LONDON Oct 16 Strong public demand for
Britain's Royal Mail sell-off could mark the retail
investor's return as a more regular player in share sales,
potentially giving firms another source of cash and broadening
share ownership in the country.
Small investors flocked to Royal Mail, Britain's biggest
privatisation for decades, prompting comparisons to pioneering
sell-offs such as British Airways and British Gas. These aimed
to create an "equity culture" in Britain, which the government
hoped would make ordinary people feel they had a stake in the UK
corporate sector's success.
In continental Europe, it is more common for share sales to
include a retail portion. But in Britain it has been rare since
a retail requirement was scrapped in 1993 as too inflexible.
Institutional investors accounted for 81 percent of assets
under management in the UK at the end of 2011, versus 19 percent
for retail clients, according to a report from the European Fund
and Asset Management Association. In Italy, retail made up 42
percent and in Belgium 56 percent.
While it may only be big privatisations that pull in small
investors on such a big scale, the Royal Mail sale showed public
demand is there to put money into new stocks.
When Britain opened up a third of the sale to the public,
more than 690,000 people applied for shares, oversubscribing the
retail portion of sale seven times.
"I'm confident that of the big IPOs (initial public
offerings) we see in the UK over the next few years, the vast
majority will have a retail element," said Jim Renwick, Chairman
of equity capital markets for Europe, Middle East and Africa at
Barclays. "A lot of things have changed very positively to make
it easier to do retail-targeted transactions."
Low interest rates have made the stock market attractive for
those seeking income or a chance to grow their capital. At its
sale price, Royal Mail offered a yield of around 6 percent,
versus less than 3 percent from a regular UK savings account.
And there is plenty of cash to be invested as the baby
boomer generation reach retirement. Benchmarking firm ComPeer
estimated the UK wealth management industry had 576 billion
pounds ($919.85 billion) of investment assets in the second
quarter of 2013.
For companies, the Internet has also made selling to small
investors much quicker and cheaper.
Every small investor on a share register was previously
estimated to cost a company around 30 pounds a year in printing
and posting of documents, said Renwick. But today's virtually
paperless process has cut it to less than 10 percent of that.
Bankers say retail is more suited to bigger sales of
well-known companies, such as some consumer, retail or
technology brands. Among those upcoming listings expected to
include a retail offering is theme park operator Merlin.
The government has also said it may offer shares to retail
investors when it offloads more of its stake in bailed-out
lender Lloyds Banking Group.
Last year, British insurer Direct Line sold 15
percent of its offering to retail, who bought between 5,000 and
6,000 pounds worth each. While in March fellow insurer esure
sold 10.8 percent of its offer to retail investors.
For companies, one attraction of retail investors is that
they can be less price sensitive, applying to put in a fixed sum
of money rather than placing orders at a specific price per
share. But relying too heavily on them in a more challenging
sell-off has its risks for both governments and companies.
In Spain, banking group Bankia had to be rescued
by the government months after a 3.1 billion euro share sale
campaign aimed at ordinary Spaniards. Retail bought 60 percent
of the sale, leading to mis-selling lawsuits.
Bill Megginson, professor of finance at the University of
Oklahoma, said that while governments doing privatisations have
a political incentive to allocate discounted shares to small
investors, private companies will on the whole continue to
prefer institutional investors.
"In and of itself there is nothing inherently good about a
retail investor over any other type, in fact at the margin they
are probably less rational, less efficient than institutional
investors," he said.
Yet in Britain, there is some pressure building for retail
investors to be routinely given a share in stock market sales.
Brokers Peel Hunt and the Association of Private Client
Investment Managers, now the Wealth Management Association, in
May called for the re-introduction of a mandatory minimum retail
offer on all UK stock market listings of sufficient size.
Other countries, including Belgium and Hong Kong, require at
least 10 percent of offerings to go to retail.
"We were picking up a lot of frustration from investors
about access to IPOs," said Steven Fine, managing partner at
Peel Hunt. He said offerings of at least 500 million pounds
would be a good cut-off size, and said Peel Hunt was looking at
aggregating retail demand to make it simpler for companies and
bookrunners to monitor interest and allocate the stock.
And small investors are not always just taking part to make
a quick buck. Even though Royal Mail shares have risen as much
as 48 percent since their debut, Olivetree Financial estimated
only 11 percent of the shares allocated to retail had been sold.
"The best thing that has come out of Royal Mail is that it
has reignited interest in an equity culture," said Fine.