Capital is the cornerstone of a company’s financial strength. Periodically, companies may need to raise capital for various purposes. Investors participate in capital raisings to fund companies’ operations or growth for financial benefits. Understanding different types of capital raising is the first step for investors entering capital markets.

Broadly speaking, companies need to raise both debt and equity capital, and they can go to either public or private markets for raise funds.

Public Market:

Refers to a publicly traded exchange, such as New York Stock Exchange or Australian Securities Exchange (ASX), where it allows a broader investor base to participate. Or it can also refer to Over-the-counter (OTC) market where buyers and sellers can trade with the facilitation of brokers or traders. Capital raisings in public markets can potentially reach a broader audience, while also being subject to more stringent rules and public scrutiny.

• Initial Public Offering (IPO) – refers to a private company offering its shares for the first time to the public via a capital raising and listing on a stock exchange. The company must meet listing requirements of the exchange and lodge compliance documents such as a Prospectus, in which must be disclosed the nature of the business and potential risks.  An IPO allows a company to achieve several strategic goals, such as increasing brand awareness and financial credibility, providing incentives for employees and exit opportunities for early investors, and improving corporate governance.  It also has future implications for a company’s operations and strategies, for example, if a company wants to acquire a new business, it can issue shares to create additional instead of depleting cash holdings or using debt. For investors, a good quality IPO opportunity may present strong growth potential, but it remains essential to do thorough research and read relevant disclosure documents as investment risk will still be present.
• Rights Issue/Entitlement Offer – companies already listed can raise additional capital from its existing shareholder via a rights issue. Shareholders receive the right to purchase additional shares, usually pro-rata to their existing holdings at a discounted price. Companies usually specify a period for shareholders to exercise this right. Sometimes this right is renounceable, meaning investors can sell or transfer this right to other investors should they choose not to participate. It can also be non-renounceable, which means shareholders can either participate or give up the right without monetizing it. Rights issues enable companies to raise capital and at the same time allow investors to maintain their level of ownership. However, investors also need to decide if the terms of the issue are beneficial to them.
• Corporate Bonds – Companies can also raise capital from bond markets by issuing corporate debt/bonds, which deliver investors regular interest payments. Like issuing equity capital, bond issues must also be registered with regulators and be accompanied with relevant documents, such as an Information Memorandum. Some bonds can be accessed via an exchange, although the majority trade on the OTC market. Companies engage debt arrangers and sometimes also rating agencies for investor communication, and pricing terms. Issuing bonds has many benefits for companies. They can save tax because bond interest payments are tax deductible, and they provide predictable cash flows.
• Capital Notes (listed hybrids) – Companies also utilise capital notes to raise funds. These instruments have both bond and equity features. The most common ones are preferred shares, for which the companies must pay a fixed distribution, but holders do not exercise voting rights.  Some capital notes allow investors to convert to equity ownership at a later date, to delay an immediate dilution. In an Australian context, financial institutions such as banks or insurance companies also raise listed hybrids, which is a type of regulatory capital under BASEL III framework and classified as additional tier common capital that is traded on the ASX. These instruments pay investors high coupons but are also subject to the risk of write-off or conversion at the discretion of the banking regulator, APRA.

Private Market:

Refers to capital markets with participation limited to a small group of investors who must meet regulatory definition for eligibility.  Different countries or regions might differ in their regulatory requirements for investors eligibility, but because of limited participation, regulators would exempt companies from issuing a Prospectus or other disclosure documents required in public market raising. Traditionally, private markets are only available to institutional investors. However, product innovation and new technologies have made private market opportunities more broadly available.

• Private Placements/Loans: Companies may raise money from a selected group of investors through debt or equities. Even public companies can raise equity via private placements. By only offering to a small group of investors, the raise usually can be completed very quickly compared to a rights issue. The issuer still must disclose terms of the raising to the public, and also consider potential dilution to the broader shareholder group. In Australia, ASX Listing Rule 7.1 restricts companies from placing more than 15% of outstanding capital without shareholder approval. Similarly, companies can raise private debt from a small group of investors and without issuing corporate bonds. Companies must pay a higher interest rate to compensate private debt holders for liquidity risk. Companies may also turn to banks, non-banking institutions and private lenders for private loans.
• Private Equity (PE)/Venture Capital (VC): Early stage or smaller size private companies usually turn to private equity or venture capital for money used in expansion, growth or restructuring. Companies usually give up certain amount of ownership in exchange for not only capital but also management expertise, market knowledge, distribution channel or acquisition opportunities.  Investors participate in private equity or venture capital raisings hoping to profit from a gain in a company valuation, a trade sell or future IPO of the company.

The list above is far from exhaustive. Advancement in capital markets means companies can choose from a variety of avenues to meet their capital needs, while offering investors a range of risk-return opportunities. In order to achieve a desired result, investors must decide the type of capital raisings that suits them.

Learn more:  Understanding the basics of Capital Raisings

Important Information

The information contained in this article is gathered from multiple sources believed to be reliable as at January 2024 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. NAB recommends that you seek independent legal, property, financial and taxation advice before acting on any information in this article. Past performance is not necessarily indicative of future results. No warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither NAB or any of its related entities accept liability to any person for loss or damage arising from the use of this information. ©2024 NAB Private Wealth is a division of National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.