Best Practice Report - Taking a strategic approach to investor targeting
By taking a strategic approach to investor targeting, IR teams can play a vital role in supporting the long-term development of their company.
<sup>Best Practice Report</sup>
Taking a strategic approach to investor targeting
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Introduction
The value of strategic investor targeting
Introduction
The value of strategic investor targeting
By taking a strategic approach to investor targeting, IR teams can play a vital role in supporting the long-term development of their company.
Companies need shareholders that support the corporate strategy – not just now, but also as the business grows and evolves. By taking a long-term and thoughtful approach to targeting, IR teams can help curate a shareholder base that will be supportive of the business for years to come.
There are many different examples of taking a strategic approach to targeting. A company switching strategy or product lines will need shareholders that are comfortable with its new direction, for example. Smaller companies often lack the liquidity needed to attract institutional investors; they can benefit from targeting retail investors and other liquidity providers.
And, increasingly, ESG targeting is becoming popular as companies look to align their shareholder base with their sustainability story.
‘If you can have a shareholder base that’s very like-minded with management, it takes a longer-term perspective on value creation,’ says Camilla Bartosiewicz, chief communications officer at Altus Group, a market intelligence provider to the global commercial real estate industry. ‘With that alignment, our shareholders in effect become our business partners, providing for a very constructive relationship. And that’s something you can achieve only if you have a very diligent focus on investor targeting.’
For this best practice report, IR Magazine has spoken with leading investor relations professionals and communications consultants about how they set long-term targeting goals, plan outreach with prospective investors and measure the success of targeting programs.
Getting started
Begin with your existing shareholder base
Getting started
Begin with your existing shareholder base
All targeting programs must start with a thorough understanding of the current shareholder base. From there, companies can decide what long-term goals they would like to set. What’s more, existing holders are one of the best targets for bringing in investment. It is much easier to convince current shareholders that are already familiar with the business to increase their stake than it is to get prospective investors to initiate a new position.
Chip Newcom, director of IR at global data center provider Equinix, says that when he thinks about targeting, the first area of focus is regular communication with the top 25-40 shareholders. ‘The best way to continue to drive value for them is to understand what they care about,’ he says. ‘We proactively reach out to them on a quarterly basis to see whether they have any questions.’
Newcom, whose company won best IR in the real estate sector at the IR Magazine Awards – US 2022, then looks at which existing investors are overweight or underweight the stock. As a real estate company, one of Equinix’s reference points is the MSCI US REIT Index. ‘That informs us of what kind of conversation to have,’ Newcom says. ‘If the investor is already overweight, we think about what concerns might flip it to be equal or underweight. If it is underweight, we think about what might make it bearish on us relative to other stocks in the index.’
Chip Newcom, Equinix
Setting goals
Your objectives will be company-specific
Setting goals
Your objectives will be company-specific
Strategic targeting goals can cover a wide variety of areas, from level of institutional ownership to investment style, geographic location, trading frequency and ESG criteria. Beyond the buy side, companies may also aim to increase their sell-side following, helping to spread their message and open doors to new funds. ‘Your goals are going to be very company-specific,’ says Rodney Nelson, head of IR at Qualtrics, the provider of experience management software.
Companies must bear in mind that change is unlikely to happen quickly. Convincing long-term, active investors to take significant positions often takes years of engagement. On top of this, some companies can rely more on inbound interest than others, which affects how proactive the IR team needs to be to get the word out.
One company that targeted new investors to fit its changing business profile is Altus Group. After going public as an income fund in 2005, the company’s shareholder base was predominantly Canadian, value-oriented and with a high retail ownership. It later converted to a corporation and began to reposition itself from a professional services company to a tech company, a process that involved a change in strategy and a series of acquisitions.
‘The investment thesis changed. It required us to attract a different kind of shareholder base that would see us through this period of evolution and growth,’ says Camilla Bartosiewicz of Altus. ‘Fast forward to today and our shareholder base and valuation have evolved, too. We are much more geographically diversified, split evenly between Canadian and US investors.
Steve Adams, Clermont Partners
Thomas Denny, RWE
‘And our institutional ownership has increased to more than 90 percent, of which the vast majority are growth or Garp. That was by design, and it has served us well as we’ve managed to conduct a business transition with a stable and supportive shareholder base and attract an improved valuation.’
In recent years, companies have become increasingly focused on targeting ESG investors. Global sustainable fund assets stood at $2.47 tn at the end of June 2022 and have more than doubled over the last two years, according to Morningstar.
This incredible growth creates both opportunities and risks for companies and their shareholder bases. Depending on how they are viewed by the market, companies may find themselves gaining access to or cut off from this expanding pool of capital.
‘It was 2020 when I saw a notable uptick in companies saying they actively wanted to find ESG-focused investors,’ says Steve Adams, managing director and chief of staff at Clermont Partners, the strategic communications consultancy. ‘From there, each month and year the frequency of the request has increased.’
Targeting ESG-focused investment is ‘not easy’ because many funds are not explicit about the approach they are taking, he adds: ‘Certainly at the fund level, you’ll find named green funds – those are very explicit about it. Then there are also funds that look at ESG but you’d never know it. So we try to work backwards: we look at the portfolios and see whether there is a clear theme or trend – for example, perhaps the fund invests in clean air technology or only has companies with double-A and above MSCI ESG ratings.’
ESG targeting at RWE
RWE, the DAX 40-listed German power company, wants to broaden its ESG shareholder base, says head of IR Thomas Denny. ‘We are doing that by targeting events that are focused on topics like renewables or the energy transition as a whole,’ he says.
RWE has broadened the geographic focus of investors, too – for example, by looking into the Australian investment community, which is well versed in debates around the shift to a low-carbon economy. Denny says he also speaks to investors he knows are currently unable to invest in RWE. For example, an investor may have a strict limit on sales derived from coal and coal-based products.
Given RWE’s sustainability plan, which includes lowering its revenues derived from coal, these investors should be able to invest at some point in the future. ‘I keep them engaged and involved,’ Denny says. ‘Those are the ones I reach out to proactively, too.’
In the meantime, the company is finding its way into many climate-transition funds, where the focus is on the direction of travel rather than the status quo.
‘Even though we currently have 18 percent of revenues from coal and coal-based products, [those funds] know that a few years down the road it will be significantly less, due to our investments in green energy,’ says Denny. ‘That’s better than investing in a firm today that has 10 percent-15 percent coal-based products but is not changing.’
There are also funds
that look at ESG but
you’d never know it
Targeting overseas investors
Geographical diversification is often a goal of targeting programs. Principally, this is because certain regions offer significant pools of untapped capital. For non-US companies, like Altus Group, the US is a key market to penetrate, given its status as the world’s largest capital pool. North American and European companies, meanwhile, often view Asia as a potential source of significant new investment.
There are other reasons why companies target fresh capital overseas. It could be due to a potential business expansion in that region, where building relationships with key investors in that location will offer invaluable advice about the local market.
In addition, some regions have significant expertise in particular industries, which can prove highly useful for companies looking to grow their presence in that sector.
Adams recalls a client that wanted to develop its business in Japan. ‘There was a realization that penetrating the Japanese market from a consumer standpoint would be accelerated, or at least supported, by establishing a better shareholder foundation among Japanese institutional investors,’ he says. ‘These buy-side folks understand business in Japan, and they can help navigate that. For this company, the concentration of shareholders in Japan grew pretty significantly over a period of a couple of years, and it was really helpful in growing the firm’s business operations there as well.’
Ken Levy, Iridium
A geographically diverse shareholder base challenges the company in different ways, notes Denny. ‘Some are focusing more on management capability and long-term perspectives, while others are driven by current events and short-term earnings growth,’ he says. ‘It’s helpful to get a broad set of views.’
Adding liquidity
Another targeting goal companies may set is adding liquidity to their shares. For smaller companies or those with a concentrated shareholder base, low trading volumes can prevent or put off new investors from taking a position. The situation is especially critical for small and micro-caps that need institutional investment to grow. By adding liquidity, these companies can open the door for larger investors to come on board in the future.
It’s a tough, long-term process to familiarize the retail investor community with what we do
IR teams often look at expanding their retail ownership to achieve this goal. Ken Levy, vice president of IR at satellite communications company Iridium, says he has recently ‘sharpened’ his focus on prospective retail holders. The company is tightly held by long-term institutional investors, and much of Iridium’s targeting work goes into finding new institutional buyers, but it is also looking for shareholders that can add liquidity.
‘It comes down to education,’ Levy explains. ‘Retail investors know what Hershey and American Express do. They don’t know the satellite industry or what my specific company does. It’s a tough, long-term process to familiarize the retail investor community with what we do and why we should be in their portfolios.’
To target the retail crowd, Iridium uses several channels. Two of its brokers have large retail units. ‘When they write positive pieces on the company, we definitely see the stock move,’ says Levy. Other channels include retail-focused magazines, newsletters and conferences. ‘I think there’s a payback for the investment of time,’ Levy adds.
Targeting at larger companies
As companies become larger and better known and expand their institutional ownership, they may choose to spend more time on existing holders relative to new prospects.
‘If you’re a large firm with the liquidity you want and a healthy diversity of top shareholders – so, generally speaking, your shareholder base is where you want it to be – it is natural to be a bit more hands-off with targeting,’ says Adams.
There are, however, at least two scenarios where larger companies should still be thinking about targeting proactively, he suggests. The first is when there is some kind of business evolution or corporate transformation, and you want the shareholder base to reflect this different image of the company. The second is at times of market uncertainty.
‘Even if the business is performing well, there is a higher likelihood that a long-term, dependable shareholder decides to give up,’ Adams says. ‘It’s important to have relationships with other funds to try to fill that gap. As market uncertainty increases, the general importance of targeting ramps up – even for larger companies.’
Putting your
plan into action
Take a thoughtful approach to the IR calendar
Putting your plan into action
Take a thoughtful approach to the IR calendar
Once companies have decided on their targeting goals, they need to incorporate those plans into their annual IR strategy and calendar.
A key element will be deciding the best way to make use of management time. This should be reserved for top shareholders and significant prospective investors that fit the firm's target profile, say IROs. Conferences and non-deal roadshows (NDRs) offer key moments to deliver your company’s message and secure one-on-one time with important targets.
The IR team at Equinix maps out the conferences it plans to attend at the beginning of the year, basing most of its decisions on past experience, says Chip Newcom, director of IR at the firm. ‘We test out, in any given year, a couple of conferences to see if there’s good traction there,’ he says. ‘But there are certain conferences we know are in high demand, with high-quality investors, that we’re always going to want to go to. From there, we use roadshows to target specific investors. Our approach for NDRs in the US is to rotate them around major financial centers.’
Investors are distracted during quarterly earnings. They’re going to be myopically focused on results and guidance
One of the mistakes newly public firms make is to be too hands-off outside of the earnings cycle, says Rodney Nelson, head of IR at Qualtrics. ‘Investors are distracted during quarterly earnings,’ he explains. ‘They’re going to be myopically focused on results and guidance, and will not really have the time to understand what’s happening strategically, product positioning or the important initiatives that will cut across.’
Rodney Nelson, Qualtrics
Filtering for targets
When filtering investors for potential targets, many firms start with those invested in peers and the wider industry.
While that is undoubtedly a good way to search for new investors, there are other ways to think about targeting criteria, says Steve Adams of Clermont Partners. ‘I’m constantly telling clients to consider the financial profile of their company,’ he says. ‘That could be growth rate, revenue, margin, capital allocation or even the geographical footprint of the company.
‘For example, you could have two firms in completely different industries that don’t do anything similar but have a similar growth profile. I emphasize the point of looking at investment peers, as we might call them, as well as your traditional peer group. That can be a really rewarding exercise.’
Companies should also look for nuances about their particular story or management team that could serve as a targeting hook. ‘I’ve worked with clients that have a new CEO who came from a different industry,’ says Adams. ‘If Fidelity liked ‘Joe Schmo’ before, then maybe it will still like him at the new company. Using people as a connector can be helpful.’
Measuring success
Consider a mix of quantitative and
qualitative factors
Measuring success
Consider a mix of quantitative and qualitative factors
Measuring the success of the IR program is a complicated subject with a variety of different views – and it’s no different when tracking your targeting goals. Some companies use the conversion rate of targets to shareholders as a way to measure success, but others point out that you have very little control over an investor’s buy and sell decisions. Meanwhile, monitoring activity, such as the number of meetings with prospective holders, is useful to record but may not convey whether the investment of time was worthwhile.
Many companies look at qualitative metrics such as meeting quality and investor feedback to gauge the IR team’s work. If a company has specific goals, however, like boosting institutional ownership or overseas investment, it’s hard to completely avoid those areas when judging the effectiveness of the targeting program.
If you’ve had a ton of unproductive, ineffective conversations, it might be time to go back to the drawing board and rethink the people you’re sitting down with
To monitor the progress of Altus Group’s targeting goals, Camilla Bartosiewicz, chief communications officer at the firm, says the company looked at areas like proportion of institutional ownership, geographic diversification and the investment style of new owners – the aim was for more growth and Garp funds. The company also monitored return on investment by tracking whether investor targets eventually became shareholders. Other IR tools, such as perception studies that assessed whether the IR message was landing, helped round out the picture.
‘We were on a journey to get Altus rerated as a tech company,’ explains Bartosiewicz. ‘And we achieved that. By one measure, if you look at our historic enterprise value to Ebitda multiple, there is a hugely impressive trajectory. Investor targeting was one of the most impactful initiatives in that endeavor, in addition to putting up strong operational performance and evolving our disclosure.’
Camilla Bartosiewicz, Altus Group
‘Perennial challenge’
Measuring the success of IR is a ‘perennial challenge,’ says Steve Adams of Clermont Partners, who has seen it attempted in many different ways. ‘I think the wrong way is purely quantitative: to say we should have X number of conversations with X number of buy-side analysts or portfolio managers. That means you are going for quantity over quality.’
While admitting they are subjective in nature, Adams suggests two measures of targeting work. The first is positive use of management time: did you include senior management in the meetings with the highest-quality investors for your business? The second is quality of conversations: was the analyst or portfolio manager prepared? Did he/she ask relevant, thoughtful questions? Did it feel like there was the opportunity for continued dialogue?
Adams suggests taking these questions, creating a scoring system and giving a mark to each meeting. ‘Did we average 2.2 or 4.5 out of 5?’ he asks. ‘This requires IROs to be completely honest with themselves. If you’ve had a ton of unproductive, ineffective conversations, it might be time to go back to the drawing board and rethink the people you’re sitting down with.’
While many IR teams steer clear of focusing on conversion rates or the share price to measure the success of targeting, Rodney Nelson, head of IR at Qualtrics, argues that you should consider these areas, with certain caveats. ‘I think there are lots of ways you can quantitatively measure success and failure,’ he says. ‘Whether people want to admit it or not, it comes back to: did the prospect buy, sell or hold? And is the multiple we are being assigned by the market above or below where our peers are?’
Bartosiewicz notes that, based on their profile and trajectory, companies will receive different levels of inbound interest, which can affect the likelihood of success with targeting programs. ‘Companies may have aspirations to broaden their geographical footprint or institutional base, but there may be limitations – for example, market cap or liquidity,’ she says. IR teams should bear these potential barriers in mind when setting expectations with management, she adds.
There will always be debate about the best way to measure the success of IR activity. But what’s not in doubt is the value of strategic targeting, not only to your IR program but also to the company’s long-term business goals.
By taking a thoughtful approach to targeting, IR teams can help their company execute strategic changes, enter new markets, highlight sustainability progress, and much more. ‘It’s about finding a shareholder base that comes along for the journey,’ concludes Bartosiewicz.
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Using technology for more strategic investor targeting
Using technology for more
strategic investor targeting
Investor targeting can be a delicate art and precise science. Casting your net too wide can leave you with an unfocused pool of contacts; on the other hand, too many filters can be restrictive and close you out of conversations with the right people.
Using technology to hone your targeting approach can help uncover investors that prior relationships and sell-side support alone cannot. Using the right tools can help you funnel investors into your investor relationship management solution with as broad or narrow a scope as you need.
Let’s examine how technology can help you hone in from a broad top-of-funnel approach to a narrower bottom-of-funnel scope of investors.
Using technology to understand your peer holders
The easiest investors to find will be those that own or have previously held positions in your peers. These investors will likely care about your business and will be easy to find by examining your peers’ current and historical shareholder bases. For example, if an investor holds your peers but not your stock, you know it’s likely to be interested in your business and will make a strong initial target. Peer analysis is often a good starting point for companies to build their initial investor targeting strategy.
Maintaining a database of your peers and using technology to help you track their investors’ movements can help you identify investors that would be interested in your stock. You can zero in on potential investors by targeting those that have recently increased their position in your peers.
Think outside the (geographic) box
After nailing down your peer database, you can start to go deeper and begin narrowing down your list according to investor location (country of residence) or geographic investor ownership (countries or regions where they already have investments).
Filtering by investor location is helpful if you plan to do any on-the-ground investor outreach activities, such as conferences or roadshows, as it allows you to focus on a geographic area. Filtering by geographic ownership narrows down potentially interested investors.
For example, if your business operates in the eastern US, you may be able to find investors with a specific interest in that region.
It’s important to note that not all investors are in major financial hubs. Some industries have secondary and tertiary investment hubs that are not always on Wall Street’s radar. Increasingly sophisticated investor targeting software can show you investor hotspots for your sector and direct you to increase your presence in new regions.
Advanced filtering technology to narrow your search
You can further narrow your investor targeting database by adding additional filters. As well as geography, the right technology can help you search for investors based on predetermined criteria such as market capitalization, sector/sub-sector or investment style.
Many investors might invest in your peers or your region but it wouldn’t be feasible to speak to all of them. Even if you can reach out to hundreds of people, it would still take days to process which ones are or are not a good fit based on those criteria alone.
If you know what type of investment style aligns best with your business strategy, however, you can narrow your database to only include investors with a conducive investment style. Within seconds you can narrow your investor targeting list down from hundreds of prospective targets to just a few highly qualified investors.
Using technology to filter out ill-suited investors, you can refine your strategy to spend less time on discovery and more time speaking with suitable investors. You will then have more time to personalize your outreach, refine your pitch and build a strong reputation.
Having the right IR software allows you to be flexible with your approach so your targeting strategy can be as effective as possible
Differentiated data: Finding non-reporting investors
Generally, investors that do not report holdings are family offices, smaller hedge funds, investment managers and retail investment advisers.
Targeting investors that don’t report holdings may seem counterintuitive, but these investors are less likely to be solicited by others and have the potential to be long-term partner shareholders. These types of investors can be ideal for businesses looking to lower their cost of capital and diversify their shareholder base.
While we have seen incredible growth in the assets under management held by non-reporting investors in the last few years, sell-side analysts can sometimes overlook these investors as there are simply too many to cover efficiently.
Only some data providers have information about unreported investors, making it critical to ensure your investor targeting software includes these groups.
Final thoughts
Having the right IR software allows you to be flexible with your approach so your targeting strategy can be as effective as possible. Modern IROs should stay creative in their targeting approach, and having the right investor targeting technology in place can help you be more strategic in your outreach.
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With Irwin, you can better manage your IR initiatives and empower your IR team. Our versatile product includes powerful investor targeting, comprehensive shareholder monitoring, an intuitive customer relationship management system (with built-in email and engagement tools) and timely research, estimates and transcripts.
