If a big in­vestor is about to off­load a large swathe of shares, what im­pact does this have on the price?

Shares - - CONTENTS -

Un­der­stand­ing the im­pact of share over­hangs

Ashare over­hang is when a com­pany has a large amount of shares in the hands of per­haps one or two hold­ers which, if they were sud­denly re­leased on to the mar­ket, would ul­ti­mately flood it and dampen the share price.

There could be var­i­ous rea­sons for a share over­hang, it could be a founder look­ing to exit or a fund man­ager look­ing to off­load a hefty in­ter­est in a stock. They also vary by scale.


Pri­vate eq­uity com­pa­nies when float­ing a com­pany will tend to keep a hold­ing in the com­pany once it has gone pub­lic.

Oliver Brown, in­vest­ment di­rec­tor at RC Brown In­vest­ment Man­age­ment, says one rea­son pri­vate eq­uity com­pa­nies re­tain part of the busi­ness is that in­vestors like to see them to keep ‘skin in the game’. This helps re­as­sure po­ten­tial in­vestors that there is noth­ing fun­da­men­tally wrong with the busi­ness. Brown was a buyer when

Hol­ly­wood Bowl (BOWL) floated de­spite its pri­vate eq­uity own­ers sell­ing out com­pletely. How­ever, in this in­stance the pri­vate eq­uity house had been ap­proached by an in­vest­ment bank say­ing there were plenty of buy­ers to meet the de­mand.

One of Brown’s funds, MFM UK Pri­mary Op­por­tu­ni­ties

(0960698) fund, will look at an over­hang as part of the process when se­lect­ing stocks.

He says that it may al­low for a ‘dou­ble dis­count’ as along with the dis­count as­so­ci­ated get­ting in at IPO, if there’s a ma­jor share­holder sell­ing out their stake this may also cre­ate an at­trac­tive buy­ing op­por­tu­nity.


An ob­vi­ous ex­am­ple of a share over­hang would be Royal

Bank of Scot­land (RBS). The Govern­ment still has a 62.4% stake in the bank af­ter bail­ing it out in 2008.

When £2.6bn worth of these

There could be var­i­ous rea­sons for a share over­hang, it could be a founder look­ing to exit or a fund man­ager look­ing to off­load a hefty in­ter­est in a stock. They also vary by scale

shares were sold in the lat­est tranche in June 2018 (4 Jun) the share price hit a down­ward spi­ral.

On the day the shares were sold, they lost 3.5% of their value but with the chan­cel­lor Philip Ham­mond sig­nalling his in­tent to sell down the stake fur­ther, this spooked the mar­ket and the price con­tin­ued to drop.

As Brown notes there are other rea­sons that banks in gen­eral may be los­ing in­vestor ap­peal such as the po­ten­tial im­pact of Brexit and low in­ter­est rates which lim­its their prof­itabil­ity.

RBS has made some­thing of a re­cov­ery, hav­ing not made a profit for ten years and re­cently re­sumed div­i­dends but the share over­hang looks likely to re­main a risk for in­vestors to weigh for the fore­see­able fu­ture.


Ju­lian Dunker­ton, the co-founder of re­tail brand Su­perdry (SDRY), re­cently sold £71m of its hold­ing in his com­pany af­ter sell­ing a 1.23% stake for £17.8m a few months pre­vi­ously. Should in­vestors be wor­ried that the per­son who was in­stru­men­tal in the devel­op­ment of the busi­ness has de­cided he doesn’t want to be in­volved any­more?

Brown, who has held Su­perdry at one point, was con­sid­er­ing whether to buy back into the com­pany. He says this type of over­hang is fine as long as in­vestors are com­fort­able with the rea­sons why the founder is sell­ing up.

Others such as Mark Dixon, founder of ser­viced of­fice com­pany IWG (IWG), are se­rial sellers of large swathes of shares. One is­sue when big stakes are sold of in­ter­mit­tently is that it will cause share price volatil­ity.

If an in­vestor is a holder of a com­pany which sud­denly looks like sell­ing large stakes in the com­pany it may not be the best news in terms of im­pact on share price.

Al­ter­na­tively, if an in­vestor is look­ing at an en­try point to a com­pany, a large share over­hang may be good news if it leads to some short-term weak­ness in the share price. Once the mar­ket has di­gested the avail­able shares, chances are that the price may start its up­ward des­cent again.

How­ever, while share over­hangs can be an is­sue for a va­ri­ety of rea­sons, there are by no means the first thing to con­sider when look­ing at a stock.


Re­gard­less of whether a busi­ness has a large over­hang over it or not, it has to be a good busi­ness to con­sider in­vest­ing.

As Brown says, ‘val­u­a­tions trump over­hangs’ ev­ery time. (DS)

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