Make Your Sell-side Earn Their Pay
21 May 2020
By Matthew Tractenberg
There is no denying that the way in which the sell-side services corporate issuers has changed drastically over the last 20 years. We saw it coming. We grumbled about it when we first noticed, and couldn’t do anything to stop it. A slow yet unmovable force. We knew this day would come. Spoiler: it’s only going to get worse from here.
It began by a few tier 3 banks catering to hedge funds. Their conferences were poorly attended by the long-only names, NDR schedules were mediocre, and their research was a cut and paste from your earnings material once per quarter. Then it began to leak into the tier 2 banks. Today, I see well respected investment banks with analysts that appear to be more focused on fast money. When I examine the economics of the street, I don’t fault them. However, we do need to come back to a more balanced state. That’s the purpose of this exercise.
Today, many IROs are scrambling to adjust to this new world where conferences and NDRs are questionable uses of their time. Some are unable to find a bank to host their trip in a city the analyst may find difficulty getting paid in. The root causes of this are the underlying economics, and to a lesser degree, regulatory changes like MIFID-II. To be fair, the blame is shared across both buy-side and sell-side. When you ask your analyst to secure a meeting with Firm ABC and their response is “we don’t have a relationship there”, what they are really saying is that they are not on the firm’s “approved broker list”. It’s no different than a vendor at your company. You’re not allowed to do business with just anyone offering a service. There’s a process in approving that vendor, agreeing on price, and a level of service quality.
Each side is at fault for creating the current dynamic you struggle with. The conferences are 80% fast money because you and I won’t take their meeting request for NDRs. How else are they going to meet with your management team? Conversely, long-only PMs know that a conference is expensive. They are often in a 1×1 room with firms who have a very different investment horizon. And finally, they know that you’ll likely offer an in-office meeting your next trip through town. They don’t find it difficult to get your time. It’s a self-sustaining downward spiral of investor access.
So how do we break the cycle? We are not going to change how approved broker lists are constructed, or how hedge funds participate in conferences. What we can control is our engagement with the sell-side. We can focus our resources on those sell-side analysts who provide the most value. We can create incentives for analysts to better align their interests with ours. This will require some candid conversations with your analysts about your process and the rewards.
Before we begin the work, I suggest you perform a thorough investor targeting analysis. Gather 20 or so firms you want to begin cultivating relationships with and possibly meet. Additionally, explore the entire universe of conferences throughout the year. Whether the bank covers you or not, it makes no difference. And finally, socialize this process with your leadership team and articulate what you aim to achieve. If they understand that the end result is better quality research, any comments or emails from the analysts can be taken in context. The pain will be worth it.
Step 1: Tier covering banks
The first step is to tier our covering banks. This begins with a brief survey that you will send to key buy-side contacts and any corporate employees who have exposure to your analysts or their research. It could include your treasurer, FP&A, M&A, your CEO, CFO, and COO. Any business leaders who join you on the road, at a conference, or on the phone. What you will ask this audience is to rate the analysts across a series of dimensions. Those elements could include industry insight, financial model accuracy, willingness to collaborate on financial assumptions, buy-side relationships and access, conference value, ease of engagement, frequency and relevancy of published research, quality of NDRs, equity sales team, events team, perceived reputation, and so on.
Determine whether your internal participants should opine on all attributes. Some may not have had exposure to them directly, but regularly review their financial models. You and your team should complete this survey as well. When scored on a 1-5 basis and aggregated, you should find a natural segmentation. Depending on the number of analysts you have, shoot for three tiers.
Tier 1 consists of the handful of analysts who are creating value and helping you achieve your goals. They have unique and deep industry/company insight and publish research regularly. They put you in front of quality buy-side names. They are collaborative in their financial model, and are a pleasure to work with. They will likely be rewarded with their first choice in annual events.
Tier 2 is moderately useful. While their events are mixed, they do publish useful, insightful research when motivated. You’ve found some meetings to be useful, but many not. Your relationship with them is professional and pleasant. There is room for improvement in their model, but they’ve shown a willingness to consider adjustments.
Tier 3 can be challenging. They regurgitate your earnings release or transcript. Their model has errors that can take time to fix. Your relationship with them may be strained, and they may not view the engagement as symbiotic.
Step 2: Evaluate resources and commitments
Second, we’ll evaluate our resources and engagement calendar. How many conferences can you commit to? How many of them is your CEO willing/available to attend? Your CFO? You alone? Do you have access to other company executives? What about NDRs? Any top-of-mind educational webcasts planned this year? Bus Tours or virtual NDRs on your calendar? These events are of great value to your analysts. They drive fees, relationships, and coveted Institutional Investor rankings. We will use them as an incentive as we communicate tiers.
My suggestion is to construct your annual 2020 calendar now. Place all your potential conferences on it. Drop your NDRs with locations. Schedule that webcast for the fourth quarter and secure your internal speaker. Note the timing of other events that are priorities for your company (such as product launches, quiet period, Board meetings, industry trade shows, developer and customer conferences). Make sure you are incorporating your investor targets into this as well. Cover their city with an NDR. Also, if a non-covering bank conference is on your wishlist, put it on there too. Completing this step will make it easier when you’re done with step three where you create a wish list
Step 3: Gather analyst feedback
In the third step, we’ll ask each of our analysts for their first, second, and third choice of annual events next year. Do they want our CEO at their big conference next year? Would they prefer a bus tour to our facility? Does hosting a webcast with a business leader excite them? Ensure we communicate that this is an information gathering exercise. You’re not making promises and any results are fluid. They can be influenced. Set these expectations with your audience early. You have multiple mouths to feed, and can’t make everyone happy, all the time. You may consider teasing that the allocation of your resources (i.e. executive time) may incorporate a variety of perceived values including buy-side access, quality of research, and alignment of goals. I suggest that you consider articulating that it is not dependent on rating or price targets. Autonomy is critical for their reputation, so don’t imply that you would compromise it.
Step 4: Start scheduling
Fourth, we’ll begin to slot the banks into the calendar we constructed. Accept or remove the conferences. Pencil in potential speakers for events or NDRs. This will also allow you to plan and prepare well ahead of time. You are not committing to anything. You are simply creating a framework that you hope to operate by.
Step 5: Schedule calls with your analysts
Finally, schedule a 30-minute call with each of your analysts. Communicate that you seek to create a more efficient and productive relationship with all your covering banks. Points you may want to hit on can include:
- This is the result of numerous respondents across several internal & external functions. It is intended to remove personal bias.
- Price targets and ratings are not considered here.
- You have finite resources that must be allocated efficiently.
- Ultimately, your goal is a relationship where you help them be successful, and vice versa.
- The survey will be performed annually, or semi-annually, and your engagement offering will adjust accordingly.
- Communicate that you have taken into account multiple aspects of performance.
- Have several examples of areas they can work on to improve the opportunities they have with your company.
- Their willingness to help you achieve your IR goals.
- Your shared ability to constructively debate model assumptions.
- The resulting offer you present them can and will change based on how they approach the items above.
I have found that some research analysts appreciate the candid discussion of goals and objectives. They can see what criteria you apply to your resource allocation, and can influence it. Those analysts can move from a tier 2 to a tier 1. I’ve also found that some react poorly to the concept of “grading their value proposition”, especially if they are not in the top tier. For these names, you may not want to communicate explicit tiers, but rather shades of grey where an improvement in meetings or research could be rewarded with better events.
Ultimately, this process is designed to encourage the sell-side to up their game and be more accountable for what they bring to the table. Articulate that you have explicit IR goals that they can help you achieve, and that you can help them meet their sell-side goals as well. This is not an uncontrolled downward spiral. We can influence the speed, and even the direction of how this plays out. Once you’ve achieved success in one analyst improving their offering, use that as an example for the others. The sell-side community is motivated by reputation, and that is a function of access to what you have. Now go get ‘em.
If you’d like any assistance with this process, from constructing a buy-side targeting screen to hosting your educational webcasts, or advising and ranking the universe of sell-side conferences, contact your Q4 representative.