An Australian Council of Superannuation Investors (ACSI) titled Underwriting of Rights Issues examined 63 underwritten issues conducted by ASX300 companies between 2010 and 2012, and compared the amount they paid for underwriting against a benchmark value.
The report found that over three years companies have in aggregate paid underwriters a premium of more than $170 million – an average of 50 per cent above the value of the underwriting service.
The report also found that average underwriting fees are more than 60 per cent higher than they were 20 years ago, despite innovations that have dramatically reduced the time required to complete a rights issue (thereby decreasing the underwriting risk).
ACSI chief executive Gordon Hagart said the report highlights the need for public company boards to be more active in their oversight of the capital raising process to ensure the best outcomes for the shareholder.
“From the research it also appears that many companies are applying a heuristic of roughly two per cent underwriting fee even though the underlying risks vary markedly between rights issues,” said Mr Hagart.
“It also reminds us that while underlying fees for pro rata issues are disclosed, there is currently no requirement for companies to reveal how much they had paid advisors to underwrite share placements – even when companies subsequently seek shareholder approval to ratify those equity issues,” he added.
The report also found that boards should seek to reduce the cost of increasing new equity and to ensure that fees paid to advisers – including investment banks and underwriters – reflect the actual value delivered and the risks incurred.
