TWO small Perth companies, Regenera and Plexus International, are giving investors something new to ponder by including performance shares in their planned capital raisings.
TWO small Perth companies, Regenera and Plexus International, are giving investors something new to ponder by including performance shares in their planned capital raisings.
Performance shares, which are rarely used in Australia, provide a means of linking ownership of a business to its performance.
For investors, they create new risks.
In particular, investors could end up with a heavily diluted stake if all of the performance shares are converted to ordinary shares.
For the recipients of performance shares, they provide added upside, but only if the business meets specified targets.
In the case of Plexus, 45 million performance shares are being issued to the vendors of Citrofresh, an organic antibacterial product.
The performance shares will be converted for free to ordinary shares if the company meets specified earnings targets over the next four years.
If this occurs, their stake in Plexus (to be renamed Citrofresh) will jump from 7.4 per cent to 60.2 per cent.
In the case of biotech float Regenera, 65 million performance shares are being issued to “more than a dozen promoters”, including chairman Tony Fitzgerald and chief executive William Ardrey.
Conversion is tied to a series of business goals, including regulatory approvals, completion of clinical trials to a certain standard, licencing agreements and commercial sales agreements.
If all of the performance shares are converted to ordinary shares, the promoters would end up with nearly 85 per cent of the company.
On the flipside, investors in Regenera’s $8 million initial public offering, who are being offered 16 million ordinary shares, would see their stake diluted from 44 per cent to little more than 15 per cent.
Alison Coutts, a director of Sydney-based corporate finance firm eG Capital, summed up the dilemma facing investors.
“As long as the interests of the promoters and investors are aligned and it’s a reasonable lick [of performance shares], then its okay, but it all depends on what is reasonable,” Ms Coutts said.
She said performance shares could support high risk transactions that might otherwise not proceed.
“The practice in the west is to reward promoters more than in the east, but if you look at some of the transactions they have been able to get away, then on balance it can be a good outcome.”
Mr Fitzgerald suggested investors should compare Regenera with other biotech floats that did not have performance shares but instead a larger free carried interest for the promoters. He said achievement of the milestones would lift the value of the stock, for the benefit of all investors.
Plexus will be holding a shareholders’ meeting on May 31 to seek approval for a complex restructuring, which includes acquiring the rights to Citrofresh and raising $2 million of new equity.
