors to get it through the cash crunch of having revenues halve as clients shut their canteens and cancelled events.

Nobody was surprised by that – even if it was a massive sum. Many companies big and small have had to raise emergency funding.

But what has raised eyebrows – and many cheers – is the way it’s done it.

Namely, by allowing retail investors access to the fundraiser as well as the big City pension and hedge funds, insurance companies and the like.

This has relieved many small investors who feel they have been let down by the City up until now and have been agitating loudly for change.

How do companies raise money?

When raising big sums of cash, if they don’t want to take on more debt, they raise equity instead. They do this by selling new shares.

Sometimes, to attract investors, they offer the shares at a discount to the current price.

That discount can exacerbate the fall in the value of each share that often happens anyway, as more shares in issue dilute the value of each one.

Loyal existing shareholders are traditionally offered preferential terms and extra access to the funds being made available.

What’s the row about?

Many companies have been in urgent need of the money. So, to raise money quickly and efficiently, they’ve only gone to the relatively small numbers of big institutions rather than deal with tens of thousands of members of the general public.

Nearly all the billions of pounds of funds raised for dozens of companies have gone solely to institutions.

They’ve been helped by a change in the rules by the City authorities that allowed companies to raise up to 20% of their share capital without first giving original shareholders a right of first refusal.

Previously, it was 10%.

That has led to companies ignoring small shareholders who had been loyal backers of the company.

It has proved especially infuriating when share issues are discounted, as the loyal retail punters suffer a share price fall and are blocked from accessing the new shares at the lower price.

Shareholder representative groups Glass Lewis and ISS have called on shareholders to vote against the fundraisers of Foxtons and The Restaurant Group for that reason.

Who makes the decision to exclude existing shareholders?

The board of the company, ultimately. But they do that after the advice of their lawyers.

Company law firms have been taught over the years that it’s legally risky to get too involved with retail share issues due to the risk of being accused of mis-selling if the shares fall in the future.

Brokers and bankers have also preferred to follow the path of least resistance and advise on an institution-only route.

Most CEOs will happily ignore their broker, but the general counsel’s word is sacrosanct.

So how did Compass manage to do things differently?

As with so many of the emergency problems thrown up by covid, technology came to its aid.

An app called PrimaryBid, run by former financiers and bankers, can do all the legwork involved in getting retail punters on board.

Members of the public can register, go through a vetting process to ensure they know what they’re doing, and apply for shares.

Those who are existing shareholders can get preferential treatment if the company chooses.

PrimaryBid then collects the orders and sends them through as one application to the company.

It says it got close to winning the mandates on share offers by Big Yellow, JD Wetherspoon, Hiscox and Beazley but, as chief operating officer and former JPMorgan Cazenove banker James Deal puts it: “no cigar.”

How does PrimaryBid tell the public about these opportunities?

The company has a deal with the London Stock Exchange that allows it to put its details on the Stock Exchange announcement when the company announces the plan.

Most retail investors are savvy enough to be keeping an eye out on the 7am announcements, Deal says.

Clients then order and pay for the shares through the app and they can be transferred automatically to their trading platform.

Little wonder Hargreaves Lansdown and AJ Bell are fans.

So why did Compass agree to the scheme?

Deal attributes its success to Freshfields lawyer Mark Austin, who had been looking at ways of allowing the companies he was advising safely to do rapid fundraisings from retail clients.

That gave Compass's management the reassurance they needed to do the right thing by retail punters.

A head of steam does appear to have been building as the ruckus became noisier in recent days and weeks.

The likes of UBS dealmaker John Wooland had been an advocate, while Slaughter & May had given the system its legal mark of approval some time ago.

Will ordinary punters get more access to share issues after this?

Probably yes. Winning such a huge deal as Compass’s £2 billion raise today will be a huge marker in the sand. Chief executives will say to their lawyers: if they can do it, why can’t we?

In many cases, including retail investors will be good publicity for firms. For example, had Hiscox included retail investors from its fundraiser, it might have had a slightly easier time of it over the alleged failure to pay out on valid business interruption claims for small businesses.

Big money ahead for PrimaryBid then. Who are they?

It was set up about two years ago by Anand Sambasivan, a hedge funder and former Goldman Sachs banker who had seen how retail investors were being excluded in favour of the likes of, well, Goldman Sachs and hedge funds.

James Deal is the frontman going out to win business. He cut his teeth at broker Dresdner Kleinwort advising small capital companies before helping found Evolution, another broker, then moving to Numis and JPMorgan Cazenove.

He joined last year, invested in the business himself and helped raise funds from private equity groups Pentech Ventures (famed for backing the online personal finance group Nutmeg), Investec's venture capital arm Outward VC, Hambro Perks and some well-connected individuals.

Being in private hands, you can't invest in it.

What’s the future for retail investors?

If Deal gets his way, there will be more public ownership of UK shares. He has been banging the drum with chief executives to explain the importance of having a wide spread of investors to counter the influence of big, faceless tracker funds and other electronic trading outfits who move share prices at the whim of an algorithm. Most of the time, the company can’t even tell who is buying and selling their shares.

Having a broader shareholder base, who actually might listen to what you’re trying to do, can be a useful ally for a CEO. Particularly when activist investors come along.

Deal highlights the situation Melrose found itself in when it was trying to buy GKN. It was a close run shareholder vote, but retail investors helped win the day.

It’s a self-serving narrative for Deal, naturally, but makes good sense and helps the retail punter too. Especially as it’s the company who pays the bill.

Are retail punters clever enough to know what to buy and sell?

Regulators have been increasingly nervous about that, and for good reason. Stockpicking is inherently risky and you’re probably better off investing in a fund. Deal points out that 80% of trades placed with retail platforms are “buy” orders. In the past eight weeks of coronavirus, the percentage of trades in the stockmarket being done by retail punters has gone from 5% to more than 20%.

Whether that makes them smart or dumb is a matter of opinion.

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