Key questions to ask when considering investing in a share placement

Monday, 14th November 2016 13:51 - by Tom Britton

While there is money to be made from investing in share placements, there are also a lot of associated risks if you don’t know what to look for. Below, I’ve highlighted some of the key questions you should answer before deciding to invest in any company and business.

Crucially, if you’re newer to investing and have not invested in a share placement before, I’d start by going through the process and getting an understanding of what to expect. On to the questions.

1. Why is the company raising finance?

Are they burning through cash quickly and need the raise to keep the company afloat, or do they have new projects and plans lined up that the extra cash will help them kick off or jump to the next level? While it’s not always as simple as these two options, you need to take a close look at what the money is going to be used for. You need the company to be more profitable in the long run for you to make money: will this raise help the company get there or is it just propping them up in the short term?

2. What do the last financial reports say?

Following on from figuring out what the money raised will be used to do, you should look at the latest financial filings. Has revenue been growing? Have costs been kept under control? Just like any other company, scrutinise at the finances and pay close attention to any gaps  that may mean the placement is being used to dig them out of a hole. It is all about re-investment and careful money management. That leads us to the next question…

3. Who is on the Management Team / Board?

Investing in a company is investing in their people and having faith that they will deliver on their promises, creating value for shareholders from their current assets. In your research, always look at the management team, the board of Directors and their track records and experience.  Second question: are they suitable for the company given the current position? The management team that got the company into the current situation may not be qualified to get it out of it or grow it beyond that, so find out if there are any plans to hire in the people that may be needed to help them scale, or if the situation requires, turn things around.

4. Which brokers are involved?

Good companies want to work with good brokers, and while that doesn’t always mean ‘if the broker is not strong then the raise will be weak’, you should look at the companies the broker has worked with previously and what happened to the company’s stock prices in the months after the placements, to give you a reference for what may happen with the current raise.

Bonus: Try and find out who else has committed to investing in the round. Are there new investors coming into the round or is it just existing investors? A big-name investor putting money into the company for the first time could be a positive sign.

5. What’s in the Prospectus?

While it’s not likely to win an award for entertainment, the prospectus lays out all the risks and opportunities as well as a detailed outline of how the money will be spent. Companies going through a raise are likely to be overly optimistic about their prospects, so take the forecasts with a pinch of salt.

6. What are the analysts saying?

Look back through the latest analyst reports and figure out if they were optimistic about the company and their assets or business. First, look at the analyst who did the report to see whether or not he is specialised in the field and experienced. Then, find out their target price in the medium term and the valuation they would currently give to the company. Those are important elements to consider.  Are there any problems or challenges they have pointed out and have these been addressed in recent times or are they addressed in the prospectus? Even if the analysts are optimistic about the prospectus, make sure there have been no key events between the report and the present that might change the state of play.

7. Are you comfortable investing knowing that you could lose all of your investment?

As with investing in any stock, investing in a share placement, even if you receive a discount, is risky. Don’t be attracted simply because there may be a discount. Always do your homework and if something doesn’t smell right, simply sit out the placement and continue to track the company from afar.

If you’d like to find out more about placements and investing in growth stocks, come on down  to our event on November 24th where Jim Mellon, one of the UK’s most successful investors, will be giving the keynote as well as some invaluable tips and advice. There will be drinks, nibbles, 400+ investors and a couple of companies presenting as well.

I hope to see you here: An evening with Jim Mellon