Inequitable Treatment of Retail Investors in COVID-19 Capital Raisings 15 January 2021

Inequitable treatment of retail investors in COVID-19 capital raisings 15 January 2021

Vesparum White Paper Series Paper #4

We bring data science to equity capital markets Executive Summary

Key outcomes from COVID-19 capital raisings 1. Allocations: Only A$5 billion of A$38 billion of capital raised during the COVID-19 period was allocated to retail investors. 2. Returns: Only A$2.7 billion of the A$15.7 billion increase in portfolio values due to capital raising allocations was attained by retail investors. 3. Fairness: Inequitable capital raising structures and allocations have resulted in a wealth transfer from retail investors to institutional investors of A$3.6 billion, based on typical retail investor company ownership levels of 40%. 4. Trading: The above results occurred despite retail investors showing strong on-market support around capital raisings during both the COVID-19 period and in normal times, compared with institutional investors who were typically net sellers in the aftermarket. 5. Short selling: Short selling activity by hedge funds around capital raisings has been more prevalent during the COVID-19 period, contributing to an increase in the indirect costs of raising capital. - Supporting case studies include Ooh!Media, Webjet, Kathmandu, Southern Cross Media, Flight Centre and Monash IVF. - NEXTDC provides a noteworthy example of different trading behaviour in the aftermarket, influenced by a policy of allocating away from hedge funds.

Key takeaways for directors of ASX-listed companies • A deep understanding of retail and institutional investor behaviour is critical to optimise investor targeting, allocations and aftermarket performance. • Truly independent advice is critical for companies raising capital, given potential conflicts of interest, including dual agency, misaligned incentives, information asymmetry, lack of transparency, illusory underwriting and suboptimal timing.

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2 1. Allocations Allocations: Only A$5 billion of the A$38 billion of capital raised during the COVID-19 period (i.e. 13%) was allocated to retail investors

Capital raising allocations to investors during the COVID-19 period1,2 (A$ billions) $100m+ market cap companies at time of announcement

35.0

30.0 Institutional investors3 25.0 ~A$33B allocated NAB $3.0B 20.0 placement

15.0 Retail investors4 10.0 ~A$5B allocated NAB $1.25B SPP 5.0

Institutional investors Retail investors

1 Total amount of capital allotted during the COVID-19 period to date, split by institutional vs retail components 2 COVID-19 period (to date) based on 21 February to 30 November 2020 3 Based on allocations to investors in placements and the institutional components of entitlement offers 4 Based on allocations to investors in share purchase plans and the retail components of entitlement offers Source: Vesparum, IRESS

3 2. Returns Returns: Only A$2.7 billion of the A$15.7 billion increase in portfolio values due to capital raising allocations (i.e. 17%) was attained by retail investors

Portfolio value increase due to capital raising allocations during the COVID-19 period1,2 (A$ billions) $100m+ market cap companies at time of announcement

16.0 Institutional investors3 14.0 +A$13.0B value increase

12.0

10.0

8.0

6.0

4.0

2.0

- Retail investors4 +A$2.7B value increase (2.0) 21-Feb 10-Mar 30-Mar 21-Apr 11-May 29-May 19-Jun 09-Jul 29-Jul 18-Aug 07-Sep 25-Sep 15-Oct 04-Nov 24-Nov

Institutional investors Retail investors

1 Cumulative impact of the net value of capital raising allotments (based on prevalent share price vs offer price) assuming all allocations are held 2 COVID-19 period based on 21 February to 30 November 2020 3 Based on allocations to investors in placements and the institutional components of entitlement offers 4 Based on allocations to investors in share purchase plans and the retail components of entitlement offers Source: Vesparum, IRESS

4 3. Fairness Fairness: Retail investors have suffered from inequitable capital raising structures and allocations, to an amount of A$3.6 billion

Typical shareholder composition Retail investor returns Institutional investor returns Capitalisation-weighted company Portfolio value increase due to capital Portfolio value increase due to capital ownership for All Ordinaries companies raising allocations (A$ billions)1 raising allocations (A$ billions)1

+3.6 13.0

9.4 40%2 -3.6 6.3 60%2

2.7

Retail investors Expected returns Actual returns Expected returns Actual returns 2 3 2 3 Institutional investors (at 40% allocations) (at 13% allocations) (at 60% allocations) (at 87% allocations)

1 During COVID-19 period based on 21 February to 30 November 2020. Analysis based on $100m+ market cap companies at time of announcement. 2 Typical company ownership for All Ordinaries companies estimated at ~60% institutional / ~40% retail based on entitlement offer data in our proprietary database, weighted by market capitalisation 3 Cumulative impact of the net value of capital raising allotments (based on prevalent share price vs offer price) assuming all allocations are held Source: Vesparum, IRESS

5 4. Trading Trading: Retail investors have suffered despite their strong on-market support around capital raisings, compared with institutional investors

COVID-19 period Normal times Cumulative net value traded1 (A$ billions) Cumulative net value traded2 (A$ billions)

Announcement Announcement date date 10.0 30.0

5.0 15.0

Strong support from retail investors Similar trading behaviour 0.0 0.0 in normal times

-5.0 Selling pressure from -15.0 institutional investors

-10.0 -30.0 -5 0 5 10 15 20 25 30 35 40 -5 0 5 10 15 20 25 30 35 40 Trading days post / (prior to) announcement Trading days post / (prior to) announcement

Retail investors 3 Institutional investors 4 Institutional allotment date range 5 Retail allotment date range 5

1 Represents aggregated trading around all capital raisings during the COVID-19 period (21 February 2020 to 30 November 2020), rebased to 5 trading days prior to announcement 2 Represents aggregated trading around all capital raisings from 1 January 2010 to 20 February 2020, rebased to 5 trading days prior to announcement 3 Represented by the aggregate trading of the following retail platforms: ANZ, Bell Direct, CBA/CommSec, CMC Markets, NAB and WBC 4 Represented by the aggregate trading of the following investment banks: Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, J.P. Morgan, Macquarie, Merrill Lynch, Morgan Stanley, RBC, UBS 5 Based on 25th to 75th percentile of all capital raisings from 1 January 2010 to 20 February 2020 (for normal times) Source: Vesparum, IRESS

6 5. Short selling Short selling: Hedge fund trading has been more prevalent around capital raisings during the COVID-19 period, increasing indirect costs

Average aggregate short position (%)

Announcement date 1.8%

Increase in short positions seen between the announcement and 1.6% allotment dates Short positions appear to be closed out around the 1.4% institutional allotment date

1.2%

1.0%

0.8% -20 -15 -10 -5 0 5 10 15 20 25 30 35 40 Trading days post / (prior to) announcement

Normal times 1 COVID-19 period 2 Institutional allotment date range 3 Retail allotment date range 3

1 Average aggregate short position of all companies that have announced a capital raising between 16 June 2010 and 20 February 2020 (based on available ASIC data), rebased to 5 trading days prior to announcement. 2 Average aggregate short position of all companies that have announced a capital raising during the COVID-19 period (21 February 2020 to 30 November 2020), rebased to 5 trading days prior to announcement. 3 Based on 25th to 75th percentile of all capital raisings from 1 January 2010 to 20 February 2020 (for normal times) Source: Vesparum, ASIC

7 Case study: Ooh!Media Ooh!Media is one of many examples of capital raisings with strong retail support and significant short selling activity by hedge funds

Refer to Appendix for other examples of similar OML – Cumulative net value traded (A$ millions) trading activity for Webjet, Kathmandu, Southern Rebased to 20 trading days prior to announcement Cross Media, Flight Centre and Monash IVF

Announcement Institutional Retail date allotment date allotment date (26-Mar-20) (3-Apr-20) (23-Apr-20) 60 16% Significant short selling activity, 40 leading into announcement and 14% around the institutional allotment date 20 12%

0 Strong support from 10% retail investors -20 8%

-40 6%

-60 4%

-80 2%

-100 0% -20 -15 -10 -5 0 5 10 15 20 25 30 35 40 Trading days post / (prior to) announcement

1 2 Retail investors (LHS) Institutional investors (LHS) Aggregate short position (RHS)

1 Represented by the aggregate trading of the following retail platforms: ANZ, Bell Direct, CBA/CommSec, CMC Markets, NAB and WBC 2 Represented by the aggregate trading of the following investment banks: Citi, Credit Suisse, Deutsche Bank, J.P. Morgan, Goldman Sachs, Macquarie, Merrill Lynch, Morgan Stanley, RBC, UBS Source: Vesparum, IRESS, ASIC

8 Case study: NEXTDC NEXTDC provides an example of different trading behaviour, influenced by a policy to allocate away from hedge funds

NXT – Cumulative net value traded (A$ millions) Rebased to 20 trading days prior to announcement

Announcement Institutional Retail date allotment date allotment date (2-Apr-20) (7-Apr-20) (7-May-20) 120 12.0% Strong support by 100 institutional investors in 10.0% the aftermarket 80 8.0%

60 6.0%

40 4.0% Selling pressure at SPP 20 allotment date driven 2.0% by uncapped SPP 0 0.0%

-20 -2.0%

-40 -4.0% -20 -15 -10 -5 0 5 10 15 20 25 30 35 40 Trading days post / (prior to) announcement

1 2 Retail investors (LHS) Institutional investors (LHS) Aggregate short position (RHS)

1 Represented by the aggregate trading of the following retail platforms: ANZ, Bell Direct, CBA/CommSec, CMC Markets, NAB and WBC 2 Represented by the aggregate trading of the following investment banks: Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, J.P. Morgan, Macquarie, Merrill Lynch, Morgan Stanley, RBC, UBS Source: Vesparum, IRESS, ASIC

9 Key takeaways A deep understanding of investor behaviour is critical when making capital raising allocations to optimise aftermarket performance

Trading behaviour and allocation implications

Investor type Trading behaviour observed during 2020 Allocation implications and lessons for 2021

• Issuers should have confidence in the retail Retail investors • Strong on-market support around capital raisings component of their register and structure capital raisings accordingly

• Significant variability in behaviour • Data is imperative to understand likely behaviour to Institutional investors • Behaviour can be driven by broader portfolio weightings and performance relative to benchmark optimise allocations and aftermarket performance indices

• Short selling behaviour evident around capital raisings • The indirect costs of raising capital are typically Hedge funds • Behaviour can be driven by short term arbitrage higher when allocations are made to hedge funds opportunities

10 Key takeaways Vesparum uses its proprietary data on investor behaviour to target investors, optimise allocations and improve aftermarket performance

Selected active institutional investors

Note: All logos and brands are registered trademarks of their respective owners. Source: Vesparum proprietary databases

11 Key takeaways Truly independent advice is critical for companies raising capital, given potential conflicts of interest

Factors that should be considered: Potential to result in suboptimal capital raising outcomes

Dual agency • Investment banks typically earn fees on both sides in a capital raising – directly from the company issuing shares and indirectly from Misaligned incentives investors via future trading commissions.

• The investment banks have particularly strong relationships with institutional investors who Information asymmetry frequently participate in their capital raisings.

• This can make it challenging for the investment Lack of transparency banks to act in the best interests of both parties, since the interests of the company and investors often diverge.

Illusory underwriting • This may help to explain why shares issued in capital raisings are often heavily discounted and end up in the hands of hedge funds, rather than Suboptimal timing the best long term shareholders.

12 About Vesparum Vesparum is uniquely placed to help Boards and management teams optimise capital raising transactions

• The difficulty for each issuer to determine and discharge its duty to act in the best interests of the company as a whole demonstrates that companies need truly independent advice in the capital raising process. • Issues which should be front of mind for directors include optimising for timing, structure, pricing, quantum, risk/underwriting, fairness, register evolution, adviser selection, allocation decisions and aftermarket trading. • Vesparum has a strong track record of providing independent capital raising advice. o 80+ ASX-listed clients; 20+ private clients; 50+ capital raisings; 90%+ clients from referrals. o Predictive capital raising models and reports for ASX-listed companies based on comprehensive data on 300+ transaction variables including offer structures, fees and underwriting terms. • We work constructively with a wide range of banks, brokers and investors, leveraging data to optimise all of the key decisions in the best interests of each company and its shareholders. • Vesparum’s team combines backgrounds in investment banking, management consulting, asset management, law and data science. o Advisory team: Previous experience at top-tier firms including Macquarie, UBS, Morgan Stanley, Bank of America Merrill Lynch, Lazard, Bain & Company, L.E.K., Optiver and King & Wood Mallesons. o Data science team: World-class academic backgrounds in quantum physics, mathematics and actuarial sciences which puts us at the forefront of equity capital markets innovation globally.

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13 Appendix COVID-19 period case studies

14 A. COVID-19 period case studies We analysed trading behaviour around placements and entitlement offers in April, with five capital raisings worth highlighting

Institutional Institutional Date Discount to Amount Company Structure component component Case study announced last close (%) raised (A$m) (A$M) (% of total)

Webjet 1-Apr-20 55% 346 228 66% Refer to page 16

Kathmandu 1-Apr-20 51% 202 150 75% Refer to page 17

Southern Cross Media 6-Apr-20 45% 169 149 88% Refer to page 18

Flight Centre 6-Apr-20 27% 701 563 80% Refer to page 19

Monash IVF 27-Apr-20 27% 80 65 81% Refer to page 20

Legend: Placement Entitlement offer

Source: Vesparum, IRESS

15 A. Case study: Webjet Strong support from retail investors, however short selling activity by hedge funds likely increased the indirect costs of raising capital

WEB – Cumulative net value traded (A$ millions) Rebased to 20 trading days prior to announcement

Announcement Institutional Retail date allotment date allotment date (01-Apr-20) (14-Apr-20) (28-Apr-20) 1,500 12.0%

Short selling activity Strong support from 1,000 around the institutional retail investors 10.0% allotment date

500 8.0%

0 6.0%

-500 4.0%

-1,000 2.0%

-1,500 0.0% -20 -15 -10 -5 0 5 10 15 20 25 30 35 40 Trading days post / (prior to) announcement

1 2 Retail investors (LHS) Institutional investors (LHS) Aggregate short position (RHS)

16 A. Case study: Kathmandu Strong support from retail investors, however short selling activity by hedge funds likely increased the indirect costs of raising capital

KMD – Cumulative net value traded (A$ millions) Rebased to 20 trading days prior to announcement

Announcement Institutional Retail date allotment date allotment date (01-Apr-20) (9-Apr-20) (24-Apr-20) 600 2.1% Short selling activity 400 around the institutional 1.8% allotment date 200 1.5%

0 Strong support from 1.2% retail investors -200 0.9%

-400 0.6% Short selling activity -600 around the retail 0.3% allotment date -800 0.0% -20 -15 -10 -5 0 5 10 15 20 25 30 35 40 Trading days post / (prior to) announcement

1 2 Retail investors (LHS) Institutional investors (LHS) Aggregate short position (RHS)

17 A. Case study: Southern Cross Media Strong support from retail investors, however short selling activity by hedge funds likely increased the indirect costs of raising capital

SXL – Cumulative net value traded (A$ millions) Rebased to 20 trading days prior to announcement

Announcement Institutional Retail date allotment date allotment date (06-Apr-20) (20-Apr-20) (4-May-20) 125 8.0% 100 Short selling activity around the institutional 7.0% 75 allotment date 6.0% 50 25 5.0%

0 Strong support from 4.0% retail investors -25 3.0% -50 2.0% -75 -100 1.0% -125 0.0% -20 -15 -10 -5 0 5 10 15 20 25 30 35 40 Trading days post / (prior to) announcement

1 2 Retail investors (LHS) Institutional investors (LHS) Aggregate short position (RHS)

18 A. Case study: Flight Centre Strong support from retail investors, however short selling activity by hedge funds likely increased the indirect costs of raising capital

FLT – Cumulative net value traded (A$ millions) Rebased to 20 trading days prior to announcement

Announcement Institutional Retail date allotment date allotment date (06-Apr-20) (17-Apr-20) (8-May-20) 1,500 15.0% Short selling activity around the institutional Strong support from 1,000 allotment date retail investors 12.0%

500 9.0%

0 6.0%

-500 3.0%

-1,000 0.0% -20 -15 -10 -5 0 5 10 15 20 25 30 35 40 Trading days post / (prior to) announcement

1 2 Retail investors (LHS) Institutional investors (LHS) Aggregate short position (RHS)

19 A. Case study: Monash IVF Strong support from retail investors, however short selling activity by hedge funds likely increased the indirect costs of raising capital

MVF – Cumulative net value traded (A$ millions) Rebased to 20 trading days prior to announcement

Announcement Institutional Retail date allotment date allotment date (27-Apr-20) (6-May-20) (27-May-20) 30 6.0%

Strong support from 20 retail investors 5.0%

10 4.0%

Short selling activity 0 around the institutional 3.0% allotment date -10 2.0%

-20 1.0%

-30 0.0% -20 -15 -10 -5 0 5 10 15 20 25 30 35 40 Trading days post / (prior to) announcement

1 2 Retail investors (LHS) Institutional investors (LHS) Aggregate short position (RHS)

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