Overview
The beginning of June marked the second anniversary of SPP Harvester. In our second year, SPP Harvester gained access to 15 in the money1 Share Purchase Plans (SPPs), 10 of which were harvested2. Over this period, SPP raisings have echoed global capital raising activity more generally. Capital raising experienced a flurry of activity in the second half of 2021, before grinding to a halt this year as the war in Ukraine and inflationary pressures made many companies reluctant to issue capital. By way of comparison, SPP Harvester harvested 41 SPPs in the first 12 months of operation.
Whilst the number of SPPs decreased from the first to the second year of operation for SPP Harvester, the number of full allocations for SPP Harvester also decreased. This was no doubt due in part to the prolonged fiscal and monetary stimulus that has led to a substantial level of pent-up investor demand.
Discounts and Returns
The discount offered to SPP Harvester investors at the SPP announcement date in their second year ranged from 1.9% to 18.8%, which was broadly in line with year 1. However, market volatility meant that this discount did not always translate into returns.
Out of the 10 successful SPPs eligible to SPP Harvester members in the second year of operation, 7 were profitable. Based on a $15,000 application, the Aussie Broadband SPP led returns, resulting in a $1,120 profit3. This was followed by Macquarie Group, and Pendal Group returning $880 and $490 respectively3. These returns were mostly eroded due to the Zip Co Ltd SPP which resulted in a $1,770 loss based on a $15,000 application3.
Since the launch of SPP Harvester a little over 2 years ago, we have seen how the frequency of SPPs affects overall returns. Nonetheless, even though the number of SPPs was down during this period, both relative to the previous year and the long-term average of SPPs, SPP Harvester has averaged a return of 11.7% for each SPP since inception3. This aggregation of marginal gains and the ability to efficiently recycle capital into each SPP, is why we expect SPP Harvester to post positive returns irrespective of market direction.
Outlook
So, what now? History suggests that following a period of robust capital raising activity, there is typically a slow down before a mean reversion occurs. Whilst the last 12 months reflect this general trend, markets are now also confronted with extreme uncertainty and volatility. Against this backdrop, we expect that over leveraged companies that undertake emergency capital raisings to recapitalise their balance sheets will need to have deeper discounts to attract institutional investors. Deeper discounts should be, of course, good for the SPP Harvester model.
On the other hand, it is our experience that the number of capital raising is inversely correlated to market volatility. While we can’t predict the future, we anticipate that there will be less SPPs, but at deeper discounts, in the short term. Then, as market volatility (to be distinguished from the absolute market level) declines, and interest rates rise, we anticipate that a larger number of companies will seek to raise equity as they recalibrate their debt/equity ratios. SPP Harvester returns are correlated with a higher number of SPPs, as well as the size of the discount.
In both cases, it is our belief that the uncertain outlook of inflation and central bank interest rate settings combined with geopolitical tensions and supply chain bottlenecks will lead companies to be more inclined to accept higher amounts raised in SPPs and impose less scale-back on applications. High levels of scale-back in the past 2 years have been a drag on our expectations of SPP Harvester returns.
After this period of reset occurs, we have no reason to believe that the number of SPPs by SPP300 companies will not return to its long-term average of 29 SPPs per year.
To review past and upcoming SPPs, please click here.
1. In the money means the SPP has a Price Fall Protection clause or the SPP price (after adjusting for any differences in the dividend or distribution entitlements) is less than the opening price on ASX, on the SPP Harvester Acceptance Date.
2. Harvested SPPs include SPPs that SPP Harvester members successfully received an allocation for
3. Before brokerage and fees