Diminishing Sellside Services Compel More SMID-Cap IROs to Find Investor Marketing Alternatives

There are times that no matter how well your company is performing, no matter how exciting its newest product or service might be, it seems like your best investor marketing efforts and those of covering banks are not helping support your company`s market valuation. Investors don’t seem to be paying enough attention, or perhaps those who are accepting meetings are simply the wrong investors to target.

There are roughly 4,300 publicly traded companies on US stock exchanges alone. Even for sector analysts, the relentless flow of industry news makes it difficult to stay completely abreast of even the largest and most well-known companies in each industry. Further, larger institutional investors are no longer inclined to spend the time and other resources to discover smaller-cap opportunities, largely because it’s often difficult for them to amass enough shares to drive fund performance.

Some SMID-cap companies are falling victim to the fact that there are only so many hours in a day for a sellside or buyside analyst to discover and research them. With regard to the sellside, it hasn’t always been this way. During the ebullient years of the late-90s internet stock boom, bank analysts like Henry Blodgett and Mary Meeker were household names in the US and even in other countries. Both were considered Wall Street royalty. They headed large research departments with deep resources that could take the time to write research on smaller capitalization companies. However, following the 2008 global financial crisis, the sellside landscape has fundamentally changed, due to economic and regulatory reasons.

Investment banks have significantly reduced the number of equity research analysts they employ and have also cut back on related services, such as corporate access. This phenomena has accelerated with the recent implementation of the European Union’s MiFid II regulations. These regulations require institutional investors to pay for bank research separately, instead of paying for it as a package of services; as a consequence of having to pay for research, investors have been reducing the number of banks that provide research to them. Some firms outside the EU, particularly large global banks, are taking a universal approach to complying with MiFid II regulations. For example, a US-based business unit of a global investment bank would operate within the confines of the regulations as would sister units located in the EU. Beyond establishing a rigorous compliance environment to avoid regulatory violations, this approach can also make a bank more attractive to investors from a risk management perspective. It should be noted that some legal experts believe regulators in other capital markets could adopt similar rules, which could broaden the current phenomena.

In today’s world of less bank research, small- and mid-cap companies can have a difficult time getting noticed and being followed by investors, regardless of the merits of their value propositions.  This problem is magnified in markets like Brazil and Mexico, where many analysts are tasked with covering multiple sectors; for example, instead of having individual analysts covering the hardware, software, and e-commerce sectors separately, a bank might have one Information Technology analyst covering all of them. In some cases, banks are abandoning entire sectors. Diminishing research coverage isn’t the only problem. Banks are also committing less to taking companies on non-deal roadshows and investor attendance at some bank conferences has been falling, particularly in Europe; again, because now the cost of attending has been unbundled like that of research. Roadshows and equity conferences have traditionally been the most effective means for a company to meet with shareholders and get exposure to new investors.  Investor Days and smaller issuer-initiated events for the financial community have also been an important part of strategies for shareholder engagement and investor marketing.

Also, it´s not that there is a lack of available capital for investment in SMID-cap companies. Rather, even for those funds that specialize in them – of which there are many – it is becoming increasingly difficult to differentiate and get noticed in a sea of thousands of peers of similar size.

A more proactive approach is now required with regard to investor marketing.

Moving beyond using banks to organize non-deal roadshows, more companies are targeting and reaching out to prospective investors on their own, often using the services of IR advisors or the tools of other service providers. The latter includes online targeting platforms and portals that function in similar ways to dating websites.

For each company, the most effective approach often depends on its budget and the size of its IR department. Ideally, you are partnering with a firm that has the expertise and breadth of resources to introduce you to the right investors – those that have an appetite for your company’s type of equity story – and can do this in a way that optimizes your exposure in any given equity market. Equally important is a partner who can also manage the logistics of a non-deal roadshow, which are often complex.

The right corporate access services can make the difference between frustrating obscurity and newfound trading liquidity that gets your company the attention of additional investors and, ultimately, a market valuation that reflects your company´s economic value.

Contact Priscila Nannetti (priscila@inspirgroup.com) or Monique Skruzny (monique@inspirgroup.com), to learn how InspIR can assist you with our independent corporate access services.