Research Report: Small-Cap IR
The global voice of investor relations
Small-Cap IR
An analysis of investor relations at small-cap companies in comparison with the practice of IR at companies of all cap sizes
Introduction
What is in the report?
Introduction
IR is different for small-cap companies. The resources available, level of engagement with the investment community and priorities of internal governance all lead to a contrast between the practice of IR at small-cap companies and at larger firms. This is something IR Magazine has regularly found in its reporting over the years.
This report looks at our recent research to see the extent to which IR at small-cap companies differs from, or is similar to, IR at larger companies. We examine four key areas to identify this:
- We begin by examining the resources available for IR, from team sizes and responsibilities to budgets and outsourcing
- The report then goes on to look at the nature of senior management involvement in investor relations at small caps compared with companies of all sizes
- This report also examines engagement with the investment community, from analyst coverage and targeting to investor meetings and reporting
- Finally, we look at the challenges the investment community faces when looking to invest in small-cap companies.
Data in this report is taken from IR Magazine’s Global IR Survey from Q2 2017 to Q3 2019. This is our biannual survey of IR professionals around the world. Historical trend analysis in this report uses data taken from the same survey process dating back to 2011. As data is taken from several surveys there is no one total number of respondents.
The investor view section of this report uses data taken from the latest round of IR Magazine’s Global Investor Survey, which was conducted in Q4 2019. For the purposes of this report the following cap size definitions are used:
Contents
Introduction
Small-cap IR by the numbers
IR resources
Senior management
Investor engagement
The investor view
Small-cap IR by the numbers
Team size, budget, analyst coverage and more
Small-cap IR by the numbers
IR resources
Compensation, external spend and
career path
The average number of people working in IR at small-cap companies is 1.5. This is more than a whole body lower than the overall average of 2.6 among companies of all cap sizes. Small-cap companies typically have half the IR personnel found at large-cap companies and a quarter of the personnel seen at mega-cap firms.
IR team sizes for both small caps and overall have remained consistent since 2013, with small-cap IR teams always having just over one member fewer than the average for all cap sizes.
The median salary ranges for IR professionals at small caps is the same as those among all cap sizes: $150,000 to $199,999 for IR heads and $75,000 to $99,999 for IROs. But 39 percent of IR heads and 31 percent of IROs at small-cap companies earn above the median pay bracket, compared with 47 percent of IR heads and 48 percent of IROs at companies of all cap sizes. This means IR professionals at small-cap companies typically earn less than the overall average, although not to a significant degree.
Bonuses are also lower at small caps: 21 percent for IR heads, 18 percent for IROs, compared with 32 percent and 25 percent overall.
IR professionals at small caps come from similar backgrounds to those at other cap sizes, with 53 percent coming from a corporate background and 30 percent from a capital markets background. This compares with overall figures of 58 percent for corporate and 29 percent for capital markets.
IR professionals at small-cap companies are much more likely than professionals at other cap sizes to have multiple roles and additional responsibilities outside of IR. Just 9 percent of small-cap IR professionals have IR as the sole focus of their job with no additional responsibilities, compared with 31 percent of IR professionals across all cap sizes.
Nearly six in 10 IR professionals at small-cap companies also have responsibility for corporate communications, 43 percent have PR responsibilities and 42 percent are involved in corporate strategy.
Small-cap companies have less cash to spend on IR than companies of other cap sizes. The average IR budget is $393,000, which lies between the average budgets for mid-cap and large-cap companies. Small-cap firms have an average budget of $232,000 – $161,000 and more than 40 percent less than the average for all cap sizes.
The gap in IR budgets between small-cap companies and others has narrowed over the past nine years. While IR budgets overall have gone down by almost a third in this time, small-cap budgets have remained fairly consistent and are now just $18,000 lower than their 2011 figure. This means the difference between small-cap and all-cap IR budgets has almost halved since 2011, from $311,000 to $161,000.
Small-cap companies typically spend 37 percent of their IR budget on external services, 4 percentage points more than the all-cap average. In real terms, this amounts to an average of $86,000, 33 percent lower than the average spend of $130,000 among all cap sizes.
What IR departments at small-cap companies choose to outsource and their levels of outsourcing are more a matter of resources than desire. For example, just 28 percent of small caps commission perception studies compared with 46 of companies across all cap sizes. But 56 percent of small-cap IR professionals say they would outsource perception studies if resources permitted. This is also true of outsourcing targeting.
Senior management
How much time does management spend on
IR activities?
Small-cap IR departments are more likely to report to the CEO than IR at other cap sizes. Although half of small-cap IR teams report to the CFO, more than a third report to the CEO compared with an average of 23 percent across all cap sizes.
CEOs are also more involved in IR at small-cap companies when it comes
to time spent on investor relations. Although senior management at small-cap companies spend the same amount of time in total on IR, the CEO spends on average four more days than the average for all cap sizes, while small-cap CFOs spend an average of four
days fewer.
Time spent on IR by senior management has remained relatively consistent over the past eight years. In 2012 the average number of days small-cap senior management dedicated to investor relations was 42, while for companies of all cap sizes it was 43. In 2019 the average number of days spent on IR by both small-cap and all-cap senior management was 45.
Senior managers at small-cap companies are more likely to attend meetings with investors than senior management at other cap sizes. In the past year they have attended 58 percent of investor meetings compared with 45 percent across all cap sizes. But senior managers attend more meetings in real terms at other cap sizes due to the higher number of overall meetings held by these companies.
Small-cap CEOs are more likely
to go on the road, with small-cap
bosses going on nearly two thirds of
all roadshows, while CEOs among
all cap sizes typically go on a third
of roadshows. Just 6 percent of small-cap roadshows involve no senior management.
Access to senior management
When it comes to frequency of contact, senior managers have similar involvement in IR at small-cap companies as they do at other cap sizes. More than three quarters of small-cap IR departments meet with their CEO at least monthly to discuss IR issues, while 93 percent meet with their CFO with the same frequency. CEOs at small-cap companies have more regular contact, with 45 percent meeting each week to discuss IR issues, compared with 40 percent across all cap sizes.
Half of small-cap IR departments meet with their board of directors at least quarterly. This compares with 37 percent of all IR departments regardless of cap size. Less than a quarter of small-cap IR departments never meet with the board, compared with 31 percent of departments across all cap sizes.
There is less concern about the issue of board diversity at small-cap companies. Slightly more than three in 10 small caps have targets for increasing board diversity, compared with 38 percent across all cap sizes. This is possibly because there is less external pressure on them. Just over one in five small-cap companies has received questions from investors on board diversity in the past year, compared with 35 percent across all cap sizes.
Investor engagement
Roadshows, targeting and investor base constitution
Roadshows, meetings and events
Small-cap companies typically hold just over half the average number of meetings held by companies regardless of cap size. The gap between small-cap and all-cap investor meeting numbers is the same in 2019 as it was in 2012, with small-cap companies having an average of 91 fewer meetings than the average for all companies. In the intervening years the gap between the two has grown to more than 100, but has never varied too wildly.
Small caps also go on fewer roadshows and attend fewer investor conferences, going on 2.7 fewer roadshows and attending 2.3 fewer conferences than the averages for all cap sizes. Small-cap companies spend fewer days on the road per year, too, and go on the road with fewer brokers.
Sell-side analyst coverage is typically much lower for small caps than is the norm for companies of other cap sizes. The average number of analysts covering companies across all cap sizes is 14.1, while for small-cap companies it is just 5.4.
Analyst coverage increases dramatically with cap size, with mid-cap companies having more than twice the number of analysts covering them as small caps and mega-caps approaching five times the small-cap coverage.
Direct targeting of investors is more common at small caps, with 45 percent of potential investors directly targeted by small-cap IR teams, compared with 37 percent among all caps. Reliance on brokers for targeting has fallen, with 21 percent of small caps seeing a decrease in their use in 2019 and 13 percent seeing an increase.
Looking at criteria to use when targeting investors, small-cap companies are more likely than other companies to focus on peer ownership and sector focus. Just 9 percent of small caps specifically target SRI investors, compared with 18 percent of all caps.
A quarter of small-cap investor-targeting efforts result in a stock purchase and it takes an average of 3.7 meetings with an investor before it takes a position in the company, 0.7 fewer than the all-caps average.
Outside of financial reporting, the frequency of reporting is slightly lower among small caps than at other cap sizes. Slightly more than a quarter of small-cap companies report on qualitative issues such as business model and risk factors at least quarterly. This compares with a third of companies across all cap sizes.
Small-cap companies are less focused than other companies on ESG issues. One fifth of small caps produce a separate ESG report while almost a third do not report on ESG at all. Just 16 percent have a dedicated sustainability team responsible for ESG communications, with responsibility often falling into the hands of the corporate communications team.
Less than a quarter of small-cap companies have engaged with ESG investors and analysts by holding group meetings, going on an ESG-focused roadshow or attending an ESG-focused investor conference. Just 17 percent have any meaningful engagement with ESG ratings agencies.
Small-cap companies are also behind other companies in terms of hard data for ESG. While 47 percent of small caps report on employee-related KPIs, around four in 10 report on governance and environment-related KPIs. More than half of companies across all cap sizes report on these issues.
When asked what their primary goals are for reporting over the next three years, the focus is to make a clearer link between strategy and financial results. More than four in 10 have this as their top priority, with increasing reporting around ESG issues a distant second on 16 percent. Priorities for small caps here closely mirror the priorities for all cap sizes.
Earnings guidance is slightly down at small caps, with 36 percent not providing any compared with 29 percent for all caps.
Small-cap companies have fewer institutional shareholders and more shares held by individuals and founding families than do companies of other sizes. Small cap is the only cap size where a minority of shareholders are institutional investors.
The investor view
What challenges do small caps face?
In our global survey of the investment community in Q4 2019, we asked both the buy side and the sell side what the particular challenges are for investing in small-cap companies. The question was open comment, allowing respondents to answer in any way they wished. These comments were then categorized to give a broader picture of the challenges faced in small-cap investment.
Liquidity
The most common issue to be raised is liquidity, with three in 10 respondents mentioning it. Quite simply, investors are concerned about having money tied up in small-cap companies, whether they can get enough investment in the first place and whether they can readily get out of that position when needed.
Liquidity is the issue mentioned most by both buy-side and sell-side respondents, although it is more commonly cited by the sell side: more than four in 10 sell-siders mention liquidity, compared with a quarter of buy-siders.
Information
The lack of information and insufficient communication and disclosure is the next most commonly mentioned issue. Investors often feel there is not enough data on small-cap companies for them to make an informed investment decision. They are also concerned about the lack of transparency at small caps and whether these companies are able to regularly provide investors with the information they need.
Information issues are more of a concern for the buy side than the sell side: 23 percent of buy-siders mention these issues, compared with 13 percent of sell-siders.
Governance
The third-most commonly cited
issue is governance. This includes aspects of the way small-cap companies are run, including quality
of senior management. Governance
is mentioned by 19 percent of respondents. It is more commonly mentioned by the buy side than the sell side, being identified by 21 percent of buy-siders and 13 percent of sell-siders.
Coverage
As identified elsewhere in this report, sell-side analyst coverage for small-cap companies is considerably lower than coverage for companies of other cap sizes. This is reflected in the view of the investment community, with 15 percent of respondents citing it as their key challenge in small-cap investment. Rather predictably, the sell side does not see a lack of analyst coverage for small caps as a key issue, but the buy side does, with 19 percent of buy-side respondents mentioning it.
Moreover, lack of analyst coverage can be considered in the wider issue of lack of information. Respondents who mention analyst coverage or lack of information generally amount to 35 percent, more than the 30 percent who mention liquidity. Seen this way, lack of information, either from the sell side or elsewhere, is the major challenge facing small-cap investment.
Volatility
Volatility is another issue that concerns the investment community regarding small-cap companies. This time it is the sell side that is more concerned, with 17 percent citing it as an issue, compared with just 7 percent of buy-siders.
Other issues
The other issues mentioned by the investment community as challenges
to investing in small caps include the lack of resources available to such companies to have an effective IR operation, trading issues such as ETFs and the lack of index availability for small caps. The lack of information around ESG is mentioned by a small number (7 percent) of investors while
a few specifically cite the impact of Mifid II as being detrimental to small-cap investment.
Comments
As always, it's the people and the balance sheet
Buy side, Asia
Expectation that volatility will pick up and liquidity will trade at a premium
Buy side, North America
Finding top managers who aren't there to optimize their remuneration over short periods
Buy side, Asia
Gathering sufficient independent data and analysis on the industry and unit economics
Buy side, Asia
How to absorb the rising costs of ESG programs
Sell side, North America
Investors favor large caps over small caps in a low-growth environment
Sell side, Europe
Lack of analyst coverage, lack of conference calls, illiquid trading, high bid/ask spreads
Buy side, North America
Lack of ESG disclosure often results in poor ratings by external ESG providers
Buy side, North America
Lack of information, different accounting styles, lack of historical information
Sell side, North America
Less analyst coverage, though this is an opportunity for investors: smaller companies typically are easier to engage
Buy side, North America
Liquidity: how to enter a decent-sized position and exit it when needed
Buy side, Europe
Maintaining research coverage post-Mifid-II
Sell side, Europe
Mifid II poses a threat for companies, particularly small caps. The companies are at risk of becoming less liquid
Buy side, Europe
Little or no coverage by analysts/media, which results in less scrutiny
Buy side, Asia
Not covered by brokers, therefore need to do own research, which takes time
Buy side, Europe
Not enough people to handle all those ESG topics even though they might be better than others but don't communicate/list them
Buy side, Europe
Passive ETF investing has reduced their appeal for large parts of the market
Buy side, North America
Poor management teams, financial needs and trends toward larger-cap names, which could be changing
Buy side, North America
Prevalence of ETFs has killed the ability for them to go to the market for funds
Buy side, North America
Risk of rating fluctuation and liquidity
Sell side, Asia
The usual: they often don't have a lot of IR resources
Buy side, Europe
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