Plunging into chaos at pool of capital

Many in the market have forgotten how disruptive rights issues can be, but they're being reminded now. Bradford & Bingley plunged 16% yesterday, but the most striking movement may be Royal Bank of Scotland's. Its shares have fallen almost 20% over the past eight trading sessions - and that's after a rights issue that the market, bizarrely, cheered on day one.

There seem to be many factors at work. Yesterday's new element was selling by US investors who hold their shares in RBS via American depositary receipts, or ADRs. Unable to take up their rights to new RBS shares, the ADR holders have been dumping their entitlements.

Welcome to modern markets in action. The theory says it ought to be easier for big, internationally known banks such as RBS to raise funds from a wide pool of capital. In practice, the scenes are chaotic. RBS's weary advisers are braced for more volatility until June 6, the day shareholders must pay for the new shares if they want them.

Some won't, of course, and that creates further pressures. A rump of shares will be left to be sold at the end. Given that RBS, HBOS and B&B all have large numbers of retail investors, it's hard to guess how big the rumps will be. In RBS's case, we're talking about Europe's largest rights issue.

The only safe bet is that there will be a day when the selling pressures are exhausted. At RBS, the moment surely can't be too far away. Yes, the rights issue is immensely dilutive. Yes, chief executive Sir Fred Goodwin's record is tarnished and he is on probation. But there's a price for everything: RBS can't go much lower than 256p, can it?

Debt has its uses

The private equity industry rarely misses an opportunity to remind us of its own brilliance. Yesterday's little statistic, from a report by independent auditors for the British Private Equity and Venture Capital Association (BVCA), was this: over the past decade, the industry returned 20.1% a year to investors, beating the average pension fund (which achieved 7.1%) and the FT all-share index (6.2%).

The performance was "excellent", reckons the BVCA's Simon Walker. In one sense, he is right: 20% a year is roughly what the great Warren Buffett has averaged over half a century.

But how did private equity do it? That's where the report falls silent. There was no attempt to assess how much was due to private equity's supposed management superiority and how much was the result of financial leverage - that is to say, the cranking-up of returns with the use of debt.

Such an analysis is promised later this year. It should be more useful than yesterday's report since risk-adjusted returns are the only ones that really matter. Michael Gordon, Fidelity's chief investment officer, has consistently pointed out that any stock market investor with an appetite for debt could replicate private equity's returns by adding the spice of leverage.

Gordon's view is that private equity may bring superior management and better incentive structures but their impact has been minimal when compared to leverage.

For sceptics like him, yesterday's report will provide further ammunition. The strongest contributors to the overall 20.1% return were the management buy-out funds, which tend to use debt aggressively. By contrast, the smaller venture and technology funds - where debt is less prevalent - are said "to continue to face challenges". How interesting, and how unsurprising.

A long view at M&B

What has Robert Tchenguiz done to deserve a seat on the board of Mitchells & Butlers? The last time the duo acted in tandem, the company landed itself with a £380m loss on a hedging position after a property joint venture failed to happen. A good reason, you might think, for M&B to steer clear.

The problem, of course, is that Tchenguiz owns 3% of the shares, controls a further 24% via derivatives and is clearly not going away.

Include fellow travellers - meaning investors who want M&B to "unlock" the value of its freeholds - and half the company is probably in the hands of property specialists. So you can't really blame the board for concluding that it's better to have the awkward crowd inside the tent.

Tchenguiz & Co now have the chance to prove there is gold within M&B. Conversion to a real estate investment trust is on the cards. Will it work? Come back in a year. It will take at least that long to refinance M&B to make conversion possible. There are no quick fixes here, as even Tchenguiz probably now appreciates.

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