Inequitable treatment of retail investors in COVID-19 capital raisings - 15 January 2021 Vesparum White Paper Series Paper #4

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Inequitable treatment of
 retail investors in COVID-19
 capital raisings
 15 January 2021

 Vesparum White Paper Series
 Paper #4

We bring data science to equity capital markets
Executive Summary
Key outcomes from COVID-19 capital raisings
1. Allocations: Only A$5 billion of A$38 billion of capital raised during the COVID-19 period was allocated to retail investors.
2. Returns: Only A$2.7 billion of the A$15.7 billion increase in portfolio values due to capital raising allocations was attained by
   retail investors.
3. Fairness: Inequitable capital raising structures and allocations have resulted in a wealth transfer from retail investors to
   institutional investors of A$3.6 billion, based on typical retail investor company ownership levels of 40%.
4. Trading: The above results occurred despite retail investors showing strong on-market support around capital raisings during
   both the COVID-19 period and in normal times, compared with institutional investors who were typically net sellers in the
   aftermarket.
5. Short selling: Short selling activity by hedge funds around capital raisings has been more prevalent during the COVID-19
   period, contributing to an increase in the indirect costs of raising capital.
    - Supporting case studies include Ooh!Media, Webjet, Kathmandu, Southern Cross Media, Flight Centre and Monash IVF.
    - NEXTDC provides a noteworthy example of different trading behaviour in the aftermarket, influenced by a policy of allocating
      away from hedge funds.

Key takeaways for directors of ASX-listed companies
• A deep understanding of retail and institutional investor behaviour is critical to optimise investor targeting, allocations and
    aftermarket performance.
• Truly independent advice is critical for companies raising capital, given potential conflicts of interest, including dual agency,
    misaligned incentives, information asymmetry, lack of transparency, illusory underwriting and suboptimal timing.

                                         Think we can help? Please get in touch.
                                               +61 3 8582 4800 | www.vesparum.com

2
1. Allocations
Allocations: Only A$5 billion of the A$38 billion of capital raised during
the COVID-19 period (i.e. 13%) was allocated to retail investors
Capital raising allocations to investors during the COVID-19 period1,2 (A$ billions)
$100m+ market cap companies at time of announcement

    35.0

    30.0

                                                                                                                                        Institutional investors3
    25.0
                                                                                                                                           ~A$33B allocated
                                                        NAB $3.0B
    20.0
                                                        placement

    15.0
                                                                                                                                           Retail investors4
    10.0                                                                                                                                   ~A$5B allocated
                                                                                NAB $1.25B
                                                                                   SPP
     5.0

       -

                                                                  Institutional investors                            Retail investors

1 Total amount of capital allotted during the COVID-19 period to date, split by institutional vs retail components
2 COVID-19 period (to date) based on 21 February to 30 November 2020
3 Based on allocations to investors in placements and the institutional components of entitlement offers
4 Based on allocations to investors in share purchase plans and the retail components of entitlement offers

Source: Vesparum, IRESS

3
2. Returns
Returns: Only A$2.7 billion of the A$15.7 billion increase in portfolio values
due to capital raising allocations (i.e. 17%) was attained by retail investors
Portfolio value increase due to capital raising allocations during the COVID-19 period1,2 (A$ billions)
$100m+ market cap companies at time of announcement

    16.0
                                                                                                                                                                      Institutional investors3
    14.0                                                                                                                                                             +A$13.0B value increase

    12.0

    10.0

     8.0

     6.0

     4.0

     2.0

       -                                                                                                                                                                         Retail investors4
                                                                                                                                                                              +A$2.7B value increase
    (2.0)
        21-Feb       10-Mar         30-Mar          21-Apr         11-May        29-May          19-Jun         09-Jul          29-Jul        18-Aug      07-Sep     25-Sep     15-Oct   04-Nov   24-Nov

                                                                  Institutional investors                                                              Retail investors

1 Cumulative impact of the net value of capital raising allotments (based on prevalent share price vs offer price) assuming all allocations are held
2 COVID-19 period based on 21 February to 30 November 2020
3 Based on allocations to investors in placements and the institutional components of entitlement offers
4 Based on allocations to investors in share purchase plans and the retail components of entitlement offers

Source: Vesparum, IRESS

4
3. Fairness
Fairness: Retail investors have suffered from inequitable capital raising
structures and allocations, to an amount of A$3.6 billion
Typical shareholder composition                                              Retail investor returns                                                      Institutional investor returns
Capitalisation-weighted company                                              Portfolio value increase due to capital                                      Portfolio value increase due to capital
ownership for All Ordinaries companies                                       raising allocations (A$ billions)1                                           raising allocations (A$ billions)1

                                                                                                                                                                                        +3.6
                                                                                                                                                                                                        13.0

                                                                                                                                                                       9.4
              40%2
                                                                                                           -3.6
                                                                                          6.3
                                       60%2

                                                                                                                              2.7

            Retail investors
                                                                             Expected returns      Actual returns                                         Expected returns      Actual returns
            Institutional investors                                        (at 40% allocations) (at 13% allocations)3
                                                                                               2                                                        (at 60% allocations) (at 87% allocations)3
                                                                                                                                                                            2

1 During COVID-19 period based on 21 February to 30 November 2020. Analysis based on $100m+ market cap companies at time of announcement.
2 Typical company ownership for All Ordinaries companies estimated at ~60% institutional / ~40% retail based on entitlement offer data in our proprietary database, weighted by market capitalisation
3 Cumulative impact of the net value of capital raising allotments (based on prevalent share price vs offer price) assuming all allocations are held

Source: Vesparum, IRESS

5
4. Trading
Trading: Retail investors have suffered despite their strong on-market
support around capital raisings, compared with institutional investors
    COVID-19 period                                                                                             Normal times
    Cumulative net value traded1 (A$ billions)                                                                  Cumulative net value traded2 (A$ billions)

            Announcement                                                                                                  Announcement
                date                                                                                                          date
     10.0                                                                                                       30.0

     5.0                                                                                                         15.0

                                                    Strong support
                                                  from retail investors
                                                                                                                                                                Similar trading behaviour
     0.0                                                                                                          0.0
                                                                                                                                                                     in normal times

     -5.0                                Selling pressure from                                                 -15.0
                                         institutional investors

    -10.0                                                                                                      -30.0
            -5     0       5     10     15      20      25   30    35                           40                      -5        0         5     10     15       20       25   30              35     40
                       Trading days post / (prior to) announcement                                                                       Trading days post / (prior to) announcement

                 Retail investors 3                Institutional investors 4                          Institutional allotment date range 5                             Retail allotment date range 5

1 Represents aggregated trading around all capital raisings during the COVID-19 period (21 February 2020 to 30 November 2020), rebased to 5 trading days prior to announcement
2 Represents aggregated trading around all capital raisings from 1 January 2010 to 20 February 2020, rebased to 5 trading days prior to announcement
3 Represented by the aggregate trading of the following retail platforms: ANZ, Bell Direct, CBA/CommSec, CMC Markets, NAB and WBC
4 Represented by the aggregate trading of the following investment banks: Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, J.P. Morgan, Macquarie, Merrill Lynch, Morgan Stanley, RBC, UBS
5 Based on 25th to 75th percentile of all capital raisings from 1 January 2010 to 20 February 2020 (for normal times)

Source: Vesparum, IRESS

6
5. Short selling
Short selling: Hedge fund trading has been more prevalent around
capital raisings during the COVID-19 period, increasing indirect costs
Average aggregate short position (%)

                                                                    Announcement
                                                                        date
1.8%

             Increase in short positions seen
             between the announcement and
1.6%
                     allotment dates
                                                                                                                    Short positions appear to be
                                                                                                                        closed out around the
1.4%
                                                                                                                     institutional allotment date

1.2%

1.0%

0.8%
       -20              -15              -10               -5                0             5           10            15       20                                   25               30                35              40
                                                                                  Trading days post / (prior to) announcement

                                           1                                       2
                        Normal times                       COVID-19 period                           Institutional allotment date range 3                            Retail allotment date range 3

1Average aggregate short position of all companies that have announced a capital raising between 16 June 2010 and 20 February 2020 (based on available ASIC data), rebased to 5 trading days prior to announcement.
2Average aggregate short position of all companies that have announced a capital raising during the COVID-19 period (21 February 2020 to 30 November 2020), rebased to 5 trading days prior to announcement.
3Based on 25th to 75th percentile of all capital raisings from 1 January 2010 to 20 February 2020 (for normal times)
Source: Vesparum, ASIC

7
Case study: Ooh!Media
Ooh!Media is one of many examples of capital raisings with strong retail
support and significant short selling activity by hedge funds
                                                                                                                                                       Refer to Appendix for other examples of similar
OML – Cumulative net value traded (A$ millions)                                                                                                       trading activity for Webjet, Kathmandu, Southern
Rebased to 20 trading days prior to announcement                                                                                                         Cross Media, Flight Centre and Monash IVF
                                                                 Announcement           Institutional                               Retail
                                                                       date            allotment date                          allotment date
                                                                   (26-Mar-20)            (3-Apr-20)                             (23-Apr-20)
    60                                                                                                                                                                                                  16%
                Significant short selling activity,
    40         leading into announcement and                                                                                                                                                            14%
            around the institutional allotment date
    20                                                                                                                                                                                                  12%

     0                                                                                                                              Strong support from                                                 10%
                                                                                                                                       retail investors
    -20                                                                                                                                                                                                 8%

    -40                                                                                                                                                                                                 6%

    -60                                                                                                                                                                                                 4%

    -80                                                                                                                                                                                                 2%

-100                                                                                                                                                                                                    0%
          -20          -15             -10               -5               0            5            10           15        20                                 25               30             35   40
                                                                               Trading days post / (prior to) announcement
                                                          1                                                                    2
                             Retail investors (LHS)                                     Institutional investors (LHS)                                        Aggregate short position (RHS)

1Represented by the aggregate trading of the following retail platforms: ANZ, Bell Direct, CBA/CommSec, CMC Markets, NAB and WBC
2Represented by the aggregate trading of the following investment banks: Citi, Credit Suisse, Deutsche Bank, J.P. Morgan, Goldman Sachs, Macquarie, Merrill Lynch, Morgan Stanley, RBC, UBS
Source: Vesparum, IRESS, ASIC

8
Case study: NEXTDC
NEXTDC provides an example of different trading behaviour, influenced
by a policy to allocate away from hedge funds
NXT – Cumulative net value traded (A$ millions)
Rebased to 20 trading days prior to announcement

                                                                 Announcement Institutional                                                        Retail
                                                                      date    allotment date                                                 allotment date
                                                                   (2-Apr-20)    (7-Apr-20)                                                     (7-May-20)
120                                                                                                                                                                                                     12.0%
                                 Strong support by
100                           institutional investors in                                                                                                                                                10.0%
                                   the aftermarket
    80                                                                                                                                                                                                  8.0%

    60                                                                                                                                                                                                  6.0%

    40                                                                                                                                                                                                  4.0%
                                                                                                                                                                      Selling pressure at SPP
    20                                                                                                                                                                 allotment date driven            2.0%
                                                                                                                                                                         by uncapped SPP
    0                                                                                                                                                                                                   0.0%

-20                                                                                                                                                                                                     -2.0%

-40                                                                                                                                                                                                     -4.0%
         -20          -15             -10               -5               0            5           10           15       20                                 25              30                 35   40
                                                                             Trading days post / (prior to) announcement
                                                             1                                                                  2
                             Retail investors (LHS)                                     Institutional investors (LHS)                                       Aggregate short position (RHS)

1Represented by the aggregate trading of the following retail platforms: ANZ, Bell Direct, CBA/CommSec, CMC Markets, NAB and WBC
2Represented by the aggregate trading of the following investment banks: Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, J.P. Morgan, Macquarie, Merrill Lynch, Morgan Stanley, RBC, UBS
Source: Vesparum, IRESS, ASIC

9
Key takeaways
A deep understanding of investor behaviour is critical when making
capital raising allocations to optimise aftermarket performance
Trading behaviour and allocation implications

 Investor type                    Trading behaviour observed during 2020             Allocation implications and lessons for 2021

                                                                                • Issuers should have confidence in the retail
 Retail investors          • Strong on-market support around capital raisings     component of their register and structure capital
                                                                                  raisings accordingly

                           • Significant variability in behaviour
                           • Behaviour can be driven by broader portfolio       • Data is imperative to understand likely behaviour to
 Institutional investors
                             weightings and performance relative to benchmark     optimise allocations and aftermarket performance
                             indices

                           • Short selling behaviour evident around capital
                             raisings                                           • The indirect costs of raising capital are typically
 Hedge funds
                           • Behaviour can be driven by short term arbitrage      higher when allocations are made to hedge funds
                             opportunities

10
Key takeaways
Vesparum uses its proprietary data on investor behaviour to target
investors, optimise allocations and improve aftermarket performance
Selected active institutional investors

Note: All logos and brands are registered trademarks of their respective owners.
Source: Vesparum proprietary databases

11
Key takeaways
Truly independent advice is critical for companies raising capital, given
potential conflicts of interest
Factors that should be considered:
Potential to result in suboptimal capital raising outcomes

                      Dual agency                            •   Investment banks typically earn fees on both
                                                                 sides in a capital raising – directly from the
                                                                 company issuing shares and indirectly from
                Misaligned incentives                            investors via future trading commissions.

                                                             •   The investment banks have particularly strong
                                                                 relationships with institutional investors who
               Information asymmetry                             frequently participate in their capital raisings.

                                                             •   This can make it challenging for the investment
                 Lack of transparency                            banks to act in the best interests of both parties,
                                                                 since the interests of the company and investors
                                                                 often diverge.

                 Illusory underwriting                       •   This may help to explain why shares issued in
                                                                 capital raisings are often heavily discounted and
                                                                 end up in the hands of hedge funds, rather than
                  Suboptimal timing                              the best long term shareholders.

12
About Vesparum
Vesparum is uniquely placed to help Boards and management teams
optimise capital raising transactions
•    The difficulty for each issuer to determine and discharge its duty to act in the best interests of the company as a whole
     demonstrates that companies need truly independent advice in the capital raising process.
•    Issues which should be front of mind for directors include optimising for timing, structure, pricing, quantum,
     risk/underwriting, fairness, register evolution, adviser selection, allocation decisions and aftermarket trading.
•    Vesparum has a strong track record of providing independent capital raising advice.
      o 80+ ASX-listed clients; 20+ private clients; 50+ capital raisings; 90%+ clients from referrals.
      o Predictive capital raising models and reports for ASX-listed companies based on comprehensive data on 300+
          transaction variables including offer structures, fees and underwriting terms.
•    We work constructively with a wide range of banks, brokers and investors, leveraging data to optimise all of the key
     decisions in the best interests of each company and its shareholders.
•    Vesparum’s team combines backgrounds in investment banking, management consulting, asset management, law and data
     science.
      o Advisory team: Previous experience at top-tier firms including Macquarie, UBS, Morgan Stanley, Bank of America Merrill
          Lynch, Lazard, Bain & Company, L.E.K., Optiver and King & Wood Mallesons.
      o Data science team: World-class academic backgrounds in quantum physics, mathematics and actuarial sciences which
          puts us at the forefront of equity capital markets innovation globally.

                                         Think we can help? Please get in touch.
                                                +61 3 8582 4800 | www.vesparum.com

13
Appendix
     COVID-19 period case studies

14
A. COVID-19 period case studies
We analysed trading behaviour around placements and entitlement
offers in April, with five capital raisings worth highlighting

                                                                                         Institutional   Institutional
                               Date                       Discount to        Amount
Company                                      Structure                                   component       component       Case study
                            announced                    last close (%)   raised (A$m)
                                                                                            (A$M)         (% of total)

Webjet                       1-Apr-20                        55%              346            228             66%         Refer to page 16

Kathmandu                    1-Apr-20                        51%              202            150             75%         Refer to page 17

Southern Cross Media         6-Apr-20                        45%              169            149             88%         Refer to page 18

Flight Centre                6-Apr-20                        27%              701            563             80%         Refer to page 19

Monash IVF                  27-Apr-20                        27%              80              65             81%         Refer to page 20

Legend:         Placement      Entitlement offer

Source: Vesparum, IRESS

15
A. Case study: Webjet
Strong support from retail investors, however short selling activity by
hedge funds likely increased the indirect costs of raising capital
WEB – Cumulative net value traded (A$ millions)
Rebased to 20 trading days prior to announcement

                                                                 Announcement             Institutional                       Retail
                                                                      date               allotment date                  allotment date
                                                                   (01-Apr-20)             (14-Apr-20)                     (28-Apr-20)
    1,500                                                                                                                                                                                               12.0%
                                                                                                          Short selling activity                       Strong support from
    1,000                                                                                               around the institutional                          retail investors                              10.0%
                                                                                                            allotment date

     500                                                                                                                                                                                                8.0%

       0                                                                                                                                                                                                6.0%

    -500                                                                                                                                                                                                4.0%

-1,000                                                                                                                                                                                                  2.0%

-1,500                                                                                                                                                                                                  0.0%
            -20          -15              -10              -5              0            5           10           15      20                                 25              30                35   40
                                                                               Trading days post / (prior to) announcement
                                                          1                                                                    2
                             Retail investors (LHS)                                     Institutional investors (LHS)                                       Aggregate short position (RHS)

1Represented by the aggregate trading of the following retail platforms: ANZ, Bell Direct, CBA/CommSec, CMC Markets, NAB and WBC
2Represented by the aggregate trading of the following investment banks: Citi, Credit Suisse, Deutsche Bank, J.P. Morgan, Goldman Sachs, Macquarie, Merrill Lynch, Morgan Stanley, RBC, UBS
Source: Vesparum, IRESS, ASIC

16
A. Case study: Kathmandu
Strong support from retail investors, however short selling activity by
hedge funds likely increased the indirect costs of raising capital
KMD – Cumulative net value traded (A$ millions)
Rebased to 20 trading days prior to announcement

                                                                 Announcement Institutional                          Retail
                                                                      date     allotment date                   allotment date
                                                                   (01-Apr-20)    (9-Apr-20)                      (24-Apr-20)
    600                                                                                                                                                                                                 2.1%
                                      Short selling activity
    400                             around the institutional                                                                                                                                            1.8%
                                        allotment date
    200                                                                                                                                                                                                 1.5%

     0                                                                                                                                                           Strong support from                    1.2%
                                                                                                                                                                    retail investors
-200                                                                                                                                                                                                    0.9%

-400                                                                                                                                                                                                    0.6%
                                                                                     Short selling activity
-600                                                                                  around the retail                                                                                                 0.3%
                                                                                       allotment date
-800                                                                                                                                                                                                    0.0%
          -20           -15             -10              -5               0            5           10           15       20                                 25               30               35   40
                                                                              Trading days post / (prior to) announcement
                                                          1                                                                    2
                              Retail investors (LHS)                                    Institutional investors (LHS)                                       Aggregate short position (RHS)

1Represented by the aggregate trading of the following retail platforms: ANZ, Bell Direct, CBA/CommSec, CMC Markets, NAB and WBC
2Represented by the aggregate trading of the following investment banks: Citi, Credit Suisse, Deutsche Bank, J.P. Morgan, Goldman Sachs, Macquarie, Merrill Lynch, Morgan Stanley, RBC, UBS
Source: Vesparum, IRESS, ASIC

17
A. Case study: Southern Cross Media
Strong support from retail investors, however short selling activity by
hedge funds likely increased the indirect costs of raising capital
SXL – Cumulative net value traded (A$ millions)
Rebased to 20 trading days prior to announcement

                                                                 Announcement                 Institutional                        Retail
                                                                      date                   allotment date                  allotment date
                                                                   (06-Apr-20)                 (20-Apr-20)                      (4-May-20)
    125                                                                                                                                                                                                 8.0%
    100                               Short selling activity
                                    around the institutional                                                                                                                                            7.0%
     75                                 allotment date
                                                                                                                                                                                                        6.0%
     50
     25                                                                                                                                                                                                 5.0%

      0                                                                                                              Strong support from                                                                4.0%
                                                                                                                        retail investors
    -25                                                                                                                                                                                                 3.0%
    -50
                                                                                                                                                                                                        2.0%
    -75
-100                                                                                                                                                                                                    1.0%

    -125                                                                                                                                                                                                0.0%
           -20         -15              -10              -5               0            5           10           15       20                                 25               30               35   40
                                                                              Trading days post / (prior to) announcement
                                                          1                                                                    2
                             Retail investors (LHS)                                     Institutional investors (LHS)                                       Aggregate short position (RHS)

1Represented by the aggregate trading of the following retail platforms: ANZ, Bell Direct, CBA/CommSec, CMC Markets, NAB and WBC
2Represented by the aggregate trading of the following investment banks: Citi, Credit Suisse, Deutsche Bank, J.P. Morgan, Goldman Sachs, Macquarie, Merrill Lynch, Morgan Stanley, RBC, UBS
Source: Vesparum, IRESS, ASIC

18
A. Case study: Flight Centre
Strong support from retail investors, however short selling activity by
hedge funds likely increased the indirect costs of raising capital
FLT – Cumulative net value traded (A$ millions)
Rebased to 20 trading days prior to announcement

                                                                 Announcement            Institutional                                         Retail
                                                                      date              allotment date                                    allotment date
                                                                   (06-Apr-20)            (17-Apr-20)                                       (8-May-20)
    1,500                                                                                                                                                                                               15.0%
                                      Short selling activity
                                    around the institutional                                                Strong support from
    1,000                               allotment date                                                         retail investors                                                                         12.0%

     500                                                                                                                                                                                                9.0%

       0                                                                                                                                                                                                6.0%

    -500                                                                                                                                                                                                3.0%

-1,000                                                                                                                                                                                                  0.0%
            -20           -15             -10              -5              0            5           10           15      20                                 25              30                35   40
                                                                               Trading days post / (prior to) announcement
                                                          1                                                                    2
                             Retail investors (LHS)                                     Institutional investors (LHS)                                       Aggregate short position (RHS)

1Represented by the aggregate trading of the following retail platforms: ANZ, Bell Direct, CBA/CommSec, CMC Markets, NAB and WBC
2Represented by the aggregate trading of the following investment banks: Citi, Credit Suisse, Deutsche Bank, J.P. Morgan, Goldman Sachs, Macquarie, Merrill Lynch, Morgan Stanley, RBC, UBS
Source: Vesparum, IRESS, ASIC

19
A. Case study: Monash IVF
Strong support from retail investors, however short selling activity by
hedge funds likely increased the indirect costs of raising capital
MVF – Cumulative net value traded (A$ millions)
Rebased to 20 trading days prior to announcement
                                                                Announcement            Institutional                                        Retail
                                                                     date              allotment date                                   allotment date
                                                                  (27-Apr-20)            (6-May-20)                                       (27-May-20)
    30                                                                                                                                                                                                  6.0%

                                Strong support from
    20                             retail investors                                                                                                                                                     5.0%

    10                                                                                                                                                                                                  4.0%

                                                                                                            Short selling activity
    0                                                                                                     around the institutional                                                                      3.0%
                                                                                                              allotment date
-10                                                                                                                                                                                                     2.0%

-20                                                                                                                                                                                                     1.0%

-30                                                                                                                                                                                                     0.0%
         -20         -15              -10              -5               0             5           10           15        20                                25               30                35   40
                                                                             Trading days post / (prior to) announcement
                                                            1                                                                  2
                            Retail investors (LHS)                                      Institutional investors (LHS)                                       Aggregate short position (RHS)

1Represented by the aggregate trading of the following retail platforms: ANZ, Bell Direct, CBA/CommSec, CMC Markets, NAB and WBC
2Represented by the aggregate trading of the following investment banks: Citi, Credit Suisse, Deutsche Bank, J.P. Morgan, Goldman Sachs, Macquarie, Merrill Lynch, Morgan Stanley, RBC, UBS
Source: Vesparum, IRESS, ASIC

20
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