Investor relations, the latest buzz

By Joshua Nicholas

Firms that successfully employ Investor Relations (IR) have more success enticing institutional investors, larger IPO’s, higher share prices, and find it easier to raise debt and equity.

What is IR?

A guide published by the London Stock Exchange (LSE) defines IR as, “the ongoing activity of companies communicating with the investment community.”  Or in other words, “the part of stock market life that sees companies interacting with existing shareholders, potential investors, analysts and journalists”.

According to Jon Zax, an Indonesia based IR Expert, IR is “the interface between the ‘real sector’ in which companies actually operate their businesses, and the financial sector, which basically places bets or otherwise on the future performance of the company.”

IR is essentially a channel through which a company deals with financial intermediaries such as brokers, banks, and fund managers, who evaluate a company’s strategy, prospects and current value, and decide whether or not it is a “good or bad bet going forward,” says Zax.

It is about discussing the strategy, regulatory regime, macro situation and competitive environment facing the company and the sector in which it operates says Zax, it is, “being able to weave together a coherent story about how this company is positioned fundamentally different, or following a strategy that will deliver relatively better value going forward than its peers.”

“It is communication, it is storytelling, from a strategic perspective. How is this business going to perform?” he says.

Who should the IR person be?

As a general rule of thumb: the smaller the company is, and the newer it is to the investment community, the more senior the IR person has to be, says Zax, “especially for newly listed companies, investors really want to speak to the decision makers directly.”  In most industries and most businesses, the preferable person would be the CEO or CFO; however, in some cases marketing and strategic heads also make effective IR officers.

Zax cites a good faculty for numbers, and the ability to create presentations that give “illustrations as to the company’s prospects and going forward,” as all that is required from an IR official. “The individual can come from anywhere, the primary characteristic is that they need to be able to talk,” he said.

What information must an IR official disclose?

Investor relations can take many forms, including meetings, company news releases, annual reports, and web pages, with the general goal being that all current and prospective investors have access to all the same information at the same time.

According to Zax, all information that has an impact on the performance of the company above a certain percentage of net profit needs to be disclosed on a timely basis. “The issue about disclosure has really nothing to do with things that truly are competitively held,” he said, “The disclosure that we are really talking about is: can you give us the context within this financial performance was delivered? What were you doing that resulted in these numbers? How is it that the macro environment or the regulatory environment affected what you were doing? How is that what you were doing differed from your peers? Were you growing faster or slower? Are your margins higher or lower?” Zax claims that part of the issue of transparency is making sure the financial market understands where your numbers come from and how you intend to address any differentials in performance.

He says, “You say ‘this is how we see our markets going forward, this is how we are positioning ourselves relative to our peers. These are the sorts of measurements you should expect to monitor in order to see that we are succeeding in what are doing’ At that level you are saying we want you to know how we view our business and where it is going. It is not about giving trade secrets, it is not about giving development plans, it is about talking about strategic thinking and how you achieve those goals.”

How does IR help win over institutional investors?

IR helps companies win over institutional investors through the assurance of face-to-face communication. “Most institutional investors need to see that a company is willing to maintain an ongoing dialogue, both when times are good and when times are bad,” says Zax.

He went on to add that an institutional investor is looking to generate a superior level of return, always, but as a general rule doesn’t necessarily want to be surprised. In particular they don’t want to be surprised in a negative sense but they also don’t want to be surprised in a positive sense, because what it suggests is they didn’t understand the business they were buying into.

In Zax’s view, institutional Investors only really get comfortable with firms over a period of time, “It is not one face to face meeting where they walk away and say  ‘I really like these guys, I’m gonna go buy some shares”.

According to the LSE, even though there are a number of sources of information available to institutional investors, “the key determinant is the face to face meeting between the analyst, fund manager and senior executive of the company. Potential institutional investors may meet a company several times before investing.”

How can IR assist with an IPO?

“In my view the worst thing you can do from an investor relations perspective is wait until your IPO to go meet investors for the first time,” says Zax adding, “it is a very artificial environment. You have 45 minutes to go through a document that your investment bankers created for you, to leave behind a several hundred page prospectus that nobody will have the time to read, and at the end of 45 minutes you say ‘thank you for your time, now will you give us some money?”

Companies need to get the word out and make themselves into a familiar entity long before their IPOs says Zax, “if you look at the IPOs that are generating the best value, the Google IPO, the upcoming Facebook IPO, if you think about the nature of those companies, Facebook does not have to go into any room anywhere on the planet, and say this is who we are, this is what we do, this is the revenue model.”

Zax advises beginning the IR process early, courting potential investors with information and guidance about your company as much as two years before you plan to list. “That way when the time comes to raise funds, you already have a relationship, it is not a cold call. The likelihood that people will come to you with real value for your shares is much, much higher,” says Zax.

“There are a number of ways for a company to gain exposure in advance of an IPO, and investment relations can be one of the channels for them to do that” he says.

How does IR ensure higher share prices and help raise debt and equity?

According to the LSE, profiling and explaining the company to the investment community on a continual basis can assist in creating greater awareness, which in turn can attract pools of buyers and sellers, resulting in higher frequency trading. “Entering into dialogue and developing relationships with the investment community over time so that its participants become cognisant with the company and its investment proposition is generally seen as a worthwhile exercise when trying to achieve efficient, cost-effective access to capital,” says the LSE.  Zax claims that after an IPO, firms should continue IR as insurance against a day when they might have to ask for money again. “We will obviously get better value the second time around if we have treated you well after the first time,” he says.  

Conclusion

IR is utilised by major firms the world over, with companies such as Google, General Electric, BHP Billiton and Apple all featuring web pages dedicated to informing their investors. Through effective communication, IR creates awareness and understanding of a company, and helps them gain access to institutional investors, capital, liquidity and a fair valuation of their shares.