Moving Engagement with Investors in the Right Direction

In years gone by, it was common for investor relations officers to rely heavily or exclusively on brokerage firms to arrange introductory meetings with institutional investors. Direct engagement to forge an initial relationship without sell-side involvement was rare – at least among large and mid-cap companies.

That is no longer the case, as IROs increasingly use technology and their own market intelligence to directly and frequently forge new and meaningful relationships at home and abroad. In this issue of IR focus, we examine the tools and techniques used by IROs to broaden and diversify their companies' ownership.

Why go direct?

IROs provided several answers to this question. Most frequently mentioned is that by engaging directly with prospective new institutional investors, companies can gain exposure to more – and different – funds than they can by outsourcing all of their outreach to investment dealers.

Said one IRO: “It all comes down to our strategy. We’ve set a goal of diversifying our shareholder base and the strategy we use requires targeting new accounts across different geographies and investment styles. We leverage several dealers in Canada and the U.S. to get meetings with new investors that help us fulfill our diversification strategy. But over time, we’ve found that brokers exhaust their contacts, introduce us only to funds with whom they are executing trades or put us in front of funds that are not necessarily ones we want to meet – in the context of our IR strategy – or can convince to buy in on our company. Through direct engagement, we complement the brokers’ efforts to make our outreach program more effective and thorough.”

A do-it-yourself approach appeals to IROs who have ambitious objectives in mind. Said one contributor to this story: “Brokers serve many masters and although they try hard, they often don’t have the time or the resources to spend to do the heavy lifting each company needs to get in front of new accounts. No one is going to do it for us, so we do a lot (of outreach) ourselves because of the goals we’ve set for our program.”

There can also be a quality issue with broker-originated meetings. One IRO noted that meetings recently set up by one dealer “were horrible. The broker simply didn’t target the right funds for our business, which meant a full day was basically wasted.”

The rise of direct in Europe

Direct engagement goes both ways, with more fund managers starting to reach out directly to issuers – without support from intermediaries – to arrange initial engagement meetings. This means IROs need to be ready to respond to inbound inquiries at a moment’s notice as well as prepared to engage directly and proactively to add new relationships.

In Europe, direct engagement is not only popular, it is more of a necessity due to the Markets in Financial Instruments Directive (MiFID) II. This legislative framework, introduced in January 2018, prohibits investors from paying brokers for the work put into connecting them with issuers out of trading commissions. While this does not eliminate the outreach role played by dealers in Europe, it does require them to unbundle their fees and, as a consequence, many fund managers there appear disinclined to pay a broker for arranging meetings.

In a paper published in March 2018 just after MiFID II came into force, the UK IR Society noted that 90% of investors used corporate access provided by the sell-side before MiFID II and only 38% on the buy-side said that they relied on companies contacting them directly. Following MiFID II, the scales tipped such that 54% of investors surveyed said they would be more reliant on companies approaching them and 52% said they would reduce their use of the sell-side.

In another paper published for the UK IR Society in April 2019 – one year after MiFID II was enacted – entitled MiFID II – what next?, author Michael Hufton said that from an IRO perspective the extent of the change “isn’t always obvious, especially for large cap corporates: most see more incoming meeting requests directly from investors; many see an evolving landscape at conferences; some perceive changes to sales and research coverage on the sell-side. But the buy-side has experienced profound change, with the entire industry moving to a model where the cost of research and corporate access is taken to P&L, not billed to the client, and several large firms building internal corporate access teams. The impact of these shifts is still percolating through.”

A more recent report by Euronext Corporate Services stated that “While brokers once played a key role in facilitating discussions between investors and issuers, the changing landscape brought about by the European legislation has seen a move away from that model.” The report noted that, due to MiFID II, “only 5% of fund managers” would pay a broker to arrange a meeting with an issuer.

From a direct engagement perspective in North America, the question that remains unanswered is whether MiFID II will evolve into an international standard. If it does, it will have broad implications, including for IR teams in terms of responsibilities and processes.

Corporate access moves in-house at some global investors

To the point made above by Michael Hufton, investors such as Norges Bank Investment Management (with investments in 9,000 companies worldwide) and Fidelity International now operate their own corporate access teams. Norges Bank told issuers shortly after MiFID II was implemented to reach out directly: “We see access to senior management as being a central part of our investment process, and key to fulfilling our role as a responsible active owner. In sending this letter, we felt it was important to reiterate this message with the companies the fund owns to help ensure the level of access we currently receive does not change under MiFID II.”

While going direct is the preferred method of maintaining a relationship, the challenge for IROs is to get that relationship in the first place.

The hybrid model of outreach

Every IRO we spoke with still relies on brokers for initial outreach to new investors. But many referred to a hybrid model whereby IR teams identify potential investors rather than leaving it to dealers to perform this role.

In describing this hybrid model, one IRO said: “We do the initial targeting and brokers use their platforms and relationships to get the meetings we want. It takes us time and effort to identify potential investors – and that’s something we have become increasingly good at – but brokers have connections we don’t, which makes it easier for them to open doors for us. We feed them names and they set up meetings.”

IR teams often collaborate with dealers now to see who would be best to make initial contact.

Fintech provides the fuel for effective targeting

There is universal agreement among the IROs we spoke to that the keys to a successful approach are to have good data to identify prospective investors and good customer relationship management software (CRM) to record activities for follow-up.

CRM systems used by IROs who contributed to this story are Toronto-based Irwin and BD Corporate from S&P Global Market Intelligence. Both are workflow solutions that automate administrative tasks associated with IR engagement (from prospecting to recording details of outreach efforts) and contain databases necessary for investor prospecting and monitoring/tracking of current investors and their holdings.

“I use Irwin because it gives me cost-effective access to a global database of institutional investors including what they invest in and their contact information,” said one IRO. “Whether you use BD Corporate or Irwin, and I’ve used both, they provide a great cloud-based platform and dashboard to empower direct engagement.”

It is common for IR teams to purchase more than one software seat or license so that several users can access data and review the history of outreach activities. As one IR said, the notes she takes after every investor meeting are recorded in the CRM and reviewed by her CFO and a member of the finance team on a bring-forward basis before a follow-on meeting with the same investor. This type of attention to detail ensures that future engagements are more meaningful and intentional. “Everyone’s time is valuable, so we consider it a matter of respect to record what was said in the first introductory meeting with an investor and the last meeting.” Beyond being used for bring-forward purposes, meeting notes form part of a company’s disclosure record and snippets can be shared with the company’s Board to inform Directors of investor sentiment.

To complement CRM software, some IROs we spoke to subscribe to FactSet, AlphaSense, Bloomberg, Capital IQ, and/or Nasdaq tools to build models that analyze share trading patterns of their companies and peer organizations to identify outreach opportunities. “If a fund is invested in our sector but holds none of our stock or has a lower weighting in us than in others, I will engage to find out why. I look at short interest positions and changes in ownership among other things that help me sharpen my targeting,” said another IRO.

Using such tools enables IROs to do several things, including efficiently search earnings call transcripts of peer/competitor companies and watch for M&A news in their sectors. As one IRO said, “I use events in our part of the capital markets as triggers to reach out to new and current (fund) accounts, usually via email, to offer our company’s perspective and to start a dialogue that I hope will lead to a relationship or solidify trust in an existing relationship.” While not all were shareholder oriented, this IRO noted he sent 30,000 emails in 2021 – a sign of the importance of this communication channel to investor engagement.

For IROs whose budgets preclude the use of such tools, getting dealers to share their research is necessary. Such requests will often be accommodated, although not always, as dealers do see their market intelligence and investor connections as proprietary competitive advantages.

Microcap IROs that do not have sell-side support to rely on find particular value in databases that list contacts for family offices, investment clubs and funds willing to take positions in their sectors.

To choose the software that is right for your company, IROs suggest getting a demonstration, looking into after-sales support and asking for references from other IROs.

How to go direct

Setting up a direct engagement program starts with a recognition that brokerage firms are a helpful conduit to relationships. Every IRO we spoke to attended broker-sponsored conferences as a way of meeting potential new investors and then forming ongoing relationships. As one IRO said, “It’s easier (to attend) than cold calling.”

Of note, some investors will not meet one-on-one with issuers with whom they do not yet have a relationship, meaning that the only ways for IROs to engage with those accounts are either a broker-sponsored conference or an investor day. This is because some fund managers put a high value on the opportunity to hear what other investors are asking management. Through such exchanges, institutions can observe hot-button issues that concern other investors before taking their own positions.

Investor days provide an ideal forum for direct engagement and most companies will use such opportunities – or asset tours – to spur interest from new accounts.

When it comes to the actual fulfillment of direct engagement, IROs who contributed to this story said they typically start by emailing a fact sheet or concise message to a prospective investor. If that does not trigger a response, they will follow up by phone to gauge interest. Some fund managers will take initial meetings with issuers over Microsoft Teams but will not invest unless and until an in-person meeting with management is held – something to keep in mind when planning the outreach calendar.

“To get our foot in the door, the email we use encapsulates our investment thesis,” said one IRO. “It’s brief but conveys secular trends and our positioning relative to those trends and contains selected facts and figures that we know will be of relevance to the investment manager we are targeting. It’s a written form of an elevator pitch crafted specifically to capture the attention of that investor based on what we know of their investment proclivities.”

Fact sheets may also be supplied to corporate access teams at brokerage firms to direct and enable their outreach.

Said one IRO: “We have a series of four or five fact sheets that we use depending on the nature of the investment account we’re targeting. One of them is specifically crafted for use in approaching ESG-oriented funds. It covers our MSCI, S&P Global Corporate Sustainability Assessment, and Sustainalytics rankings and provides a high-level overview of how we’ve improved those rankings over time. I would encourage all IROs to have a tool like this at the ready to engage with the increasing number of fund managers who use a responsible investing framework.”

As the world’s largest capital market, the U.S. is at the top of the radar screen for direct engagement purposes. IROs we spoke to have found U.S. investors to be generally receptive to direct engagement from Canadian companies – with one proviso. The manager must be able and willing to invest in Canadian-listed issuers in the industry sector in which the IRO operates. “We do our homework when reaching out from Canada to the U.S., which for us means we focus on funds that own U.S. domiciled companies that are similar to our own but with fundamentals that are not as strong as ours,” said one IRO. “It’s definitely not a shotgun approach.”

IROs who engage directly with prospective investors are performing some of the duties previously associated with the sales or research desks at brokerage firms. These tasks put added stress on investor relations teams in that to be effective, IROs must be able to capture and synthesize a large amount of data and act on it in more ways than in past. However, the upside is when IROs take on added responsibilities, their value increases.

IRO as a data analyst is becoming more of a reality. “I liken it to any form of marketing,” said one IRO. “If you want to sell your product, you need to know your customer, their habits, and what makes them buy or not. All marketers worth their salt today use data-driven customer research. Why should IROs be any different? We have a product to sell called our company’s stock. So, my advice is to do the consumer research, tailor your pitch, engage with potential buyers and then measure the results of your direct engagements for continuous improvement.”

Not to be missed is the fact that direct engagement ensures IROs hear exactly what an investment manager thinks of the issuer, its strategy and its future. There are no gatekeepers synthesizing or interpreting those comments, as there are when a dealer is fronting the relationship.

The IROs we spoke to typically engage in dozens of institutional investor conversations per quarter. The majority of those conversations are with existing shareholders, but in every case, a portion involves new uninvested accounts.

“I think it’s important to set aside time every day to identify and target new funds,” said one IRO. “I see this as a critical part of our role here in IR and I know our leadership team feels the same way.”

Starting a direct engagement program takes time and the allocation of some monies for fintech tools that enable research and targeting. However, once ramped up, direct engagement becomes faster, more efficient, and with practice, more effective.

For the last word on direct engagement, we turn to an IRO: “There is nothing more fulfilling than identifying someone who should own our stock, sharing our investment thesis and then seeing them buy in. It more than makes up for the time I spend in the research phase.”