Goliath investors are all very well, but don’t forget David
Small-investor trading volumes surged in the spring lockdown. Derren Nathan explains what companies need to do to attract these investors, and why retail trends may be a useful signal for institutional investors.
A common goal of IR professionals is to attract a core group of long-term institutional holders to the shareholder register. As institutional-facing corporate brokers, we have a vested interest in helping listed companies to achieve this ambition, and indeed have added the first institutional shareholders for many listed small caps in sectors as diverse as venture capital, telecoms, life sciences, media and software. However, we have never underestimated the importance for boards to communicate with retail investors. The ability for the general public to vote alongside sovereign wealth funds at a company’s AGM is a core pillar of any market that proposes to be free, open, and transparent. We strongly believe there is no place for investor snobbery.
This is particularly pertinent for smaller companies early on in their investor journey be it in the public or private arena. Companies below a certain size, (and that can be bigger than one might expect!) can really struggle to get on the radar of institutional investors, with many of them applying blanket criteria to the size of business they will invest in. Add in a company that has a limited financial trading history or is yet to reach profitability (or perhaps even revenue as can be the case in drug development and mineral exploration) or is still owned in large part by the founder(s) and the institutional bar is set even higher. It is here that retail investors can really take up the slack, making a huge vote of confidence in management teams, and accepting the risk that goes with earlier stage investments, and also benefitting from potentially very high returns from disruptive growth companies. These risks can in part be mitigated if the investments qualify for tax incentives such as the Enterprise Initiative Scheme or Inheritance Tax Relief.
However, retail investors also have a part to play throughout a company’s lifecycle. The number of retail investors is not small and as with institutions there are differences in investment criteria and holding period. Affluent younger investors may be searching for spectacular returns from growth companies, whereas a retired investor may be more comfortable with more stable larger dividend paying stocks.
Retail investors particularly in smaller companies are vital for enabling liquidity, being able to trade in smaller sizes and less constrained by process than institutions. Without this liquidity, institutions are even less likely to show interest in a company’s shares. In fact, it is often retail-fueling liquidity in a company’s shares that can first attract the attention of an institution, with the helping hand of a diligent corporate broker of course!
The rise of retail
The volatility in the markets following the onset of the COVID-19 pandemic, as well as perhaps the limitations on people’s movements and activities, has seen a surge in retail trading volumes. According to Sharesoc, it is estimated that during March and April 2020, at least 20% of the volume of the FTSE All Share was from retail investors, with over 60% being ‘buy’ orders.
Engagement with retail investors is cloaked in regulation which has become ever more stringent over recent years, and we have seen a clear shrinkage of the retail broking universe (particularly in the advisory segment) since the introduction of The Retail Distribution Review in 2012. We have also seen a more commoditised service from these brokers who have gravitated towards a one size fits all model portfolio approach, leaving those with a greater risk/reward appetite largely unserved.
What do companies need to do to make sure their investment story is followed by this dynamic segment of the investor community? One’s choice of broker is very important. Hiring a tier-one investment bank may ensure that the household names of asset management are well covered, and for a smaller company the broker may no in fact show the SME name to its asset management client base. The same advisor is likely to be less up-to-speed with the constantly evolving private client broking and family office world. It is important for all sizes of company to have an advisor who knows which pool of capital is right for the company at the right time. We place importance on the role of family offices who can invest in size, who can back earlier stage businesses than many institutions and who can be active buyers in the market, as well as focusing securing the first (possibly cornerstone) institution on the register and building more around that.
Engaging directly however with individual investors can seem like a daunting task. In a recent report by the Quoted Companies Alliance (QCA), Marc Downes the CEO of InvestorMeetCompany, disclosed that ‘there are over 4.5m execution-only retail investors in the UK who trade circa 19 million times per annum.’
InvestorMeetCompany is just one example of how technology can create investor engagement tools. It allows retail investors to attend live online webinars hosted by the issuer and submit questions and answers either in advance or during the presentation.
Primary Bid is another enabler of retail share ownership allowing companies to offer retail investors access to fundraisings on the same terms as institutions. Primary Bid enjoyed early success in the Small Cap arena but is now enabling retail access across the spectrum having participated in the transactions of at least five FTSE 100 companies in the year to date, as well several FTSE 250 deals. The platform also has plans to expand into corporate bond issuance.
Access to information
Retail investors typically do not have the same access to investment research as institutional investors. It is important that a company’s house broker is active in its research as possible whilst avoiding compliance pitfalls. Our research is widely distributed to market data platforms, institutions family offices, wealth managers and private client brokers who can share it with their clients who have been through an on boarding process.
This research is also available on Research Tree which, among its other services, allows eligible private investors to access research on a subscription basis. There are a host of media platforms and conferences (many of which have now gone virtual) that offer further channels for direct investment and it can be a little bewildering for corporates to choose. There can be something of a herd mentality amongst retail investors and the popularity of these events can fluctuate.
In essence, it is essential to engage with the broadest range of investors possible. Retail investors often reflect trends in institutional investing and indeed many retail investors are often underlying investors in institutional funds and can perhaps offer early indicators of trends such as the increasing importance of ESG factors.
The QCA report mentioned previously concluded that there was evidence that a fair proportion of retail investors will be shifting to invest more in companies with strong environmental, social, and ethical credentials. They believe the pandemic has expedited a shift towards companies that contribute positively to the world, a shift that was already occurring and will now likely gather pace.
Derren Nathan is director, head of research at Hybridan.
This article was first published in the Autumn 2020 issue of Informed, the IR Society's quarterly journal.
Published 29 October, 2020