IR for small caps – the principles are the same, but the challenges are different
Clara Melia and Lang Messer consider some of the unique opportunities and challenges faced by small-cap IROs, and discuss how a well-planned IR programme can set you up for success.
While the goals and principles of IR hold broadly true no matter what the size of the company, the liquidity of small caps and volatility of high-growth companies can present a uniquely challenging set of circumstances to small-cap IROs. While the objective to deliver an effective IR programme is the same across the spectrum, lower budgets and resources, coupled with more influential buy- and sell-side relationships for smaller companies, can mean the priorities and approach of a small-cap IRO can be starkly different to their large-cap contemporaries.
Limited resource and budget
Small caps typically operate with lean budgets and teams have more direct reporting lines into the company’s executives. Many AIM and small-cap companies are at early stages of their lifecycle, meaning management teams may also be new to public markets. Against this backdrop, dedicated and experienced IR can make a significant difference.
On a limited budget, it’s important to make the most of technology to minimise the workload, particularly around record keeping. IROs can also maximise the use of free resources, including share price feeds, analysis tools and media providing insight into market changes and fund manager moves.
Being part of a smaller team often means a greater opportunity to engage directly with the company’s executives and board, helping ensure both the IR strategy and feedback from investors is given due consideration. Small companies can be responsive and nimble and effect strategic change rapidly. They can react quickly to changes in market conditions or competitive dynamics and, as such, IROs may have to communicate changes in strategic direction or revise guidance frequently. Therefore, maintaining an open and regular dialogue with investors is key, and being responsive and transparent will promote clear understanding of the drivers of change and help to build credibility and confidence in the executive team, the board and the company’s strategic direction.
Relationships with the buy and sell sides
Small caps may have fewer, but often more engaged, buy-side and sell-side relationships.
Typically, there will be fewer covering analysts, particularly since MiFID II came into force, leaving a smaller range of opinions and views in the market. Individual analysts can gain a disproportionate share of voice which can be both helpful and challenging depending on their sentiment towards the company. It’s therefore important that small-cap IROs work to build research coverage, including considering company sponsored research, to ensure that balanced views are presented to the market.
Investors are more reliant on the house broker’s numbers and views and it’s therefore critical that small caps build a good working relationship with this analyst who will be a key voice in the market for them.
Small-cap share registers can be more concentrated as investors take larger stakes, or there may be a significant management shareholding. This means that investors can be more engaged, closer to the numbers and operations, and have a closer relationship with the executive management than would be feasible for a large-cap company. IROs can use these circumstances to their advantage, benefiting from regular investor feedback to help develop their equity story messaging.
Small changes, big impacts
There’s nowhere to hide for a small company. A slow trading week, a lost contract, a new competitor, failed marketing campaign etc. could all have a material impact on the company’s financial performance and outlook. For this reason, forecasting and guiding can be challenging as small levers can have significant impacts. Combine this with a lower level of sell-side analyst coverage post MiFID II and a narrow range of consensus forecasts, and the result could lead to guidance downgrades or profit warnings. Communication is key and it’s important that the IRO builds a close working relationship with the finance team internally, to keep on top of likely forecast changes, and the sell side externally, to ensure that forecasts are updated in line with company guidance in a timely manner.
Standing out from the crowd
Small caps have to work hard to drive liquidity. All pools of investor capital become relevant, and IROs need to ensure they are targeting as broad a range of investor audiences as possible. Retail investors, bloggers and investor forums can all influence sentiment and a small-cap IR programme needs to ensure it reaches all relevant audiences.
Small caps are also competing for capital against thousands of other companies listed on the AIM and small-cap markets, and at the same time small-cap fund managers will be tracking a wide range of companies across multiple sectors. Making key documents readily accessible on the company’s website, reporting consistent KPIs, and messaging a clear strategy, can all help companies stand out from the crowd.
IR sets a framework for growth
Despite the challenges that are unique to smaller companies, it must be remembered that many of these dynamics help distinguish and differentiate the investment case. Having a dedicated IR resource is important to cement reputation and build a flexible communication framework that can develop with the company. Ultimately the fundamental principles of IR are the same between small-cap and large-cap companies, even if the execution is slightly different.
Clara Melia is founder and managing director of Equitory.
Lang Messer is investor relations director at Equitory.
This article was first published in the Autumn 2019 issue of Informed, the IR Society's quarterly journal.
Published 28 October, 2019