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.’
