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Sep 28, 2021

IR in a bear market: The small-cap view

Matt Chesler discusses the unique challenges small caps face when the market turns – and how to be proactive in a bear market

A shorter version of this interview appears in the fall issue of IR Magazine as part of a wider piece looking at IR in a bear market. Click here to read that feature now. 

Don’t have a team of 12? Not a $300+ bn market cap? Matt Chesler, partner at FNK IR, which specializes in small-cap investor relations, says that while the idea that fundamentals always rule remains true even at the small-cap end of the market, smaller firms face different challenges from their larger peers. ‘Smaller companies tend to experience sell-offs related to economic downturns and external events more rapidly than larger companies, even if their businesses are insulated from macro events,’ he points out.

What doesn’t change, he says, is the crucial role IR plays: ‘Even during bear markets, periods of uncertainty and heightened volatility, there are investors looking for opportunities. When there is extreme volatility and uncertainty, it is even more important to engage with existing shareholders to understand sentiment and stay aware of potential external changes that could put large holders at risk of exiting.

‘Understanding entry points and time horizons can help. Why are those investors in the stock? What is their thesis and does a bear market change that?’

Maintaining relationships and two-way communication is critical, Chesler notes, ‘creating opportunities to help large holders unwind a position with less market disruption in the case of redemptions or similar external events.’

He advises small-cap firms to consider their targeting approach in a downturn and emphasizes the importance of understanding your shareholder base and how your firm performs relative to peers. ‘Reaching out to the same sector-focused investors, or even investors with investment styles and profiles that have worked in the recent past, may yield unsatisfactory results,’ he points out.

‘As valuations fall, companies may find more receptive audiences with growth-at-a-reasonable-price investors, or value or contrarian investors, depending on relative performance metrics. Similarly, companies may need to look a little lower down the investment value chain, reaching smaller funds to broaden the potential audience. Downturns increase the importance of tracking and understanding how smaller companies perform – and are valued – compared with peers.’

What Chesler stresses above all else, however, is the importance of more active and transparent communications strategies: ‘During times of crisis – and in a bear market – investors become increasingly risk-averse. You need to be willing to explain more.’

What does he mean when he advises companies to ‘explain more’? Companies can share stories about how their customers are responding to their own challenges, he says, as well as looking for creative ways to highlight their resilience.

‘One of the biggest challenges for smaller companies in bear markets and times of uncertainty is that, because they are often emerging companies, they lack historical operating and financial data to help investors understand how their business correlates to macro volatility,’ Chesler explains.

‘To reduce uncertainty, companies need to overcome this by putting forth an alternative framework for thinking about performance during downturns based on other operational or other non-financial data points. This requires strategic thinking and creativity, usually through a combination of financial planning and analysis, operational deep-dives and strategic messaging. The overall goal is to think about new and different metrics that help investors appreciate the durability of the business and reduce perceived risk.’

He adds a note of caution, however, warning companies to stick to the golden IR rule and resist the temptation to promise too much. ‘Over-promising during a challenging climate can impact not just valuations, but also credibility,’ he says. ‘This can have a lasting negative affect.’

Read We’re going on a bear hunt: IR in a bear market from the fall issue of IR Magazine now 

Garnet Roach

An award-winning journalist, Garnet Roach joined IR Magazine in October 2012, working on both the editorial and research sides of the publication. Prior to entering the world of investor relations, her freelance career covered a broad range of...