How best to tackle IR for small caps

Apr 05, 2018
This article was produced by ELITE Connect and originally published on the ELITE Connect platform

Handling investor relations activity without a dedicated IR team can be a tricky affair, but it’s not an unachievable task. We hear from three experts in the field – Rachel Crossley, senior reporting consultant at Emperor, James Houston, managing director at Jones and Palmer, and Steph Osborn, research analyst at Invicomm – who share their advice on how the C-suite can step up to the challenge.

What are the main areas small caps need to focus their IR activities on?

Rachel Crossley: Firstly, developing a clear and compelling equity story. Small caps need to think about their investment case: what they want to achieve and what it is that makes them unique and sets them apart from their peers. Then it’s about using a wide range of tools and channels – from the corporate website and annual report through to fact sheets and company presentations – to effectively communicate and cascade these messages to their key audiences.

Secondly, targeting and engaging directly with the investment community. While resources are limited and you can’t meet everyone, it’s important to work out who your most relevant analysts and investors are and reach out to them directly, using your existing conduits to share regular and timely information.

James Houston: It’s important that the board and senior management are in agreement that long-term stock performance is the primary goal. If this is the case, focusing on communicating sustainable competitive advantage becomes a priority and avoids the pitfall of concentrating on short-term swings in stock price.

Small caps should focus on producing communications materials that clearly convey the investment case, business model and strategy of the company. This will ensure the level of interaction that investors need with management will be reduced, as key questions about the company will already be answered.

Steph Osborn: Communication and engagement needs to be a huge focus for small caps and their IR activities. Talking about all aspects of the business, not just the financials, is important to ensure key messages are conveyed directly to analysts, investors and, increasingly, to all stakeholders. And it needs to be timely.

Being direct and compelling not only generates interest but is also fundamental to the success of all IR activities. It’s also really important to have an understanding of your shareholders and potential shareholders – knowing who they are and how best to interact with them.

How can small caps best gain visibility and run IR without a dedicated resource?

JH: The best focus for small caps in their communications is the annual report. There is an obligation to produce an annual report, so it makes sense to create the best document possible and then use it to update other communications, such as the corporate website and investor presentations. Effective use of an outside investor relations firm that not only has access to targeting tools but has also developed relationships within the investment community can ensure the limited time company officers have to meet with investors is most productive.

RC: Small caps should make the most of the technology available. Use technology platforms to target and manage relationships with the investment community. They should enhance the IR section of the corporate website so this becomes the first port of call for anyone looking for company information. It also needs to articulate their investment case and business model, include fact sheets, Q&As, corporate presentations and interactive features to bring content to life.

How will things change for small caps post-Mifid II, and how can companies overcome these challenges?

SO: The new regime will impact directly on small caps. The legislation is choking off the supply of information that informs investors about these companies. With less interest, small caps will need to up their game in IR activities to remain visible. Although this will be a challenge, it is achievable for all budgets, and proactive firms will be taking action now.

Creating a bank of communication assets, coupled with organizing roadshows and corporate access meetings directly, will allow small caps to reach out to prospective investors. Early indications are that buy-side analysts are receptive to these proactive approaches, and the challenges to overcome post-Mifid II may also create some fantastic opportunities for small caps to shine.

RC: As we are already seeing, the market will see a decline in both the quality and the quantity of analyst research published, making it particularly hard for smaller companies to get their story heard and make sure consensus is fair. So companies should take a look at their financial calendar and use these reporting requirements as an opportunity to tell their equity story. For example, produce an interim results booklet to share additional context in a visually engaging way, and use the annual report to present a cohesive story that articulates the company’s investment case and how it’s delivering on its promises.

What do you see as future IR challenges and/or opportunities for small caps?

JH: There are obvious challenges in the future, and many small-cap companies will continue to struggle with less recognition and media attention. They will naturally face lower liquidity and greater volatility and, with significantly smaller teams, will have fewer resources to work with.

It’s not all negative, however. With a smaller team of corporate stakeholders and a more accessible senior management team it is perhaps easier to maintain a more consistent investor message. It can also provide any external agency with an opportunity to be more effective at telling the corporate story in an engaging manner.                          

SO: The challenges are pretty steep, but they also create some great opportunities for small caps. Instigating IR activities internally and with external specialist partners will help to overcome the visibility trap created by Mifid II and get noticed by the buy side and investors.

It could also improve and transform the way these firms communicate with all stakeholders. Partnering with experts in communications and IR activities will become increasingly attractive to small caps. There is much to be communicated about these firms. Although inherently riskier, small caps have delivered a strong financial return. Over the last five years the FTSE Small Cap Index delivered a 13.2 percent return, while the FTSE 100 delivered just 7.7 percent.

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