What is a capital raising?

Companies need capital to pay for their operations, such as the production of goods or services. Companies invest capital in a variety of ways with the intention of creating value.

There are different types of capital, including working capital, debt, equity, and (for financial instructions), trading capital. A company’s capital structure will depend on the mix of capital types it uses to fund its operations. Capital is a critical component of operating a business and financing its future growth.

Companies employ capital for productive purposes with the aim of making a profit. They usually undertake capital raisings for 1 of 3 purposes – funding an acquisition, funding growth or expansion plans, or rebalancing the capital structure of the business.

To do so, companies will estimate investor demand for the type of capital they would like to issue and seek commitments from institutional investors. This helps determine pricing ahead of any offer made to retail investors. What are the different types of capital raising?

Capital raisings involve raising additional money. These funds may be in the form of equity, debt, or securities with features of both (such as convertible shares). Equity capital raisings involve the issuance of new shares. Debt capital raisings involve borrowing funds that must be repaid at a later date, and on which interest must be paid.

Capital can also be raised via the issue of convertible securities. Convertible securities may initially operate like debt, with the company required to make interest payments to investors. In certain circumstances, however, they may convert to equity.

Equity capital raisings are frequently employed by ASX companies when capital is required. Share placements are the most common form of capital raising used. Other methods of raising equity capital include initial public offerings (IPOs) , share purchase plans, and rights issues .

A share placement involves the allotment of shares made directly from a company to investors. Only sophisticated, professional, or experienced investors can buy shares through share placements. To ensure retail investors do not miss out, share placements are frequently conducted in conjunction with share purchase plans.

Share placements have a number of advantages for companies because they can be conducted relatively quickly and are often far larger than subsequent share purchase plans.

Share purchase plans allow eligible current shareholders to buy a capped amount of shares at a predetermined price. Retail investors can buy additional shares under the share purchase plan, while institutional investors buy shares through […]

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