Private Placement Frenzy

PRIVATE placements are all the rage over the past year as listed entities hog the equity market for fundraising.

In a pandemic-hit economic environment, it has become a cheaper and more efficient avenue to raise cash, particularly for those whose financial performances are quite weak.

Among common reasons to raise funds are for working capital requirements, business expansion and also diversification into new fields, which was among the more prominent reasons last year as companies jumped on the Covid-19 bandwagon from rubber gloves to personal protective equipment (PPE) to vaccines.

The hype began after Bursa Malaysia announced relief measures and fundraising flexibilities last year which eased the general mandate threshold for new issue of securities.

The relaxation allows a listed issuer to increase its general mandate threshold for new issue of securities up to 20% from the previous 10% of its total number of issued shares.

Since then, there were at least 59 instances of private placements up until yesterday.

For the year 2020, the Securities Commission (SC) reported a strong growth of 76% in secondary issuances, which came up to RM8bil.

As noble as Bursa Malaysia’s intention was, certain companies have seemingly taken advantage of the flexibilities.

An investment banker said while the initial intention by Bursa Malaysia to relax the general mandate was noble, it was sadly misused by opportunists. “Many did private placements last year. Whether they need it or not, that’s a separate story.

“The whole idea why the placement rules were relaxed last year was to make it easier for companies to raise funds in case they are facing financial difficulties but this also created the emergence of opportunists.”

The prices of some stocks jumped significantly post-private placements, some of which have earned Bursa Malaysia’s unusual market activity (UMA) queries.

Rakuten Trade head of equity sales Vincent Lau said the movement in share prices may be driven by news flows and investors may want to be part of the turnaround stories or the companies’ ventures into new businesses.

“Bursa has issued the UMA many times. That is part of the safeguards. But to keep the market vibrant, it’s good to have all these volatilities, as long as it is within the guidelines.

“On a longer-term perspective, it will be alright if investors choose fundamentally strong stocks to invest in, ” he says.

Lau believes the trend of private placements are likely to continue this year as companies take advantage of the liquidity in the market to raise funds than going to the banks for borrowings.

The process is much more straightforward, faster and companies do not have to worry about interest costs.

And for those with weak financial statements and depleting cash flows, it will take a longer time and more collateral to convince banks to lend and even so, the interest rates may not be at desired levels to factor in the risks that the banks have to assume.

Vision Group managing partner Chua Zhu Lian shares the same view, saying that the key reasons why companies continue to raise funds include to strengthen their capital buffers amidst a more challenging business environment, to expand and to take advantage of new business opportunities from new market dynamics or to diversify and pivot for the survival of the business.

“This trend of private placements could signify the evolution of business models by companies in Malaysia.

“I believe we will see more diversity in our exchange and investors will have access to more types of business from what we currently have, ” he says.

On the sharp increase in prices of some counters that have undergone private placements, Chua says it could be due to the increase in liquidity from retailers as the capital market were vibrant, arising from the working from home trend.

“The emergence of influencers and ease of spreading information via channels such as Stockbit, WhatsApp, Telegram, Facebook and Instagram have also given rise to new inputs and increased market participation but investors will need to exercise extra caution on the quality of information, as what the SC has shared, ” he adds.

Trident Analytics chief research officer and former fund manager Peter Lim foresees that the number of private placement activities will decrease, moving forward, saying that companies that are genuinely in need of capital will still do it.

“The thing about private placement is that it is only for a selected few or qualified investors, so somehow, it sometimes raises questions on who they are.

“A private placement is always a privilege to a selected few whereas a rights issue, which goes to every shareholder, is a fairer way of fundraising, in my view, ” he says.

There have been at least 15 proposed private placements this year, the latest of which comes from Vsolar Group Bhd, which is seeking to raise around RM22.5mil, to be utilised for the working capital for its Solar PV projects.

Its previous private placements in January and November raised RM9.3mil and RM7.2mil, respectively, also for its working capital.