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This is a golden opportunity to show the merits of stock markets


Jessica Ground

Jessica Ground

Global Head of Stewardship

In its long history, rarely has the smooth functioning of the equity market been more important. The survival of vast swathes of UK plc, and therefore British jobs, will depend on the ability of companies to raise money from stock market investors in the months ahead.

This is unlikely to be isolated or limited cases. The pervasive and complex nature of the Covid-19 crisis will test the breaking point of many companies, even ones that were otherwise perfectly healthy.

Airlines, retailers and tour operators are already seeking injections of capital, but many more industries will follow. Many are already drawing down on credit lines; it seems inevitable that the next step for many is fresh equity.

This sets the stage for a pivotal moment in the world of equity investing, a test of its very raison d’etre.

Much has been made of the drift to private equity – more companies are choosing private ownership, shying away from the red tape associated with public ownership and the money that has flown into private equity funds.

Research published by Schroders last year showed the number of companies listed on the UK main market had fallen by more than 70% since the mid 1960s. This is a concern for a number of reasons, the most pressing being the lower levels of accountability among private companies and the increased difficulty for individual savers to access these investments.

The equity market now has a golden opportunity to demonstrate its merits for both companies and savers. 

For long-term savers who believe that there could be interesting opportunities in the current market turmoil, accessing them is relatively easy. Equities are democratic, and savings vehicles like ISAs make it simple for individuals to support UK plc.

Many companies are looking at fundraising for survival, others for acquisitions to consolidate their competitive advantage during this time. In both cases speed may be of the essence. 

In raising equity, management teams face a range of options. A full rights issue is a route popular with investors because it provides maximum information and does not usually dilute existing shareholders. But the process is slow; companies, for instance, must produce a full prospectus.

At the other end of the spectrum, companies can raise money through a variety of more unorthodox methods, such as “cash box” placements of up to 20% of their existing market capital.

We typically have not supported such approaches, concerned that the rights of shareholders are watered down.

But drastic times require unorthodox thinking, and action.

For that reason we have pushed for so-called pre-emption guidelines, those that limit the size of a placing, to be temporarily relaxed. This has been agreed among market participants and companies have more flexibility to raise of up to 20% of their issued share capital with a placing.

We are encouraging companies to consider faster routes of fundraising, such as the cash box option in the knowledge that companies such as Schroders will help to find a positive solution for those companies who we think have a long-term future. 

Certain conditions must be met. We would expect clarity on working capital, litigation and any significant changes made since the last report and accounts. We also look for companies to offer existing shareholders their informal entitlement rights. Finally, we will expect dividends to be suspended and the pain to be shared by management regarding remuneration.

Today, we have written an open letter to UK companies to this effect (see below).

Many difficult decisions will have to be made over the coming weeks and months.  We hope that this expression of support provides company management teams with the latitude to focus on what is best for their business and the economy over the longer term. We are confident that if this takes place, value will ultimately be created for all.

It should also underline the critical importance of the stock market at the centre of the financial system. Public markets should be efficient places to raise money, where forward-thinking investors can support companies with bright long-term prospects during short-term periods of need.

Now is the time for market participants to prove it.

 

Dear UK plc,

Covid 19 creates an unprecedented challenge for governments, economies, companies, investors and individuals. Our experience of historical crises and understanding of the complexities of the current situation indicate that a difficult business backdrop is likely to persist for some time. 

From the close engagements that we have been having with companies it is clear that management teams are doing their best to steer their companies safely through these challenges.  As providers of risk-bearing capital we have an important role to play in this, alongside governments and banks.

Our message is clear: in the short term companies need to prioritise their key stakeholders, in particular employees but also customers and suppliers.  We believe that by focusing on these drivers of long-term returns the benefits to UK investors and the economy will eventually be forthcoming. 

We ask that companies maintain an open dialogue with us and all their stakeholders over this period. However, the primary focus should be on maintaining their business rather than maintaining shareholder relations. For example, examining if it is prudent to pay dividends, including those previously declared. 

We also urge a pragmatic approach to the rules and guidelines that govern equity fundraising efforts. 

Schroders endorses the Pre-emption Group Guidelines in the UK. However, given the circumstances, we also support the introduction of greater flexibility in appropriate cases until further notice. We would, for instance and where it is necessary, support the use of “cash box placements” of up to 20% of equity, which may be a less onerous route for companies that need to raise additional capital urgently but have sustainable long-term business models.

We expect a dialogue with companies about such capital raises, including clarity on working capital needs, any potential litigation that they are aware of and any significant changes post the last report and accounts.  

We would look for companies to continue to offer existing shareholders their entitlement to participate as far as possible in the circumstances.  Where companies seek additional capital we would expect their boards to suspend dividends and to reconsider management’s remuneration.

Many difficult decisions will have to be made over the coming weeks and months. We hope that this expression of support provides company management teams with the latitude to focus on what is best for their business and the economy over the longer term. We are confident that if this takes place, value will ultimately be created for all. 

Yours faithfully,

Jessica Ground, Global Head of Stewardship, Schroders

Sue Noffke, Head of UK Equities, Schroders

Important information

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. 

This information is not an offer, solicitation or recommendation adopt any investment strategy.

If you are unsure as to the suitability of any investment speak to an independent financial advisor.