After an outflow of insitutional funds, small caps in search of capital may find retail investors online.
No brand-name recognition and precious little institutional interest: that’s the dangerously exposed position many small-cap companies now find themselves in. One avenue of support, of course, is to tap the retail market, but this is generally a route few companies choose.
Yet it’s an investor seam that Crocker Coulson, president of CCG Investor Relations, has begun to mine with a vengeance. Until two months ago CCG focused 100 percent on institutional investor relations. ‘You got more bang for your buck,’ explains Coulson. ‘But since last summer, with clients that have a market cap of under $100 mn, we were struggling. Even after setting up meetings, frankly, there was very little impact.’
With around 25 percent of its clients basically stranded, CCG thought hard how to target new retail investors. Investor roadshows were out. Another problem was that many brokers no longer recommended individual stocks, and certainly not micro-caps. ‘Retail brokers are now asset gatherers recommending plain vanilla mutual funds, and most retail investors who are actively picking and trading stocks have moved to online brokerages,’ observes Coulson.
To tap this online retail base, CCG started using a strategy toolkit called Web IR 3.0. The clever thing about it, says Coulson, is that it uses real-time technology to push through pop-up browser banners when investors research peer companies, supplying in turn management interviews, webcasts and other corporate information.
‘It’s a program with a lot of layers and very highly targeted,’ Coulson adds. ‘For example, we can even target an investor who researched a related company on Fortune or Forbes by the stock ticker and push through relevant information on our client.’
Peter Breen, chief strategist at BetterInvesting, an organization that helps US retail investors make more informed decisions about stock picking, says retail investors are a lot savvier and smarter than they are generally given credit for and, yes, technology can help companies struggling for exposure. But it’s still a hard sell, he admits.
‘Retail is an enigma,’ Breen observes. ‘How do you go out and find investors? If you’re successful, what metrics do you use to measure a campaign? If you’re just moving secondary market shares, how does the IRO measure the return on investment it took to attract them?’
Yet Breen says companies can take simple, straightforward steps to initiate better retail shareholder communication – like implementing a direct stock purchase plan, for example. ‘You may not pay dividends regularly but you can set a stock plan up,’ he points out. ‘If you are going to do a newsletter, make sure it’s trackable. How many read-throughs do you get? Get a good sense of your last three months of volumes and, after you’ve done this, check to see whether there’s a volume move.’
No quick fix
MUNCmedia, a US digital corporate communications company, has been at the forefront of developing state-of-the-art communications technology for a while. But company president Matt Bird is quick to warn that such technology is a communication facilitation process, not a pill to pop in bad times.
‘It’s about the communication process between specific investors and the company, and having that communication in real time,’ Bird explains. ‘We can provide analysis that quantifies how much engagement time a potential retail investor will spend on a press release, whether he or she drills down quickly or exits out. We map and track the sort of behavior newswires simply can’t do. But we’re only as effective as your own corporate communications. What we can do is help you get right in the face of the investor at the right time with the right message.’
Meanwhile, well-known investors like Jim Cramer and Warren Buffett continue to champion the average retail investor, encouraging fundamental company analysis with often compelling TV appearances. Rarely, however, do they champion small caps, mindful perhaps that their recommendations, taken in unhealthy quantities, could spell disaster.
Roger Esler, a Deloitte corporate finance partner based in the UK, thinks growing the retail investor base is not an option to take lightly. He advises small caps to take a few steps back and look at the debt structure and medium-term capital requirements of their business first.
‘Securing medium-term bank funding is critical,’ says Esler. ‘If a small cap is over-geared and needs an equity solution, it needs to recognize the real challenge and expense in raising equity and not be too flattered by too much attention from some members of the broking community. Rights issues are very expensive and time-consuming, more so than institutional placements. Let’s say you want to raise £10 mn ($16 mn) or £20 mn. It’s administratively complex to do it via a preemptive issue involving retail investors compared with targeted marketing to institutional fund managers. Also, a wider, more sprawling private investor base is a much harder population to tap for further growth.’
A small consideration
Esler says the cheapest way to issue new shares in the UK for businesses planning acquisitions is to issue consideration shares, paying a vendor in equity rather than cash. ‘Perhaps for higher-growth businesses such as biotech or energy companies, retail investor appetite will be more accessible; it’s a route to consider,’ he notes, adding that for more mature small caps where growth is likely to be more limited, rights issues also have the potential to be more heavily discounted.
In the meantime, there are bargains to be had in the small-cap space. The Hoare Govett Smaller Companies Index in the UK has slumped alarmingly: last year the historic P/E ratio halved from 12 times earnings to just six.
Given such extraordinary valuations, Simon Hudson from London-based investor communications operator City Insights says IROs should target high-net-worth individuals, especially if your firm pays a dividend.
‘Don’t overlook private wealth managers, either,’ Hudson advises. ‘They’re regulated by the UK’s Financial Services Authority and IROs can talk to them without the red tape you get with less sophisticated investors. They’re also not commission-driven like independent financial advisers. They take the long view.’
Small caps speak out
‘Actually, we’re not as concerned with direct marketing to retail investors at this time in terms of going on the road to do presentations. My focus is to create a proactive strategy to increase awareness, targeting appropriate investment focused institutions like value players. In doing so I plan to increase communication with the retail market indirectly through improved information on the website, ensuring messaging is in all publications.’
US small-cap energy company that has been trading under $1 for some time; its shareholder base is heavily owned by retail and event-driven hedge funds
‘For all our investor types, we’ve focused on our profitability and cash flows with moderate growth as the economy allows. We also now have a majority of our revenue pretty firm and predictable, which provides better assurances to our investors.’
US small-cap IT company
‘Our company has not yet changed strategy to attract new retail investors. We focus on investor conferences to reach retail investors and, because we are not a dividend-paying stock like some peers, we focus on detailing the value of the stock. But we are open to alternatives to reaching out to retail investors and are reevaluating strategies.’
US small-cap telecommunications company
Source: Thomson Reuters corporate services team
