DIY Marketing Versus Corporate Access: An Important Choice for IROs
One of the most important roles investor relations plays is nurturing investor relationships. The age-old question is how to create these relationships in the first place. There is also a new question on the horizon: will Europe's implementation of MiFID II eventually affect how Canadian public companies attract investor attention?
In this issue of IR focus, we examine the choices that IROs can make to build an investor outreach campaign and discuss the potential impact of MiFID II on these choices.
Investment banks have long been the go-to source that public companies use to meet investors. A decade ago, most of this assistance came from sell-side research analysts and their institutional sales decks. While boutique dealers still operate this way, large dealers formed corporate access teams to formalize and strengthen their public company relationships and fill the void between institutional sales and sell-side research.
Each corporate access team has its own proprietary connections and ways of doing business, which, for competitive reasons, they do not discuss publicly. However, in general, the value proposition is compelling: what better source to use to form investor relationships than dealers who sell and trade stock daily to thousands of institutional accounts worldwide? What better source to use to form broker relationships than the organizations that have broad retail distribution networks?
Corporate access teams pull in the expertise of their research analysts, institutional sales and trading professionals to plan and execute company site visits, facility tours and non-deal (and deal) roadshows in target cities globally. They also assist with made-to-order company events.
When they aren't marketing individual companies, corporate access teams organize sector-focused investor conferences. Think TD Securities Telecom & Media Forum, RBC's Senior Gold Conference, CIBC's Eastern Institutional Investor Conference, BMO's Durable Growth Forum and Scotiabank's Financials Summit, to name just a few.
Beyond the tactical aspects of arranging meetings with prospective and existing investors, corporate access teams traffic in market intelligence. IROs can expect corporate access teams to advise on the best market penetration strategies and, of course, there is pre-meeting preparation and post-investor meeting feedback aggregated from a bank's sales, trading and research teams. Insights on the habits, preferences, personalities and idiosyncrasies of portfolio managers delivered to the IRO can make a world of difference to the success of an initial meeting.
Since these services are all free to public company clients of an investment dealer, it's hard to imagine why IROs would not avail themselves of this support, if it is available. The vast majority of public companies that are ‘banked’ (i.e. served by an investment bank) rely on corporate access teams to provide most of their outbound marketing. With so many other competing responsibilities, including nurturing the health and wellbeing of existing investor relationships, it's easy to understand why IROs prefer an outsourced solution.
That's not to say IROs go on autopilot: they are actively involved in shaping investor tours and determining timing, pouring over meeting schedules to better understand who is on the investor guest list, and acting on corporate access team feedback following events. When a company has more than one investment banking relationship (some have more than a dozen), the IRO plays a role in deciding how much ‘time’ to give to each dealer, remembering that each dealer has its own investor connections and retail distribution networks.
But there are two scenarios in which public companies may find it necessary to engage in Do It Yourself (DIY) investor outreach.
DIY Marketing for the ‘Unbanked’
While corporate access teams are agnostic in respect of the market capitalization of a public company – they market large and small companies alike – there is one catch. They will not market for companies that are not clients.
This leaves a significant cohort of small/micro-cap Canadian companies without corporate access support. These companies – unkindly referred to as ‘orphans’ – must forge their own investor and broker relationships.
Armed with the proverbial ‘good story to tell’, they network relentlessly, and if they can afford it, they buy access to databases of institutional investors from well-recognized data aggregators, scour the names based on applicable filters, identify high potential leads and embark on what can be, depending on one's temperament, an exhilarating or soul destroying cold calling process.
While time consuming and costly, DIY marketing can result in the formation of meaningful new investor relationships for both ‘banked’ and ‘unbanked’ companies. Few experiences are as professionally pleasing as identifying, targeting and capturing the interest of a new investor. Skilled IROs use a variety of resources to help ferret out investor prospects and report that it takes tenacity, knowledge and creativity to achieve success. Tenacity is important because institutional investors are known to screen out unsolicited calls, and while there is no hard data on success rates, anecdotal evidence suggests it is common to make 20-30 calls to different investors before just one will take a meeting. Knowledge of company and industry fundamentals is important because investors will ask pointed questions when they receive a cold call. And creativity is necessary in developing the so-called ‘elevator pitch’ that will capture initial interest.
Investor Marketing in a MiFID II World
On January 3, 2018, the European Securities and Markets Authority (EMSA) brought into force the Market in Financial Instruments Directive and Regulation II (MiFID II). Known as next generation legislation to protect investors, it has far-reaching implications for investor relations and investor outreach.
Under MiFID II, European investment banks are expected to charge fund managers for the research they provide. The fear is that this will create a price war, leading to a further reduction in research coverage and the potential for more companies to be left without sell-side marketing support, as fund managers opt not to pay for it.
Compounding matters, some observers believe that the work of corporate access teams may not be justified under the auspices of research. Individual meetings or tours would no longer be offered for free as these services have value. It would appear that EMSA is suggesting that public companies use a third-party corporate access provider that does not provide investment services because this removes a potential conflict of interest and inducement risk.
The challenge to European IROs is evident. Under MiFID II, investor marketing through a dealer would no longer be free of charge and may not be offered at all.
There is still uncertainty regarding how this will work in Europe and whether, at some point, all or part of MiFID II will be implemented in Canada. As one IRO told IR focus: "MiFID II represents the X factor in how we will market in future years", particularly if these rules are adopted domestically.
The implications for Canadian IROs could be two-fold:
- One, if corporate access teams are somehow restrained in service provision, IROs would have to do more DIY marketing or hire external specialist providers; and
- Two, investor marketing budgets would need to significantly increase.
A Boost to IR Firms?
In future, changes in the rules related to analyst research and corporate access could create new tiers of specialist firms and result in more business for IR firms specializing in outreach. There are a number of consultants in Canada doing this work (see the CIRI membership directory) and they are often staffed by former investment bankers or analysts who have broad investor and broker connections.
Keeping It Fresh
While nothing is currently challenging the status quo in Canada, IROs must still have a clear understanding of the different investor outreach options available to them. They should be actively engaged in working with corporate access teams, where possible, to expand investor interest. It may also pay to burnish one's own ability to DIY market, if only because cold calling helps to sharpen personal presentation skills and refine the corporate elevator pitch. IROs who engage in outreach also gain different perspectives on the capital markets’ perceptions of their companies, beyond comments from existing investors. Should MiFID II-type legislation eventually make it to Canada, the ability to DIY market will be extremely valuable.
For more insights on investor outreach, register for the 2018 CIRI Annual Conference, which will feature, among other seminars: Cultivating & Communicating with a Retail Investor Base; Marketing: Research, Targeting, Segmentation – Putting It All Together; and Small Cap Issuers: Getting Analyst Coverage & Alternatives if You Can’t.
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