IR teams consider a range of factors when deciding which brokers to partner with, finds Tim Human
A key responsibility of investor relations is making sure the company and its sell-side analysts work together in the most effective way. That means carefully allocating time and access to the brokers that will have the most influence on the investors you are trying to reach.
For companies with a large number of analysts, this process becomes more complex. While overall sell-side ranks have declined in recent years, large caps and growth firms commonly report more than 30 followers. The highest-profile names may have in excess of 50 firms penning research on them.
Many IR teams think of their sell-side analysts in terms of tiers, with the top group receiving more attention and access than those below. Some go further and devise systems to rank analyst coverage against a range of factors, from research quality to event execution and feedback provision.
The virtual engagement ushered in by Covid-19 has both helped and hindered these deliberations. On the one hand, it’s easier to make management available to a wider variety of brokers. On the other, the old way of measuring the success of roadshows and conferences needs a rethink. New tech tools coming to market may offer a helping hand to IR professionals as they seek to track the influence of their sell-side following.
Internal segmentation ‘It’s important to say that some analysts are much more active than others, which I guess is the same for all companies,’ says Daniel Bohsen, corporate vice president and head of investor relations at Novo Nordisk.
The Danish healthcare company, which won three prizes at the IR Magazine Awards – Europe 2021, including best overall IR by a large cap, goes through a process roughly once a year to place its 30-plus analysts into tiers. ‘We do an internal segmentation,’ explains Bohsen. ‘Based on that, we roughly divide the analysts into three groups. Everybody gets the same service but we try harder to stay in touch with those in the first group on a regular basis.’
A range of factors goes into the segmentation process. Novo Nordisk considers the quality of research output, external rankings, such as those by Institutional Investor, and the reach of the firm among investors. It also uses results from its own perception studies, which include a question asking investors to name the top analysts they follow. Pre-Covid, IR team members who focus on corporate access would also give scores based on the execution of roadshows and conferences.
Once the information is collated, the team sits down and discusses the results. The brokers are then placed in a ranking – but Bohsen stresses that the specific position is not important: it’s the tier in which each broker ends up that matters. ‘If you are in tier one, you will get a roadshow almost every quarter, and most often with management,’ he explains. ‘If you are in the third group, you will get roadshows less often.’
While access to management is limited, Bohsen says the company almost always says yes to IR involvement in conferences or roadshows. ‘If a small broker – say a tier three – comes to me and asks to do a roadshow in Dublin, Luxembourg or Amsterdam, we will say yes, but of course we cannot promise CEO time.’ Novo Nordisk also makes sure to spread events across different firms. For example, the company’s quarterly London roadshow normally rotates between the big brokers in the UK.
Bohsen adds that different analysts have different skillsets, so you cannot judge them only on the quality of their written reports. ‘Covid has made it clear to me that analysts have different preferences,’ he says. ‘Some have really enjoyed sitting at home writing very high-quality research. Others have felt trapped because normally they don’t spend a lot of time writing, they are more often on the road, talking with all kinds of players in the industry. We put it all together and try to come up with some kind of segmentation.’
Virtual engagement IR teams, like analysts, have experienced pros and cons from the switch to virtual engagement. One of the main benefits is the ease with which companies can now join meetings or events. With regard to a company’s sell-side coverage, this has made it easier to spread attention across the coverage universe.
‘Covid has definitely enabled us to do more conferences,’ says Katie Keita, senior director of investor relations and social impact at Shopify. The Canada-based e-commerce firm has around 35 sell-side analysts, managed by a three-person team.
‘It’s enabled us to bring managers into some one-on-ones at conferences they wouldn’t travel all the way for,’ she adds. ‘Just from an access perspective, we’re able to talk to more people and get management in from time to time.’
For some companies, however, the Covid environment means their old system for monitoring analysts is no longer fit for purpose. For many years, Patrick Kiss, head of investor and public relations at Deutsche EuroShop, used an Excel spreadsheet to rank the performance of his analysts.
The process scored brokers across five areas – pre-marketing, entourage (how well the analyst or salesperson knows the investor), research, organization and feedback, with different weights used depending on the importance of each factor. Top-ranked brokers would get to choose where they took Deutsche EuroShop on the road the following year.
But that approach fell down amid the changes ushered in by Covid-19. ‘We would still use the same old system if coronavirus hadn’t stopped all real-life activities for the past 18 months,’ says Kiss. Companies have had to find new ways to meet investors and rethink their approach to best practice IR.
During the pandemic, Deutsche EuroShop switched to attending more conferences – ‘We see this currently as the easiest and most comfortable way of meeting investors,’ says Kiss – and he is a little skeptical about whether traditional roadshows will return.
‘When I listen to what investment bankers report about IPO roadshow experiences – that the CEOs and CFOs love it, talking to investors from all over the world in a couple of days instead of two to three weeks – I’m nearly saying, We won’t do roadshows again,' he says. Even before the Covid-19 outbreak, companies needed to question their use of physical roadshows due to the carbon footprint it creates, he adds.
Monitoring your coverage While each company will have its own approach to monitoring sell-side analysts, most focus on the same areas. For Keita, key factors include the incremental value of the research, whether analysts are talking to the kinds of investors the company would like to meet and ensuring engagement is spread around the group. ‘We make it pretty clear from day one that there are a lot of mouths to feed,’ she says. ‘If we’ve already done something with a broker, it’s time to move on to another firm.’
Providing good feedback is another way for a broker to stand out, adds Keita. ‘That makes it so memorable, and makes you really want to do another roadshow or conference with that company,’ she says.
‘When the sales team gives you feedback, not just on your delivery but also on the content itself, that seems like a pretty easy way to add value, if you want to stand out for access.’
But Keita emphasizes that she appreciates all the coverage the company has and notes that different analysts bring different strengths.
‘We’re really grateful to have any sell-side analysts and do really view them all equally,’ she says. ‘I know some have way larger readerships than others but, at the same time, some do a lot more work than others. And some have dug out really rich sources of fresh, incremental information.’
When monitoring your sell-side coverage, it is also important to keep an eye on ‘potential liabilities’, notes Gabrielle Rabinovitch, vice president of corporate finance and investor relations at PayPal.
There are some companies you need to keep close because otherwise they could write research or make public comments that are inaccurate, she says. ‘Those may not be analysts doing great work but they are analysts we need to be really thoughtful about in terms of how we engage with them,' she explains. 'Left unmanaged, it’s really not a good situation.’
PayPal is among the most-followed issuers in the world, with more than 50 analysts tracking the stock. While the payments firm doesn’t maintain an internal ranking of analysts, it carefully considers the analysts it prioritizes.
Alongside research quality, other areas important to PayPal include third-party rankings, a firm’s platform, regional specialities – some brokers may be stronger in Europe or Asia, for example – and which events investors and other companies are attending.
‘We pay attention to who different firms get for a meeting, especially now with Mifid II and the way a lot of the large institutions are changing how they pay for research and access,’ says Rabinovitch. ‘If some very big, long-only firms are showing up in meetings with a certain broker, it's indicative that they value that broker.’
Influence metrics As companies try to assess the influence of different sell-side analysts, they should look beyond how many investors are subscribers and consider the profile of the readership, says Charles Hamlyn, founder and managing director at QuantiFire, a market intelligence firm.
QuantiFire looks at four specific areas – weighted for importance – when ranking the influence of analysts: the number of investment firms that subscribe to the research, the equity assets managed by the readership, the ownership level of readers in a given company and whether investors are heavily reliant on that broker or subscribe to several different research sources.
‘You start with who is being read by the greatest number of investors,’ says Hamlyn. ‘But our philosophy is that it’s not just about headcount, it’s also about profile. It clearly makes a big difference if you have Fidelity, Capital and Wellington reading an analyst versus a lot of small institutions you have never heard of.
‘At the same time, an analyst who is being read by large institutions that don’t have any exposure to your stock will have less influence on that measure than one who is followed by top shareholders.’
Hamlyn accepts that well-run IR teams have a strong handle on who the key analysts are among their most important investors. But he says it can be challenging to assess the influence of the sell side on the wider market: ‘You can’t overlook the long tail of medium and smaller investors as that’s where the volumes are that generate price pressure. But it’s a more difficult calculation for IR teams to deal with.’
For Rabinovitch, IR teams need to take a personal approach to how they organize interactions with the sell side. Some executives will get on better with certain sell-side analysts than others, she points out. And the most influential analysts for her stock may not be the same as for another company in the same sector.
‘If you’re a mid-cap company, covered by six or eight analysts, and your stock is going sideways, you probably know the one or two people you need to get in touch with, so that they’re out there pounding the table on your behalf,’ she says. ‘Those people are unlikely to be my people. Influence is relative – it’s not absolute.’
While the sell side remains a key channel for companies to access the buy side, research suggests the amount of direct contact between issuers and investors has grown over recent years. IR Magazine’s Corporate Access report, published in June, finds that 79 percent of IR professionals have become more likely to reach out directly to investors.
‘Both IROs and investors appear to embrace what they see as new opportunities afforded to them by increased direct engagement,’ write the report authors.
