To pay or not to pay: Small-cap forum talks commissioned research

The question of how to boost analyst coverage is always front of mind for small-cap companies and was on the agenda at the in-person IR Magazine Forum – Small Cap, held in New York last week.

Moderator Steven Wade, head of events content at IR Magazine, steered panelists Adele Carey, vice president of IR at BTCS, Stan Kovler, vice president of corporate strategy and IR at Extreme Networks, and John Nunziati, IR partner at Q4, through a conversation that included the benefits of bringing in ‘non-traditional’ elements of IR to help target retail investors, as well as tactics to help secure additional sell-side coverage.

Click here for more information on the event or to listen to the replay

An opportunity to try something new

Talking about both traditional and non-traditional investor relations, Carey and Nunziati noted that the current environment allows companies to experiment a bit more. ‘That’s maybe one of the most important things a head of IR at a small-cap company can think about: to try to find unique and creative ways [to target investors and attract analysts],’ said Nunziati. ‘From a targeting perspective, it’s a different environment now and… I think there’s a ton of opportunity to do that.’

But does this new openness to new things apply to commissioned research as well? If the audience poll was anything to go by, it would seem the answer is ‘yes’. Paid-for or company-commissioned analyst research has traditionally come with a degree of stigma but a notable number of audience members have used this route to get research written about their firm – and seem happy with the results.

While a third of audience members said they haven’t considered commissioned research – and wouldn’t consider it – a higher proportion (36 percent) said it was something they would consider. Just under a third (31 percent) said they had already used paid-for analyst research, while 28 percent of those casting votes said they had both used this option and were happy with the results. Just 3 percent were unhappy with the results of their commissioned research.

A balanced view

‘We haven’t used any company-sponsored research,’ said Carey. ‘[But] that doesn’t mean we are not open to it. I think there are obviously pros and cons to everything.’

Kovler added that his firm had considered company-sponsored research in the past. ‘We went down that path with a company that wanted to cover us, a company with reputable analysts I knew from before,’ he said. ‘But ultimately we decided against it. If you’re in the very early days of your evolution as a company, if you don’t have any coverage whatsoever or perhaps just one or two analysts covering you, or if you don’t feel your analysts are doing a good job, [then it makes more sense].’

At the time, Kovler said Extreme Networks was covered by five analysts but added that the idea of sponsored research had still appealed. ‘If there’s an area of your story you feel is well understood but the analysts covering you do not understand it or are just not paying attention to you’, you can think of paid-for research almost like a white paper, he suggested.

What’s the click-through rate?

Finally on the topic, Nunziati had some advice for small-cap companies considering the paid-for research route.

‘If you only have two analysts covering you, I think you probably have to consider this,’ he said. ‘It’s very tough to get what you would think of as a good sampling of opinions, if there are only two to sample from.

‘First of all, though, you have to have exhausted all other efforts to get traditional sell-side coverage. And if you are in that situation, then I think you really have to look for someone who can be treated as a somewhat unbiased expert. Maybe he or she came from the sell side and is also an expert in your industry. Because he or she is going to need that credibility to overcome the bias – or the perceived bias – of being paid.’

Nunziati advised companies to consider the quality of commissioned-report providers, noting that ‘some are better than others’.

‘You should ask about their following,’ he said. ‘You should ask what the open rate is for your research. You should ask, How many people is this sent out to? How many open it and really look at it?’

Going back to the poll findings, he added that it was interesting to see just how many people had tried commissioned research and how many were happy with the results. ‘For those who have used it, it seems like it’s a good experience,’ Nunziati concluded.