Tish Crawford Jones talks to two experienced capital markets and IR professionals about the challenges facing small-cap IROs.
The investor relations profession and profile is on the rise! Many look to the established FTSE 250 and FTSE 100 teams for best practice IR; however the importance of small-cap IR can be make or break, therefore an immensely interesting position to consider.
After spending nearly 20 years working in investment banking, I have dedicated over a decade to advising small-cap & FTSE 250 corporate clients on their IR programmes, before moving into IR Search. I recently spoke to two capital markets/IR professionals: Stephen Ford, who has 28 years’ experience running small and mid- cap equity teams (he developed Burnmoor Partners as an independent consultant working with both private and quoted companies) and Caroline Watson, head of IR at the FTSE small-cap company, Nanoco Group.
What makes IR for small-cap companies different?
SF: Larger corporates tend to have a wider availability of funds and resource that enables the support of a wider dedicated team. Typically a dedicated large-cap IR officer (IRO) will have the appropriate skills to represent the company at conferences and directly to the buy-side and sell-side community. The small-cap IRO may act as a pure administrator, liaising with investors and collating sell-side data.
CW: I think you are more at the coal face and work more directly with your CEO and CFO. Small companies tend to have a lot less analyst coverage, therefore more time is spent messaging with investors and potential investors. You are the spokesperson for the company and do more marketing of the investment proposition to investors.
What is the most important aspect that small caps need to focus on to achieve best practice IR?
SF: Quality of market messaging is crucial. A transparent, well messaged company website covering IR to include user friendly product and company financial presentations will enhance investor interest as a positive initial first impression checklist. A well-rehearsed earnings call adds to the company perception from investors, supported by clear informative company roadshow presentation material.
CW: Keeping the market and investors informed on what is going on and being transparent.
What have been the main effects of MiFID II, and is this affecting the level of activity senior management is involved in?
SF: With increasing pressure on both buy- side and sell-side fee income, the role of IR has undoubtedly become more important. As the buy side reduces its broker pool, sell-side research of non-corporate companies at the small-cap end inevitably comes under pressure. On that basis IR will need to engage increasingly with non- shareholders to maintain dialogue and new investor interest. Without a dedicated IR, senior management are therefore more time constrained from day to day business management, whilst looking to develop better interaction with non-shareholders.
CW: I don’t think we have seen the main effects yet. 2018 is the first year for many fund managers paying for research and having to judge whether the research they receive is fundamentally adding value. Most fund managers have just rolled over existing relationships in the first year but the belief, from those that I have spoken to, is that many will start to drop relationships in year two as ‘added value’ becomes easier to analyse. For many small-cap stocks the expectation is that analyst coverage will reduce. Therefore, there will be more emphasis on companies to provide information and engage with investors and potential investors themselves. This will lead to senior management spending more time marketing to investors.
"Any quoted business with more than five outside investors should consider some form of IR, - this could be part time or outsourced in the first instance."
Specialist in IR
- Small companies have less analyst coverage, so more time is spent messaging with investors.
- Quality of market messaging is crucial, through the website, presentations and earnings calls.
- Having a dedicated IRO enables companies to be more in control of the messaging.
What are the main benefits and challenges in having a dedicated IR?
SF: A successful IR function improves senior management productivity in terms of internal company messaging at board level and increased time allocation running respective business operations. The IRO needs to be fully adept on messaging to buy-side and sell-side institutions within the FCA regulatory framework.
CW: The main benefit is a dedicated spokesperson for the company and a main contact for investors and analysts. It enables companies to be more in control of the messaging to investors. The challenges are getting the right message out there and the ability to find and engage with potential new investors.
At what stage is important for a company to think about a dedicated IR resource? SF: This depends very much on the level of sell-side coverage and location of senior management. A company with management based overseas will inevitably do better with a UK IRO in terms of market engagement and reporting at board level. A deal-hungry small cap would benefit from an IRO to not only free up management time, but to understand both buy-side and sell-side views.
CW: I believe any quoted business with more than five outside investors should consider some form of IR. This could be part time or outsourced in the first instance. I think companies with a market cap over £500m should consider a dedicated IR resource.
To conclude, the perception of the small- cap company by the market is paramount to the ability to engage and attract potential new investors, which as MiFID II takes hold will shift focus onto the company versus advisors and intermediaries as broker relationships are cut. Here at Carter Murray we are seeing a shift in internal discussions around how to incorporate a specialised IR professional, with hybrid roles (alongside comms/strategy) becoming an increasingly viable option.