- Cornerstone investments could bolster a broader capital raising by a listed company.
- Each cornerstone investment will tend to have its own unique structure and considerations.
- ASIC’s recent changes have made it easier to implement cornerstone investments.
The spate of equity capital raisings around the globe since the onset of the GFC has led to a cross-pollination of transaction ideas as well as investors.
One recent Atlantic import in the Australian market is that of ‘cornerstone investments’ or ‘PIPEs’ (private investment in public equity, a term used mainly in the context of private equity firms investing). This type of investment is where an investor acquires a significant stake as part of a broader capital raising by a listed company. Investors include sovereign wealth funds, private equity firms, wealthy families and the relatively ‘cashed up’ public companies.
Examples of cornerstone investments in the Australian market include Singapore’s Government Investment Corporation’s A$430 million investment in GPT and Warburg Pincus’ announced participation in Transpacific Group Limited’s A$800 million capital raising.1
ASIC’s recent pronouncements on broadening the takeovers exception for rights issues and its associated ‘class order’ relief for accelerated rights offers have also made it easier to implement a cornerstone investment.
Why a cornerstone investment?
Listed companies are taking part in the global process of deleveraging—the essence of which is the replacement of debt with equity. While there are a number of ways in which to do this (including asset sales to pay down debt), a significant deleveraging will often involve a placement or a rights offer or a combination of the two.
For the listed company, a cornerstone investment may be particularly attractive because:
- it adds momentum and certainty of success to a broader capital raising offer to existing shareholders, especially where the cornerstone investor underwrites or subunderwrites the offer
- it allows retention of an interest in assets and businesses that may be undervalued in difficult economic conditions or with a sub-optimal capital structure, and
- it introduces a significant ‘friendly’ shareholder that is familiar to the listed company and other shareholders by the end of the process.
Cornerstone investors are generally investors who find themselves in the enviable position of having cash in this deleveraging environment. They have different motives, but in surveying their investment choices, they may find an investment in a listed company a better option because:
- the private market for assets still suffers from divergent buyer and seller expectations as there is no price benchmark of a quoted security
- some may want a relatively passive investment and may take comfort from the presence of other institutional investors on the register
- conversely to the last point, some may value an influential position in the listed company without a more substantial investment with a takeover
- some may like the relative liquidity of the public markets, and
- they may also be able to take advantage of existing debt within the listed company in circumstances where they could not raise equivalent levels of debt to acquire an ungeared investment (or not on the same terms).
Features of cornerstone investing in Australia
Cornerstone investments may be made via a placement which is subject to a ‘15 per cent placement capacity’ rule for ‘equity securities’.
Broadly, this rule restricts a listed company from issuing ‘equity securities’ totalling more than 15 per cent of its issued ordinary shares in a 12-month period without shareholder approval.
Equity securities are defined broadly in the ASX Listing Rules, and most securities giving the cornerstone investor exposure to ‘equity upside’ are likely to be the subject of the ‘15 per cent placement capacity’ limit.
Cornerstone investments may also result in a more significant holding where this is in conjunction with a rights offer. A typical rights offer and its underwriting or sub-underwriting may be conducted without shareholder approval as an exception to the ‘15 per cent placement capacity’ rule.
In the last nine months, rights offers in Australia have usually been structured as ‘accelerated offers’—institutional investors are given a shorter timeframe within which to decide and settle on an offer, with the offer to retail investors following a more usual timetable.
Accelerated offers result in better ‘deal momentum’ with an announcement of a successful institutional tranche being able to be made as early as the day after the institutional offer opens. Announcement of a firm cornerstone investment and an underwriting or sub-underwriting of the rest of the offer can also significantly enhance ‘deal momentum’.
Underwritings and sub-underwritings will require special consideration of the ‘20 per cent stop rule’ under Australian takeover provisions as well as potential prospectus or other public offer liability issues.
While there is a specific exception from the ‘20 per cent stop rule’ under Australian takeover law for underwritings and sub-underwritings in a rights offer or prospectus context, there may be technical reasons that the exception is not available. Regulatory relief is often required, although ASIC has recently released ‘class order’ relief which should reduce the need for individual relief going forward and has indicated a facilitative approach to capital raisings. Even where the exception is available, the Takeovers Panel guidelines on when it may declare ‘unacceptable circumstances’ in relation to the underwriting should also be considered.
Combined with partial disposals
Cornerstone investments need not involve a rights offer. Chinalco’s aborted investment in Rio Tinto Limited is an example of a combination of a capital raising (within the ‘15 per cent placement capacity’ constraint) together with what are essentially partial asset disposals through joint ventures in the listed company’s assets.
There are structural differences with a more direct investment in particular assets which may address particular concerns specific to the company or reflect the other commercial drivers of the investment for the cornerstone investor.
Asset disposals may involve consideration of the Listing Rules requiring significant changes to the nature or scale of a listed company’s activities to be approved by shareholders. Here, examples from happier times, such as the Seven Network-KKR or PBL Media-CVC transactions, may be dusted off as precedents.2
Considerations for listed companies
Listed companies have the difficult task of weighing up the various options for deleveraging. Capital raisings are often at a discount, and sometimes a significant discount, to the recent trading price. Introducing a cornerstone investor at depressed prices, like all discounted offers, dilutes existing shareholders at prices that may not reflect the company’s true value.
Outside of those commercial considerations, listed companies should also:
- have a clear understanding of the role the cornerstone investor is looking to play and the level of influence and interaction it will seek, whether or not this is documented. Much of the future interaction with the cornerstone investor will be in the ‘shadow’ of their sizeable stake and the influence at general meetings this brings
- be mindful of the various ways in which a structured investment beyond a simple share acquisition may play out in the future. Cornerstone investments may involve complex structures which constrain the listed company’s future activities, and
- ensure it understands the special regulatory risks or timing considerations around structuring a cornerstone investment.
In addition to the rules already discussed, other regulatory issues include related party transaction restrictions in both the Corporations Act 2001 (Cth) and the Listing Rules (especially where the cornerstone investor is an existing substantial shareholder), Foreign Acquisition and Takeover Act, and sector-specific ownership legislation and any competition or anti-trust issues.
Considerations for cornerstone investors
Potential cornerstone investors may be more familiar with investments in private companies, and there are a number of issues they should consider with an investment in a listed company including:
- the type of securities to be issued (for example, convertible preference shares)—this may address concerns around control, ranking against other investors if circumstances deteriorate and ‘change of control’ triggers in bank facilities or material contracts
- governance issues—cornerstone investors such as private equity houses or hedge funds may be used to extensive control rights which may be difficult to replicate in a listed company context. This may affect the type of security issued
- directors duties and confidentiality—rules around directors duties to the company and the shareholders as a whole will have different applications for directors on a listed company board to one on a wholly owned investee board, with greater potential liability. There are also more technical rules around board composition of a listed company
- due diligence—the degree of due diligence required and ‘leveraging’ off existing due diligence processes, and
- drag-alongs and tag-alongs—cornerstone investors will find it difficult to come to an arrangement with other significant holders without the application of the ‘20 per cent stop rule’ under Australian takeover laws.
It would be difficult to transpose some cornerstone investors’ requirements in a private company context into the listed company sphere, but with careful structuring and consideration it may be possible to address the issues in acceptable ways.
Some have suggested that cornerstone investments are a growing trend and one that will continue for a while longer. Listed companies will continue to require equity capital. With the larger listed companies dominating the capital raisings in the last nine months, the middle tier of listed companies may soon be more of a focus and they may find cornerstone investments essential to a broader capital raising.