As part of the ongoing IGB Hot Topics Series, The IGB group recently surveyed institutional investors representing over $2 trillion of assets under management. Our goal was to ascertain prevailing market views related to the impact of MiFID II regulations on U.S. small-cap investing.
MiFID II, the Markets in Financial Instruments Directive that has been in effect throughout the European Union since January 2018, has fundamentally altered the relationship between institutional investors and broker-dealers throughout Europe. The most visible aspect of MiFID II for investors and corporate issuers is the “unbundling” of fees, prohibiting broker-dealers from including the costs of research and corporate access in trading commissions.
While the U.S. Securities and Exchange Commission has thus far deferred implementation of reciprocal regulations, many U.S. institutions are beginning to voluntarily adopt key aspects of MiFID II, fundamentally changing the way that those firms use the sell side for corporate access and reducing the number of brokerages whose sell-side research they receive. Starting from a relatively lower base of sell-side support, the impact of these changes on small-cap companies is especially pronounced, creating a growing need for issuers to take a more active role in building and maintaining an appropriate shareholder base.
Notably, 100% of the respondents to IGB’s recent survey indicated the importance for U.S. small-cap companies to host large-scale investor/capital markets days where they can directly engage with the investment community at length and on their own terms; over 60% of these respondents asserted that company-sponsored events have become even more important following the implementation of MiFID II. In terms of non-deal roadshows, more than 80% of respondents indicated that company-sponsored roadshows and marketing are more important than ever to attract support from active institutional investors.
While the sell side remains important, and small-cap companies need to continue to support their covering analysts, it also critical that they implement strategies appropriate for a post-MiFID II environment, including:
- Regularly Holding Large-Scale Investor/Capital Markets Days – With fewer sell side-sponsored events, investor/capital markets days are an effective and efficient way for management teams to get in front of current and prospective investors, allowing them to communicate the company’s investment thesis to a large pool of capital. Since investor days are company-sponsored, management is able to highlight important valuation drivers – capital allocation priorities, management depth, strategic direction, earnings growth potential, ESG policies and more – in an event solely focused on delivering those messages in the most impactful manner.
- Proactively Targeting Institutional Investors and Conducting Non-Deal Roadshows – With the rise of passive investors, it’s critical that companies proactively drive their engagement with active institutional investors. This starts with crafting a compelling investment thesis and analyzing the full universe of actively managed institutions in order to identify those with the highest likelihood of investing. To ensure that a management team’s time is best used, those institutions ultimately offered meetings should be strictly evaluated based on first-hand knowledge of their investment methodology and such criteria as the appropriateness of their investment strategy relative to the company’s specific valuation drivers; current or historical investment in the peer group and adjacent sectors; and investments in companies with similar fundamental characteristics, thematic exposures, ESG policies and return profiles.
- Making the Story Accessible and Discernible to a Non-Specialist Audience – In an environment where investors often struggle to contextualize and interpret an endless barrage of datapoints across wide-ranging portfolios, it is crucial for small-cap issuers to provide clear, consistent and readily applicable communications to the market. Whether in the form of specific qualitative and quantitative guidance, additional financial and explanatory modeling disclosures, timely responsiveness to investor inquiries, or a commitment to clarifying the financial and strategic implications of developments, a supportive and transparent investor relations effort can make all the difference in a potential investment decision.
- Implementing a Financial Media and Social Media Strategy – While material and non-material market update press releases and conferences calls are important for satisfying disclosure requirements and demonstrating progress against articulated benchmarks, companies also need to consistently take steps to build their financial brand as they seek to attract both institutional and retail support. This includes securing earned print and broadcast media placements that highlight a company’s investment merits and promote management’s thought leadership on relevant industry, topical and macro issues. Based on the changing media landscape and how corporate information is accessed and acted upon, companies also increasingly need effective digital and social media strategies to provide a continuous stream of compelling, impactful opportunities for a potential investor to become a deeply engaged follower.