1. Minimise dilution

Giving existing shareholders a fair opportunity to participate in followup investment opportunities will be help minimise the dilutionary impact of funding a business' growth. It's no surprise here that if a company only includes new/external investors into a raise, then pre-existing shareholders come out of the transaction owning less of the company. That also means less of any future re-rate and upside.

Entitlement offers and share purchase plans (SPP) is the traditional way for shareholders to be included in a capital raise. These offers typically are open for 2-4 weeks and shareholders apply through the share registry. It's a fairly manual process but does give us the option (should we wish to take it) to add to our holdings at (usually) a fixed price.

When analysing a company, it's important to look at how often management includes shareholders in capital raises. This tells us how likely we are to be diluted in the future. Generally, well run companies who look after their shareholders above external investors will include a way for all shareholders (big and small) to participate at every capital raise.

Kin Mining (ASX:KIN) has done a great job at minimising existing shareholder dilution. The company is focused on gold exploration having recently passed an impressive 1.5Moz resource. However, this is an expensive business and requires ongoing capital injections in the order of ~$10m per year. In the last 36 months, the company has conducted 5 separately capital raising with shareholders prioritised in each case:

Very few other companies have worked to facilitate such strong shareholder involvement in all their capital raises. Indeed, the process is helped by the fact that Kin has had cornerstone support from their biggest shareholder, a German institutional investor.

If we look at the dilutionary effect - for a shareholder with 1m shares on 12 June 2020, the ownership effect would look like this on the basis of full take ups.

Things to note, we're assuming full subscription rounded down to the nearest share. Total shares on issue post raise is actual figures and includes raises that weren't fully subscribed.

As we can see, including shareholders so heavily in each of these raises allowed this hypothetical investor to actually increase their shareholding and prevent being diluted. This obviously requires the investor to have the funds to do so, yet it's the option here that is valuable and a positive reflection on management. In an alternate case where the capital raised was strictly to new investors via a placement, the 1,000,000 shares would only have 0.085% ownership in the current capital structure - a major dilution.

In a small number of cases, there are companies who welcome the involvement of sophisticated and professional existing shareholders to participate in their placement. Although this does not give anywhere near the equality as a SPP or Entitlement Offer, it is still a step in the right direction.

2. Minimise Cost

Including existing shareholders in capital raises also has a nice cost advantage towards traditional broker-run placements. A company can conduct company-run placements to their own network of investors at near-zero cost, alongside entitlement offers and share purchase plans which also don't attract any cost usually.

As such, companies who priorities these forms of capital raising also benefit from a lower cost of capital. For instance, KGL Resources (ASX:KGL) conducted a 10:27 entitlement offer to raise up to $20.2m on April 2023. Link to the announcement here.

This is a meaningful funding package. Yet, we can see from the associated proposed issue of securities announcement that the company did not pay any broking fees on this raise.

The company ultimate ended up raising $13.5m from the offer. Had the company decided to skip existing shareholders and raise from external investors, the company would likely have paid a 6% fee equaling to $810k. This saving can be applied to the company's growth investments instead, leading to a better outcome for all shareholders.

Closing considerations

Seeing how a company chooses to structure their capital raises can reveal how they value their shareholders. Understandably, not all funding can be sought from purely shareholders, but it is often important to meaningfully include them into every raise as early backers deserve the option to minimise their dilution through additional investment. Doing this also reduces the cost of funding which allows the company to make every dollar go further.
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