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2000 Special Article - Equity capital raisings on the Australian Stock Exchange
Both non-residents and Australian households have increased their holdings of non-financial corporation equities three-fold over the course of the 1990s, while life insurance corporations and pension funds together increased their equity holdings four-fold. Together these sectors account for nearly two thirds of the increase in non-financial corporation equity liabilities on issue. Much of the remaining increase has been in general government equity holdings (reflecting price increases for publicly owned corporations more than offsetting the impact of privatisations).
Part of the increasing use of equity as a means of raising capital for trading corporations reflects a move away from high cost debt financing in the late 1980s and early 1990s. Part of the story is also explained by the privatisation activity in the 1990s which enabled formerly publicly owned trading corporations to access equity capital beyond that previously provided by governments.
The Australian Stock Exchange
The Australian Stock Exchange (ASX) was formed on 1 April 1987 from the amalgamation of the six state capital city stock exchanges. The primary business of the ASX is to encourage markets in which investors and enterprises interact in the purchasing and selling of shares.
Initially, shares were traded "on the floor" but the high costs of such operations limited the extent to which shares could be efficiently traded. In October 1987, the Stock Exchange Automated Trading System (SEATS) was introduced, initially for trading in securities of 20 companies. SEATS is a continuous auction order book where brokers are able to make electronic bids or offers and report trade. It provides a single entry point to the trading system for brokers and has the capacity to handle over 300,000 trades per day.
By 30 June 1990, a total of 1,348 companies were covered by SEATS, with only 198 high-turnover stocks traded on the floor. By late 1990, the remaining companies were moved onto SEATS and the traditional trading floors closed. The exchange-traded warrants market was established and also covered by SEATS.
In 1994, a centralised clearing and settlements system was introduced - the Clearing House Electronic Subregister System (CHESS). CHESS is an electronic facility for settling share trading obligations. It trades on a delivery-versus-payment basis and manages the transfer of shares for all Australian-issued listed equity securities. In 1998, ASX's trading and settlement processes became fully automated with the closure of the options trading floor and the move to full automation of the Derivatives Trading Facility.
The accessibility and relatively low access costs for share trading today has assisted the ASX to set new records in share activity in recent years in terms of both turnover and equity capital raised. Potential buyers and sellers can easily access brokerage services to purchase and sell shares. Stock information is readily available on the Internet. The ASX has its own Internet site which includes market announcements and other stock exchange information.
In March 1998, the ASX established the Enterprise Market (EM), an Internet-based service to facilitate capital raising for unlisted small and medium sized enterprises (SMEs). Traditionally, SMEs experienced difficulties in raising capital because of the cost of complying with prospectus requirements of the Corporations Law and the fragmented nature of the private equity market. The EM handles both equity and debt capital issues for non-listed businesses throughout Australia and can access investors from all over the world.
The following table shows that the number of trades in exchange-traded shares in 1999-2000 was 13.9 million, up 67% on the previous year and up 355% on the turnover five years earlier. The value of traded shares also increased significantly in the five year period, from $118 billion in 1994-95 to $361 billion in 1999-2000, up 206%. Interestingly, both the average value of each trade and the average number of shares in each trade fell over this period, consistent with a rising proportion of individuals owning shares and trading in smaller volumes.
The next table shows that in the 10 year period 1990-91 to 1999-2000, total annual equity raisings increased $29.0 billion (440%) from $6.6 billion to $35.6 billion. The largest growth in equity capital raisings occurred in Initial Public Offers (IPOs). In 1990-91, new floats raised only $0.1 billion and represented less than 2% of total raisings, but nine years later in 1999-2000 IPOs had increased to $6.1 billion (from 183 new floats) or 17% of total raisings.
In 1991-92, total raisings increased $5.4 billion (81.5%) to $12.0 billion, due mainly to the listings of: the Commonwealth Bank (which raised $1.3 billion); John Fairfax Group (raising $0.6 billion); and Australian Consolidated Press (raising $0.5 billion). In 1992-93 the equity capital market marked time with total raisings slightly down on the previous year.
In 1993-94, total capital raisings at $22.9 billion were double the raisings achieved in each of the previous two years. A total of $8.1 billion was raised by means of new floats, including $2.5 billion from the Woolworths Ltd float, $0.6 billion for the Seven Network and $0.2 billion contributed by both the Crown Casino and GEM Commercial Property Trust floats. Placements raised an additional $6.7 billion, a record high and nearly triple the placements in the previous year, due to: the Commonwealth Bank ($1.7 billion); Westpac ($0.6 billion); Lion Nathan ($0.3 billion); TNT ($0.2 billion); and Amcor ($0.1 billion). In 1993-94 the climate for new capital raisings was good, with real GDP growing by 4% (well above growth in the United States and other OECD countries), employment was rising, inflation was low and stable, the All Ordinaries share price index increased 14% and the ASX enjoyed then record trading volumes and high liquidity levels.
In 1994-95 and 1995-96, total raisings fell back from the strong showing in 1993-94. In 1996-97, a total of $16.4 billion in equity capital was raised on the ASX. The demutualisation of National Mutual Holdings, Colonial Ltd and Macquarie Bank together raised $7 billion. The third stage privatisation of the Commonwealth Banks raised $2.4 billion. Other contributors that year included the float of Westfield Australia Trust and Stadium Australia, both at $0.4 billion, and Infrastructure Trust of Australia and Orogen Minerals, both at $0.3 billion.
In 1997-98 a total of $28.8 billion was raised, up over 75% on the previous year. New floats was the largest contributor, representing 53% of total raisings, due mainly to the impact of the Telstra privatisation in November 1997 which raised $8.6 billion. Other significant contributors in 1997-98 included Telecom Corporation of New Zealand at $1.7 billion, NSW TAB Ltd at $0.9 billion and AMP at $0.6 billion.
Strong growth in equity raisings continued during 1998-99 resulting from the continued good performance in Australia's expanding capital markets fuelled by flourishing world equity markets, low interest rates and a competitive Australian dollar.
The first half of 1999-2000 saw a large number of smaller companies raising equity capital on the ASX, with strong investor confidence and consequent high demand for stock despite official interest rate rises which normally would have resulted in the slowing of equity market activity. Total raisings reached a new record high.
Equity capital raisings by ASX industry group
The next table shows that, in the six months ended 31 December 1999, there were a total of 2,306 equity raisings which raised $23.4 billion, of which 70% raised less than $50 million each. A total of 86 IPOs raised $13.6 billion or 58 percent of total capital raisings. Of these 86, 32 (37%) were Internet-related companies which raised approximately $619 million. Placements provided the second largest means for obtaining capital, raising $5.1 billion or 22% of total raisings.
Telecommunications was the industry to record the highest new capital raisings, with 164 raisings for $10.7 billion or 46% of capital raised. The first instalment of Telstra 2 accounted for $9.8 billion of the capital raised. In terms of quantity, diversified industrials was the industry group most active in the equity market, with a total of 336 companies raising $284 million.
The financial industry group accounted for 379 issues, which raised $4.2 billion or 18% of total capital raised. Banks and finance raised $0.2 billion, insurance $0.5 billion, investment and financial services $1.4 billion and property trusts $2.1 billion.
The value of capital raised by the financial group of industries had remained relatively stable for several years with $1.4 billion being raised in 1995-96, $1.3 billion in 1996-97, $2.1 billion in 1997-98 and $1.7 billion in 1998-99, before doubling to $4.2 billion in the first half of 1999-2000. The most active finance industry sub-sector was Property Trusts which raised half of the funds for the financial group in the six months to December 1999.
Household share ownership in Australia
Direct household share ownership in Australia has increased substantially over the past decade, from $61 billion at 30 June 1990 to $237 billion at end June 2000. This four fold increase in direct household equity investment has seen share investments increase as a percentage of household assets from 4.6% in 1990 to 7.8% in mid 2000. Share investments as a proportion of the total financial assets of households, which excludes investment in land and homes, is now 20%, compared with less than 13% a decade ago.
Direct share ownership, which represents the shares that households legally own, and can decide whether to keep or trade is the only way of analysing household investment in equity. It is sometimes useful to also look at shares that are held by life insurance corporations and pension funds where, by and large, households are the beneficiaries of the investment. Even though the decision to buy, keep or sell the equities in these institutions' portfolios does not rest with households, household net worth is exposed to the equities market through these investments. The following table shows both the direct household equity investment as well as the institutional investments to which households are beneficiaries.
Household share ownership as a proportion of household financial assets in the United Kingdom was historically higher than in Australia. In 1990, for example, the UK equity share of household investments was 17% compared with Australia's 13%. However, by the end of 1998 the gap had narrowed, with the share in Australia growing rapidly to 18% and in the UK reaching 20%. In the United States and Canada, household equity investments have been much higher , at 25% or so of household financial assets at the start of the 1990s, and increasing throughout the 1990s. In the United States in particular, the level of equity investment had increased to over a third of all household financial assets by mid-decade.
The increase in household investment in equities could come about from significant increases in the holdings of high net worth individuals, or through a broadening in the base of the share investing public, or both. It is therefore useful to look at not only the value of household equity investments, but also the participation of households in the market. The following information from a variety of ASX sources sheds light on this aspect of household investment activity.
In the latter part of the 1980s, only 9% of the Australian adult population held shares directly. By November 1999, a total of 41% of the Australian adult population ( 5.7 million Australians) held shares directly. A further 13% held shares indirectly, via a managed fund or personal superannuation (other than compulsory employer superannuation funds), taking the total to 54% ( 7.6 million) of the Australian adult population. This represents a significant increase on the previous year where 40% (approximately 5.5 million) of Australian adults held shares, of which 32% held shares directly. The second tranche of Telstra attracted 321,000 first-time investors, of which many were aged between 25 and 44 years. In comparison, ten years earlier 22% of the Australian adult population held shares, of which only 7% held shares directly.
A large proportion of individuals have entered the share market with a relatively small amount of initial capital ($10,000 or less) and more than 60% of direct shareholders hold a small number of stocks - three or less. The rise in the number of people holding shares both directly and indirectly is in part attributed to the growing popularity of investing in managed funds and contributing to personal superannuation.
The significant increase in household direct ownership of shares over the last ten years can also be attributed to the privatisation of public enterprises, the floating of high profile enterprises and the ease with which Australians can now invest in equity. The part privatisation of the Commonwealth Bank in 1992 added 80,000 first time investors to the stock market. In the same year floats by two prominent media companies, John Fairfax Group and Australian Consolidated Press, encouraged new investors into the market.
By September/October 1994 the proportion of adult Australians holding shares had jumped to 31%. Strong GDP growth, improving employment prospects and rises in the All ordinaries index contributed to this increase. Many new individual investors were also attracted to the stockmarket by companies like the Seven Network and Woolworths which floated during the year as well as the second part of the privatisation of the Commonwealth Bank.
In May 1997, a total of 34% of Australian adults held shares, of which 20% held shares directly. This result reversed a downward trend in individual share ownership experienced over the preceding two years which was mainly due to the small number of high profile listings and the decline in participation of small investors. During this time foreign investment increased to its highest level in five years to reach 32% of equity on issue in June 1996, due to stable domestic interest rates, competitive share prices and a low Australian dollar. The growth in individual share ownership in 1997 can be attributed to the strong sharemarket turnover in 1996-97 combined with the third stage privatisation of the Commonwealth Bank and the demutualisation of well-known entities such as National Mutual Holdings and Colonial Ltd.
The growth in private ownership was significantly boosted in 1997-98 with the first stage of the privatisation of Telstra in November 1997 which added almost 2 million shareholders, including 559,000 first-time shareholders. In 1998, the privatisation of NSW TAB and the demutualisation of AMP further increased direct individual shareholders, with the latter resulting in 730,000 first-time investors. A total of 40% of the Australian adult population held shares in October 1998, up 6 percentage points on the previous year.
In 1999, Australia ranked highly in terms of the proportion of the adult population who own shares, comparing favourably with countries such as the United States, Canada, Germany, France, United Kingdom and New Zealand. The nation with the highest level of individual share ownership is Sweden at 66%.
The increasing value of equity capital being raised on the ASX has contributed to the rising popularity of share investors. Increasing public awareness of the flexibility and generally good performance of IPOs, combined with the relatively small amount of initial capital outlay and the ease with which shares can be divested make share investing a viable option for small investors. The wide variety of information sources, brokering choices and the Internet, with subsequent low transaction costs, contribute to the increasing popularity of share investment with Australian individuals.
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