Best Practices for IROs When Hiring a Sponsored-Research Firm

In our last article, we discussed the rise of direct listings and how IROs can help their companies have a successful direct listing on major exchanges. In this bulletin, we focus on the importance of sponsored research and critical factors that an IR team should consider when engaging a sponsored-research firm.

Sponsored or paid-for research is a tool that can help small-cap companies boost their Street presence, attract new investors, enhance stock liquidity, and achieve fair valuation. Over the past several years, small-cap companies have delivered good returns to shareholders (S&P 600 is up ~425% since 2009 as of February 18). Despite this performance, small caps are unable to garner the same level of Street attention enjoyed by their larger peers and remain relatively under-represented in the market. Per Capital IQ, over 50% of companies with market cap of $250 million or less in the U.S. have no analyst coverage at all. Moreover, as many investment banks are conforming to the MiFID II regulations on a global scale, they are finding small cap coverage to be less profitable. This reduced visibility makes it difficult for small caps to thrive. However, as a solution, small caps can work with sponsored-research firms (SRFs) to narrow/close the coverage gap. SRFs utilize the expertise of their experienced analysts to generate thoughtful content on a regular basis and leverage their broad investor rolodex, multi-channel distribution, and tracking capabilities to attract new investors and analysts. This evens the playing field for small caps by affording them the same degree of high-quality research coverage as large caps, resulting in enhanced Street presence, higher stock liquidity, and fair pricing. Thanks in part to trend of sponsored-research coverage, small-cap companies are now starting to experience a rise in Street coverage. This is also visible in the number of analyst recommendations on Euro Stoxx Small Cap Index members, which stood at approximately 2,700 in July 2020, up from nearly 2,500 after the MiFID II went into effect in 2018, per Bloomberg. 

We believe that IROs should evaluate the following aspects when hiring a sponsored research partner, in addition to bearing in mind of the relevant guidelines provided the National Investor Relations Institute.

·        Sector expertise and industry experience of providing sponsored research. IROs need to assess whether the SRF’s analysts have the necessary expertise in their industries/sectors. For instance, if a small-cap company operates in an industry that is technology-driven, then it is important that the analyst covering the company has clear understanding of those technological elements, value chain, and profit pools. Even if the SRF in consideration has a good reputation, the actual report is only as good as the analyst primarily responsible for producing it. Therefore, before commissioning sponsored research, IROs should talk with the covering analyst(s) and assess their sector expertise and competence.

·        A focused yet broad-based rolodex created and continually updated using technology (AI). This is one of the most important factors to consider when commissioning sponsored research. IROs should check if the SRF’s rolodex offers compatible matchmaking with investors. A compatible investor understands and appreciates a company’s metrics, strategies, and catalysts compared to a non-compatible investor; therefore, attracting the former is key for a small cap to build a reliable investor base. IROs must also evaluate whether the SRF relies on traditional methodologies for targeting investors or leverages latest technologies such as artificial intelligence (AI). Given that conventional targeting methodologies have numerous drawbacks, including restricted scope, high cost, and misalignment of incentives, we believe IROs should partner with SRFs that employs a tech-driven approach, which is highly effective in identifying potential compatible investors and which also updates the rolodex on a regular basis. Based on the company’s targeting strategy, IROs must also analyze whether SRF’s rolodex is focused on retail or institutional investors. If institutional investor focused, then they should ensure that the rolodex also covers sub-groups such as RIAs, private wealth, family offices, etc. in addition to pension funds and hedge funds.

·        A proactive and continual content strategy. Investor’s willingness to invest in a stock depends in part on the company’s ability to pitch their investment thesis that offers unique insights in an effective and regular manner. Therefore, when commissioning sponsored research, IROs should check whether the SRF’s content strategy is proactive or not. A proactive content strategy brings out the company’s positioning, as well as address key investor questions about the company. While it would still have passive elements to accommodate quarterly EPS notes and other key press releases, the key is to make sure that the content strategy largely remains proactive. Importantly, IROs should ensure that the content being distributed is simple, consistent, fact-driven, and non-promotional in nature and that it is available to their recipients in a variety of formats such as written reports, videos, or webinars. Further, SRF should disseminate information on a continual basis (ideally monthly) to maintain visibility among investors.

o   IROs should also check whether the SRF provides Buy/Sell/Hold rating and/or forward-looking earnings forecasts and EPS estimates in their reports. SRFs that do not offer ratings or recommendations are likely to distribute their research to a much wider audience, which is an advantage when it comes to increasing a small-cap company’s presence among varied investors. Moreover, reports that lack ratings/recommendations create the impression among readers that the company is only using SRF for raising awareness in the market and is not forcing the research firm to issue favorable ratings/recommendations for the sole purpose of benefitting the company.

·        Use of technology and analytics to measure investor engagement levels. IROs should understand how the content will be distributed and also how investors are responding to their story and how many of them are showing interest. This can be done by understanding which email distribution tools – Constant Contact, SendGrid, MailChimp, etc. – are being used by the SRF. An advanced delivery tool not only ensures that content gets delivered to the target audience, but also offers the ability to track investor engagement. As such, IROs can get access to important data points such as open rates, click rates, bounce rates, unsubscription rates, etc. corresponding to investor’s/analyst’s name, designation, email, and phone to gauge engagement levels. This gives IROs a better understanding of how the SRF’s email campaigns are progressing, and which investors need follow-up.

·        Use of various distribution channels to reach a broader investor audience. In order to boost visibility among investors and analysts, IROs should assess whether the SRF uses only one channel (such as email newsletters) or relies on multiple channels (direct e-mails, research platforms, and social media platforms) to distribute their content. If the SRF uses only one distribution channel, then the small-cap firm will miss out on broadcasting its investment narrative to a wider investor base. Therefore, an SRF with a strong, multi-channel distribution network offers multiple touchpoints for small caps to communicate their story to investors.

·        Research cost and ROIs. Generally, sponsored research firms charge $20,000 to $100,000 per year – significantly lower than broker research and capital markets relationships that start at $500,000 per year and can go as high as $1.5 million in upfront payment (Please note that there is no lateral comparison between the services offered by non-brokers and brokers, as relationships for the latter is more than just research since they cannot charge for research). For sponsored coverage, a small-cap company should expect an initiation report, quarterly earnings reports, periodic update notes on the company’s strategy, investor deal and non-deal roadshows, investor targeting and surveillance, corporate access, etc. More importantly, since small caps usually have to work on a modest IR budget, it makes sense for IROs to evaluate whether the cost for paid-for research quoted by the SRF would result in higher return on investments (ROIs) for them. IROs can measure their ROI by analyzing key metrics such as number of investor leads, number of new investors onboarded, web traffic, and fund raises.

·        Quality of service based on historical work, client testimonials, or awards and recognition. Finally, it is important to analyze an SRF’s track record and quality of service. IROs can do this by reviewing three or four initiation reports from the SRF under consideration that extend back a few years and comparing what is written in those research reports to what has occurred after they were released (fundamentals and price). Client testimonials or awards and recognition are another way for IROs to analyze SRF’s quality of research, its success in increasing awareness about a company and its investment case on the Street, and its ability to attract compatible investors.

About Intro-act

Intro-act optimizes corporate access in the post-MiFID II era. Intro-act’s machine learning prediction engine targets the most likely institutional buyers and sellers of a stock in the next 90 days and offers independent research to promote efficiency and transparency throughout the corporate access and investment process.

Intro-act’s services facilitate higher-quality meetings based on superior preparation for both investors and corporate executives because of centralized access to critical materials, including video, models, commissioned research, and agenda materials. The result is converting more investor meetings into shareholders and improving the ROI on corporate access.

Intro-act’s founders have over 50 years of experience (DLJ, Fidelity, First Call, OTR, Thompson Reuters) in capital markets, corporate access, and building investment research businesses. They realized that a regulatory change (MiFID II) would compel corporate investor relations to become increasingly responsible for servicing and growing their investor pool but would need to do so with fewer resources. Intro-act was created to help corporations fill this void. We use machine learning to predict investor behavior, analyze factors influencing investment decisions, and provide independent research services for investors and corporate IR officers. 

For more information: www.intro-act.com