The role of the investor relations team has evolved over time – while its roots have traditionally been in financial communications, IR has progressively taken on a more direct purpose in interfacing with investors and analysts. Now, as the investment community faces disruption in the wake of Mifid II and changing economics, IR teams could be on the verge of another evolution.
This was the focal point of a recent Q4 webinar, in partnership with IR Magazine. Setting the tone for the conversation, Ruscandra Moldovan, Assistant Professor of Accountancy at Concordia University, highlighted some recent research on the effects of Mifid II, which found that 334 European firms have completely lost their analyst coverage, since the advent of Mifid II in January 2018.
'Mifid II is making waves,' said Matthew Tractenberg, Investor Relations Partner at Q4. 'It’s most visible for small and mid-size companies. Going from 50 analysts to 40 covering analysts may be viewed in a positive light, if you’re at a mega-cap. But going from seven to four analysts could pose some real challenges if you’re at a small or mid-cap.’
Tractenberg added that some companies are being turned down by their banks for NDR opportunities, because the banks won’t get paid by investors in a certain city. 'That really shocks me. I’m not sure I’ve seen that before,' he said.
Responding to changes in the investment community
The panelists quickly moved on to discuss dealing with the dramatic changes to the sell-side, and the ripple-down effects on IR programs. Tractenberg, who has 15 years of corporate investor relations experience at companies like Cisco, Belden and WestRock, said: 'To me, it means the responsibility to identify and engage with high-quality investors lands squarely with the IR function. As an IRO, I reached a point where I could no longer rely on the sell-side to open all of the doors I needed. I personally had to facilitate the equity sales function that several had abandoned.'
Tractenberg said he had to embrace a different skillset – thinking of himself as the company sales representative. This kind of enterprise sales model addresses the need to build a deeper partnership with covering sell-side analysts, based primarily on a mutual understanding. 'I view equity sales as an IRO responsibility in the absence of sell-side support,' Tractenberg said. 'The sell-side is an extension of my team. Having candid discussions with each of them on their strengths and weaknesses, what their priorities are for the year, what success looks like for them, even understanding how they’re compensated – that can create a business relationship where both parties come out as winners.'
IR Magazine editor (and webinar Moderator), Ben Ashwell, noted that there are a number of IR teams in Europe experimenting with hiring full-time internal corporate access leads, dedicated to engaging with both the buy-side and sell-side.
Hiring former analyst IROs
Moldovan expanded on another research paper that she co-authored in 2017, which found that hiring former analyst IROs actually led to an increase in stock liquidity, institutional investor holdings, analyst coverage and improved plain English disclosures. 'We find that when the firm hires an IRO with analyst background, press releases and filings get more accurate and that helps the investment community process the information more quickly,' Moldovan says. 'We also find that these companies are more likely to host analyst and investor days, which are nice ways to bring attention to the firm.'
Tractenberg suggested that IR teams start thinking about new approaches to filling the gap left by a shrinking sell-side. 'Finding buyers, creating demand and getting in front of investors – wherever they are – is very much an equity sales skill,' Tractenberg said. 'Personally, I think we need to embrace that orientation – or hire for it. The sell-side skillset – which includes financial modeling, understanding how to navigate capital markets with a sales organization – is already resonating with C-suites today.'
Both panelists added one final caveat: hiring former analysts isn’t necessarily a silver bullet. There are still soft skills that successful IROs may not have been learned on the sell-side – such as the interpersonal know-how to coach senior management on investor interactions. 'I want to be clear that not all former analysts are better IROs. But there does seem to be an edge when it comes to communicating technical terms and engaging with the investment community,' Moldovan said. 'This is very likely because of their experience from being inside the investment community itself.'
Interested in hearing more? Watch the full webinar here.