Big data, new methods of analysis and advanced functionality are taking IR targeting tools to new levels of sophistication
As advances in technology and big data analytics have transformed every part of the investment process, from the development of smart beta strategies to algorithmic and high-frequency trading, so have the proliferation of technology and powerful software transformed the IRO’s workflow. And nowhere is this transformation more evident than in the current generation of targeting services.
Any time-stressed IRO knows working harder is not a substitute for working smarter. Understanding where to concentrate your outreach to current and potential investors and where to scale back is all about working smarter. As targeting has become a familiar IR tool, targeting service providers have aided the tool’s evolution, in part by harnessing technology, reaching new levels of sophistication. These tech-charged targeting products essentially reverse-engineer the investment process down to the fund level so IROs can see and understand where they compete for capital and – equally importantly – where and why they may not be a current candidate for investment.
Hitting the right target
Targeting grew organically out of shareholder tracking and ID, which itself was an adjunct offering of proxy solicitors. While many of the current targeting providers share that evolution, their offerings today bear only a surface resemblance to traditional targeting products. IROs still expect potential investors prioritized by the probability of taking an ownership position, as well as a risk analysis of current holders’ likelihood to increase or decrease their positions. Beneath the surface, however, both how the targets are derived and the way IROs access the results have undergone dramatic changes – driven by technology.
One big change has been expanding the definition of ‘peers’ beyond industry competitors to include any stock a portfolio manager might consider across any industry or geography. Increasingly powerful big data analytics have armed targeting service providers with nuanced and sophisticated ways of slicing the data for IR professionals.
Dan Romito, product manager for Nasdaq’s strategic capital intelligence offerings, says only looking at operational peers when performing targeting analysis can lead to false positives. He stresses the value of tracking the behavioral tendencies of investors in their decision-making. Otherwise, the analysis can overlook the large cohort of generalist portfolio managers who screen based on fundamental criteria such as capital deployment and capital structure. Those preferences are what drive their investment decisions, not the industry sector, and those behavioral profiles need to feed the targeting analysis. ‘It’s a subtle but important difference,’ Romito explains.
He also says certain industry-specific characteristics will inform a more nuanced take on targeting criteria. For example, biotech investors are more interested in which phase a research program has reached and how the balance sheet can support commercialization than they are in operating statistics.
Eye on the future
‘Next-gen targeting is probably one of the most innovative products to hit the IR market over the past two decades,’ says Adam Frederick, senior vice president of intelligence at Q4. Headquartered in Toronto, Q4 is slated to introduce its targeting offering built on a proprietary artificial intelligence platform later this year. Frederick argues that using technology to look at both historical correlations and real-time investor trends can reveal a company’s ‘true peers’.
Technology is also changing not just how targeting is done but also how the results of a targeting effort are acted upon.
ELITE Connect, a London Stock Exchange subsidiary, harnesses social media to filter and pre-qualify potential participants for investor meetings and links companies and investors in a digital meeting room, making non-deal roadshows a virtual affair with global reach on a modest budget. ‘Social networking technology can make targeting easier, and a more natural job [for IROs],’ observes ELITE CEO Luca Peyrano.
As technology pervades different sectors of the economy, even the definition of industry peers is not so straightforward. The ability of targeting firms to look beneath traditional categories allows them to view industry segmentation through investors’ eyes, which is not necessarily the same way a company may think about itself. Joe Gwozdz, head of investor targeting for Nasdaq Corporate Solutions, illustrates the challenge with a riddle: ‘Is a company that resells cars online or produces driverless cars in the automobile industry a software as a service, a company, or both?’
Case study: Targeting’s role in strategic IR
Powerful screening techniques can deliver strategic benefits to IROs contending with specific challenges. Companies contemplating a major shift in capital structure, an M&A move or major new venture can prospectively evaluate the impact the move will have on both existing shareholders and targets. While some investors may react negatively to a contemplated move, this prospective analysis can also unearth new pools of potential investors that welcome the new emphasis. In addition, screening a company’s fundamentals against activists’ known hot buttons can alert IR professionals to inform senior management and proactively anticipate and head off potential trouble.
Trying to identify potential investors to introduce to your story can be especially challenging for small and mid-cap companies that suffer from limited exposure and little or no sell-side coverage. Here the power of analytics can level the playing field, as several targeting providers point out, ferreting out new names with a high likelihood of interest.
In the case of underfollowed smaller companies, targeting providers need to adjust their criteria as non-operating factors become more important, argues Dan Romito, product manager for Nasdaq’s strategic capital intelligence offerings. For example, investors tend to focus on operating results such as margins and growth rates when looking at large-cap companies because they are presumed to be ‘well-oiled machines,’ he observes. That is not necessarily the case for small caps where portfolio managers’ investment decisions are based more on their belief in management than the business model, Romito adds.
Analysis: Prix fixe or a la carte?
The current generation of targeting services delivers a more appropriately focused set of recommendations that integrates targeting analysis into the IR desktop, combining a customer relationship management (CRM) database, communications and reporting capabilities. This seeming level of complexity can overwhelm the less tech-savvy IRO. But the good news is that service providers have invested heavily in designing user interfaces that strive to be intuitive, seamless and multi-platform, masking the complexity underneath. The platform meets the IRO where and how he or she works, whether on the desktop in the office or through a smartphone on the road.
This integrated platform approach, while attractive, may not meet the needs – or budget – of every IRO, however, so service providers are generally willing to package their offerings in whatever way the client chooses. And it’s not necessarily a simple calculation. Lucas Scheer, president of LS Global Advisory Group, sees many of his clients taking an à-la-carte approach, guring the freedom to shop around for a targeting provider separate from their CRM database provider outweighs the advantages of an integrated package.
On the other hand, Joe Gwozdz, head of investor targeting for Nasdaq Corporate Solutions, cautions that, particularly within smaller IR offices, it may be a better and more efficient use of time to take a bundled approach and leverage the experience of the service provider’s expertise.
Case study: Value of human intelligence
Lucas Scheer, president of LS Global Advisory Group, is not necessarily a fan of ‘so-called rocket-fueled targeting systems.’ While acknowledging that there is ‘some merit’ to analytic screening, he contends that there is no substitute for market knowledge based on experience.
And he traces his experience back nearly three decades, starting in proxy solicitation. Knowing who’s buying and who’s selling, who the activists are and understanding what specific investors want at a certain point in the market cycle ‘supersedes any of those screening tools,’ says Scheer. ‘That is really worth at least as much, probably more’ than a purely software-driven screen.
Case study: The IRO's view
Heide Erickson, IRO at Capella University and an IR veteran with a track record in several industries over her more than 20-year career, notes that the effectiveness of targeting does not vary much by industry.
‘The technical aspect of targeting [stays the same],’ she says, adding that the real variation comes in the emphasis given to different targeting criteria. It’s also a dynamic process, she observes, noting that the parameters ‘are likely to change depending on the business cycle.’
Erickson describes the current, state-of-the-art integrated IR platform as ‘critical’, especially in preparing for analyst meetings, adding that it has enabled her to be more effective and focused where it matters most.
This article appeared in the winter 2016 issue of IR Magazine
