Companies often require a significant amount of capital to fund their expansion plans, acquire new businesses or assets, or pay off debt. One way to raise such capital is through an equity offering, which involves issuing new shares of stock to investors in exchange for cash. However, traditional equity offerings can be time-consuming, expensive, and subject to market conditions, which may not always be favourable.
Enter Accelerated Equity Offerings (AEOs), a faster and more flexible way of raising capital through the sale of new shares. AEOs typically involve the sale of a large block of shares to institutional investors in a short period, often overnight or within a few days. This approach allows companies to raise capital quickly, with minimal marketing efforts and at a lower cost than a traditional equity offering.
How do AEOs work?
In an AEO, the company announces its intention to sell new shares to institutional investors, usually with the help of an investment bank or a broker-dealer. The investors are given a short period, usually one or two days, to place their bids for the shares at a predetermined price. The company and its advisors then review the bids and decide on the final price and the number of shares to be sold. The entire process can be completed within a week, from the announcement to the settlement.
AEOs are often structured as a private placement, which means that the shares are sold to a small group of accredited investors, such as institutional funds, private equity firms, or high-net-worth individuals. Private placements are exempt from many of the regulatory requirements that apply to public offerings, such as the need to file a prospectus or disclose detailed financial information.
Oftentimes a company will have a resolution in their AGM that permits for up to 5% of new shares to be issued without the need for shareholder approval and a further resolution that permits a further 5% of shares to be issued, also without shareholder approval, if the capital raised from the second batch of new shares is to be used for a specific capital expenditure purpose, such as an acquisition. AEOs can sometimes take advantage of these resolutions, but do not necessarily have to. Sometimes, special resolutions are passed to authorise new shares to be issued and thus for AEOs to occur.
Benefits and drawbacks of AEOs
The main benefit of AEOs is speed. Companies can raise capital quickly and efficiently, without the need for extensive marketing or roadshows. AEOs also tend to be cheaper than traditional equity offerings, as they involve fewer intermediaries and lower legal and accounting fees.
Another advantage of AEOs is that they can be used to raise capital in challenging market conditions, such as during a downturn or a period of volatility. Institutional investors are often willing to invest in AEOs because they offer the opportunity to acquire a large block of shares at a discounted price, which can be attractive for long-term investors.
However, AEOs also have some drawbacks. One of the main concerns is dilution, as the sale of new shares can reduce the ownership percentage of existing shareholders. AEOs can also result in a lower valuation for the company, as the shares are sold at a discount to the market price to attract institutional investors.
Real-life examples of AEOs
Many companies have used AEOs to raise capital quickly and efficiently. For example, in March 2021, UK-based cybersecurity firm Darktrace raised £143 million through an AEO, which valued the company at £1.7 billion. The shares were sold to institutional investors, including some of Darktrace's existing shareholders, at a 10% discount to the market price.
In another example, UK hotel chain Travelodge raised £313 million through an AEO in 2019, which helped the company to reduce its debt and fund its expansion plans. The shares were sold to a group of institutional investors, including some of Travelodge's existing bondholders, at a 4% discount to the market price
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About the author
Sabbir Rahman is Managing Director of Langdon Capital. He has held prior roles with Morgan Stanley, Lazard and Barclays Investment Bank. He has executed over £60 billion in notional value of transactions across financing, M&A and derivatives with global corporates, private equity funds and financial sponsor groups.
About Langdon Capital
With a network of 700+ alternative investors, Langdon Capital raises debt and equity capital between £1m and £25m for high-growth and innovative scale-ups with >£1m annual revenue and >30% annual revenue growth in the technology, environmental impact and renewable energy sectors, at Series A or beyond, to help fulfil growth ambitions and paths to profitability.
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