On the surface, the public stock market by definition is a broadly inclusive marketplace, where investors of all shapes and sizes ranging from large pension funds and asset managers all the way down to the individual retail investor can easily buy and sell shares of listed companies from one another. A recent wave of innovative digital stockbrokers have driven commissions for retail investors down to zero, whilst an array of publicly available information remains easily accessible so that retail investors are able to make well-informed decisions. It is important to note however that what I have just described above reflects the secondary capital markets, where investors buy and sell shares already listed on the public stock markets. When companies issue new shares in order to raise capital, through either an IPO or a discounted follow-on equity issuance, this level of inclusivity has generally broken down. Historically, these attractively priced deals were offered almost exclusively to large institutional investors, effectively shutting out retail investors.
Now, before the proverbial finger is pointed at investment banks, who typically advise and control these processes, it is important to note that there were valid and entirely rational reasons behind why this was the case. This largely boiled down to two key factors – timing and certainty.
Institutional-only capital raises can be launched and completed without a prospectus in a matter of hours. When retail investors are added into the mix, this typically would extend the deal timeline to days or even weeks whilst introducing significant complexity around retail distribution, order management and regulation. With speed and certainty absolutely critical to the majority of these deals, it is no surprise that listed companies opted for institutional-only offers. This is a significant problem that unfairly affects retail investors and one that resonated strongly with the Outward VC team, which is a big reason why almost a year ago we invested in PrimaryBid to support its mission of ‘democratising equity capital markets’. PrimaryBid provides publicly listed companies with a technology platform that enables retail investor participation in capital raisings alongside blue-chip institutional investors as part of the same accelerated process, and most importantly, on the same discounted terms. Once a deal has been launched and publicly announced to the market, retail investors wishing to participate have a window of opportunity to place an order through the PrimaryBid app with their debit or credit card. Individual orders are then aggregated by PrimaryBid and routed to the company as a single order in guaranteed, cleared funds. This entire process addresses the complexity issues of old, delivering both time efficiency and certainty for listed companies and investment banks as well as a level of access for individual investors that the market has lacked for decades.
As industries still come to terms with the profound impact of COVID-19 on societies and economies, this speed and certainty has never been more important in the context of raising capital, as listed companies in their droves seek to raise record breaking levels of capital in order to protect their futures, and in some cases, seize opportunities for growth.
The last four months in particular has seen PrimaryBid grow rapidly to become the UK market’s go-to solution for retail offerings and effectively revolutionise the public markets in the process. In May 2020, Compass Group became the first FTSE 100 business to carry out a retail offer alongside an accelerated institutional capital raise, with PrimaryBid acting as the conduit to access retail investors. PrimaryBid’s technology has since been used by dozens of companies across the FTSE 100, FTSE 250 and AIM, including other household names such as Ocado, Aston Martin and William Hill with international expansion also well in its sights.
It is not hyperbole to say that the impact of PrimaryBid on public markets has been transformational. Firstly, it is providing listed companies with the ability to engage with and efficiently include its retail shareholder base in the capital raising process and respect corporate governance principles relating to the fair treatment of all shareholders, which simply was not possible before. It is also democratising access to the primary markets for retail investors, and in doing so, democratising the potential for ‘alpha’ returns.
Alpha measures the performance of a stock against a relevant market index, and is a key metric in assessing the performance of an actively managed fund, where returns from attractively priced primary share offerings can often form a strong component of alpha. When analysing the aftermarket performance of listed companies that completed retail offerings through the PrimaryBid platform in recent months, it paints an interesting picture. Two-dozen retail offers were completed through PrimaryBid between the months of April to June 2020. Based on closing prices as at 17 July 2020, the retail offers have generated a blended average return of 19%. Benchmarked against the average returns of relevant indices over the period of 2% this implies an alpha return of 17%, which is impressive by any standard.
Now it is important to keep in mind that PrimaryBid is not providing recommendations to retail investors on its platform, it is simply providing access to these deals that were previously inaccessible. Secondly, there is absolutely no guarantee that discounted share prices and a fresh capital raise will lead to a company delivering positive returns. It is therefore imperative that sophisticated retail investors are able to assess each opportunity on its own merit. That being said, it is difficult to deny that the so-called democratisation of primary markets provides the potential for retail investors to generate alpha returns that were previously only available to large financial institutions, creating more of a level playing field for retail investors in the last four months than has been seen over the last four decades.
We therefore feel incredibly excited to see how far PrimaryBid and other innovators in the space can go in driving capital markets forward to a place where it is truly transparent, open and inclusive to all of its participants. Whilst it is still early days, the data would suggest that they are on the right track.
If you’re keen to hear more, the founder Anand Sambasivan and Andi Kazeroonian from Outward VC will be discussing the future of equity capital markets on the Innovate Finance panel @2pm 30-July. Register here.
