April was a record-breaking month, with 37 placements raising a total of $13 billion, compared to a similar spike in the number and size of capital raisings from placements in October 2009, where the number of placements within a single month hit $7 billion, according to Zenith Investment Partners.
The firm’s report on Australian Shares – Large Companies revealed that similar to the Global Financial Crisis (GFC), the deterioration of the economy resulted in companies raising capital to shore up balance sheets. However, this time around, companies with growth ambitions also took the opportunity to tap the market for additional capital.
Jacob Smart, senior investment analyst at Zenith, stressed that on 1 April 2020, the Australian Stock Exchange (ASX) additionally eased capital raising rules which made it easier for companies to raise additional capital due to COVID-19.
“With this temporary rule change, we saw companies such as Flight Centre and NAB, shore up balance sheets at a rate reminiscent of the GFC,” he said.
“Some company behaviour we saw was somewhat opportunistic, with companies that were unaffected or less impacted by COVID-19 also raising capital. Rather than fortifying their balance sheets, companies such as NextDC and Breville raised capital for growth initiatives such as acquisitions and investment.”
Of the 57 placements between 21 February, 2020 and 31 May, 2020, Zenith’s rated managers participated in 43 which produced an average return of 33%.
According to Smart, during the GFC, the growth investment style exhibited a stronger degree of capital protection in the drawdown, whilst the value investment style significantly outperformed in the subsequent recovery and, although the full effects of COVID-19 were not yet known, it appeared as if history is repeating itself.
“Unsurprisingly, value managers were prominent in the placements of more distressed companies such as Metcash, Kathmandu and Flight Centre. Whilst companies without balance sheet issues such as Ramsay Health Care, IDP Education and Cochlear were popular amongst the growth managers,” Smart said.
