The hit and miss of investor targeting
The prospect of the gruelling two weeks of non-stop meetings and travel that constitute the average investor roadshow can make the heads of even the most professional IROs and senior executives sag a little.
So what actually is the point of these roadshows? Most companies’ well-honed response is along the lines of: ‘They create new buyers for the equity and – over the long term – they generate a broad and stable shareholder base’.
But is that goal really being served by the traditional roadshow and broad-brush investor targeting that hardly seems worthy of the title?
No doubt the usefulness of roadshows has been questioned at length by many IROs and their increasingly fractious chief executives as they drag themselves from one asset management company to another.
Are we seeing the right investors? How can we be sure they are the right investors? Is this really the optimal use of management time? Will any fund manager ask a question that couldn’t have been answered simply by listening to the results webcast? Some – if not all – of these questions, will be far too familiar to IR professionals.
Companies have several options when it comes to investor targeting. First, they can do the targeting themselves. Doing this qualitatively via questionnaires often produces misleading answers, however. After all, nowhere is the difference between what people say they do and what they actually do more stark than in the world of investment.
Attempting to target accurately the investor base using quantitative analysis is time-consuming, complex and rarely cost-effective. Moreover, the labyrinthine data-mining skills necessary to turn the slew of shareholder data into something accurate, lucid and relevant are, understandably, not often in an IRO’s core skill set.
Unsurprisingly, therefore, quoted companies most often turn to their nominated advisers for shareholder analysis. In truth, however, the output on investor targeting from nominated advisers faces exactly the same challenges: conclusions from qualitative data about market perceptions are unreliable.
Meanwhile, the sophisticated quantitative analysis necessary to identify the key addressable pools of capital and the relative stances of individual investors within that peer group is way beyond the basic service provided by the overwhelming majority of advisers.
Conflict and commission
It should come as no surprise that there is also an inherent conflict of interest for brokers between the needs of their corporate clients to enhance and promote the investment case for their equity, and the commission fees generated by brokers’ investment clients.
For investment bank brokers, that conflict becomes especially acute given the growing importance of prime brokerage as a low-risk source of profitability to the investment banking business model.
Are some of the highest commission producers – the hedge funds – really the investor base companies seek? What about the pool of high-quality capital represented by investors not on the broker’s commission matrix? It is not difficult to see how this leads to hours of misspent senior management time and executives viewing roadshows as nothing more than a necessary fiduciary evil.
But to do so surely misses the point – and, more importantly, the opportunity. Every public company is competing for investors’ capital. In theory companies are competing across the entire equity market but in practice they are competing with what is often a relatively small number of peer companies.
The assumption that the index sector in which a company’s equity resides is an accurate peer group is often a misguided one. Quantitative analysis can more accurately define the peer group competing for this capital, the major investors in that peer group, and their active stances and relative positions within the peer group.
As one FTSE company executive recently observed, ‘Competitors for capital absolutely vary by geography – especially if you are a dual-listed company or quoted on multiple exchanges.’
All the right moves
The ability to see how an individual investor has changed its active position over a given time period also provides powerful insights. ‘The difference between quantitative and qualitative targeting is like the difference between Tesco Clubcard data and customer opinion surveys: the Clubcard data show what people actually do rather than what they say they might do,’ notes Mark George, head of investor relations at UK supermarket group Tesco.
The benefits of such objective quantitative analysis are material. Perhaps most importantly the ability to identify those asset managers who are either increasing or decreasing their position in a stock relative to the peer group hones in on those investors that are making active decisions. Precision investor targeting therefore ensures companies are able to go to the right people at the right time, resulting in fewer management hours spent with investors to achieve a higher impact.
What’s more, by understanding the rationale behind changing stances in their stock from major investors, companies are also better able to judge the effectiveness of the messages they send to the market concerning specific issues and refine the future investment case for their equity.
So next time your CEO turns around in the back of a taxi and asks, ‘Why are we seeing this investor?’, the answer doesn’t have to be, ‘Because our broker recommended that we do’ or ‘Because we always do’.
Remarqua is an independent company providing equity capital advisory services.