Small-Cap Companies: Top Tips for Attracting the Investment Community
21 July 2020
By Vanessa Hartung
Small-caps are often under-covered by analysts and/or overlooked by the street, making it difficult to stand out and garner institutional attention. Small teams, tight budgets, MiFID II, and a global pandemic have all contributed to an increasingly challenging situation for small-cap companies.
Recently, Q4’s Investor Relations Partner Matt Tractenberg joined a panel of IR industry professionals, including Charlie Parry, head of IR at Good Energy Group, Dr. Peer Niles Schroader, head of corporate communications & IR at Basilea Pharmaceutica International, Ltd., Sofia Antunes, IRO at Lundin Energy, and moderator, Michel Gerber, head of IR and corporate communications at VAT Group for a Swiss IR Association webinar to discuss how small-cap stocks can increase visibility and better position themselves as attractive investment targets.
Here are the top tips shared by the experts on this panel for getting noticed by the investment community.
Build a Compelling Narrative
The discussion kicked off with a critical component of building an effective plan for small-caps to attract investor attention – creating a compelling equity story. Webinar panelists discussed the importance of communicating your relevance, or point of purpose, to both investors and society. They added that it’s increasingly important for small-caps to include an ESG focus in their equity story, as it gives investors insights into the sustainability of your business.
The narrative should define the total addressable market and include data to support that view. It should also communicate financials in a way that shows investors what to expect and makes peer comparisons easy. These and other metrics should help clearly define what your small-cap company is offering as an investment opportunity in order to attract the right investors.
And finally, participants cautioned IROs not to forget the importance of the C-suite in crafting this narrative. Illustrate what management can deliver as it relates to the equity story by highlighting credibility and confidence in their ability to deliver on the equity story.
Use the Right Metrics to Measure Progress
When it comes to building a solid track record, laying out and delivering against the right metrics is key. The webinar’s panelists recommended using common industry metrics as your foundation.
Recognizing that each company, sector, and geography is different, these experts guided webinar attendees to use common metrics to allow for consistent measurement methodology and comparison. One potential downside, of course, is that these universal metrics may not capture where a small-cap company fits in the corporate lifecycle. So, panelists suggested asking investors what’s most important to them to help build out the list of metrics you’ll report on.
Beyond the selection of metrics, it’s imperative to stay explicitly connected with guidance so progress can be measured. Importantly, the panel stressed the need to be transparent and consistent, resisting the urge to change the yardstick from year to year. This is the best way to develop trust and a reputation of delivering on the narrative you’ve communicated.
A final discussion on metrics highlighted the rise of ESG, with panelists reporting the increasing importance of non-financial metrics. They highlighted a heightened focus on social impact and gender issues, pointing to signs that the investment community has started to see the idea that ESG sacrifices profits as a myth.
Identify, Engage, and Target the Right Investors
As valuable as C-suite availability is, it simply doesn’t make sense to secure meetings with investors not likely to take a position because you don’t meet their criteria for whatever reason. At a very basic level, panelists touted technology solutions to help replace the declining value of banks in delivering quality investors. There was quick agreement on the idea that everyone should have access to a CRM solution or database of firms, portfolio managers, holdings, and patterns.
As part of this very interesting discussion, the experts introduced the strategy of thematic targeting. The idea behind this strategy stems from an acknowledgment that, unlike 20 years ago, simply identifying investors who own your peers but not you doesn’t go far enough. Given changes in the industry (especially the broker relationship), IROs now must now go beyond this step to seek a better understanding of key company characteristics. This doesn’t just mean the financial profile but the market in which we participate, secular trends that we benefit from, capital allocation strategy, and even your management team’s pedigree. These are the characteristics that can be used to create thematic targets.
Unlike industry peers, thematic peers might not play in your sector but will rather share one or more personality or character traits that portfolio managers might find attractive. While PMs may not own anyone in your space, they might find these specific traits compelling enough to initiate a position. Importantly, Matt noted that you’d likely never target this group of prospective investors with a more traditional approach, making this thematic targeting approach quite powerful.
After identifying and connecting with these targets, the panel advised playing the long game by building and cultivating relationships that can convert them into owners of your stock when the time is right.
Work Around the Declining Sell-Side
While large and mega-cap stocks can’t be ignored by the street, small-cap IROs have to do the heavy lifting of selling their narrative to generate interest in their stock. That said, there is a lot of opportunity for small-cap IROs to leverage a sales orientation to create demand for their stock.
IROs should identify likely shareholders by looking at where they spend their time, what conferences they attend, and what banks they use. Using this detail as a guide, IROs can reach out to banks hosting events attended by these targets and ask to present. It turns out, this is a surprisingly inexpensive request for the host to fulfill, especially given the industry’s recent pivot to virtual events. Once you’ve secured participation, announcing your participation via a press release, social media, and your IR website can not only create awareness but also credibility with the street. Finally, proactively and directly reach out to attendees for meetings. Offering a PM direct access to your C-suite, for example, can prove quite effective.
Use Size to Your Advantage
While small-cap IROs may feel like they’re at a disadvantage compared to large-cap, the advantages of being small can often go overlooked. While large-cap companies are typically burdened with the internal logistics of “turning the Titanic”, small-caps are able to be more agile and can pivot direction rather quickly. Instead of spending time cutting through red tape or soliciting input from multiple stakeholders to arrive at a final decision, small-cap IROs can focus their time on executing their revised plan.
Bringing a wealth of industry expertise to the table, panelists discussed a host of other ways that small-cap IROs can be creative and aggressive in telling their stories, agreeing that small-cap IROs have a unique opportunity to truly move the needle for their companies, helping to shape perception, impact valuation and generally improve corporate profile. For more, please view the entire webinar replay here.