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Retail vs. institutional: why small caps need a broad spread of investors

13 November 2009

Simon Bridges, the head of corporate finance at City firm Canaccord Adams, has told AIM company directors that they need to engender a sense of trust if they want to successfully attract a broad spread of retail and institutional shareholders.

In a speech to delegates at the London Stock Exchange’s annual AIM conference, Mr Bridges expressed his confidence in the overall liquidity of AIM stocks but said companies would benefit from developing strategies to attract both private and institutional backers.

He went on to outline a series of tips for companies to tap into the respective investor communities, including the need for good quality research, employing capable advisors and communicating with investors in a way that they could understand.

Mr Bridges insisted that while his advice bordered on being obvious, it was essential for companies to adopt simple procedures in order to cajole liquidity into their shares. Indeed, he rebuffed suggestions that AIM had no liquidity, saying that the liquidity challenge for companies was more a case of “how to generate it, how to sustain it and how to balance it between retail and institutional”.

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Simon Bridges: “My view is that the money is now heading into smaller caps.”

His speech reflected a strong theme running through this year’s conference of encouraging companies to take investor relations much more seriously. During the economic downturn, the LSE has sought to head off occasional criticism over its perceived inaction in helping AIM companies that have found themselves hamstrung by depressed share prices, by encouraging them to take a proactive role in communicating with investors.

Broad church of investors

Mr Bridges began his speech by dismissing misconceptions over the types of investors active on AIM. He said it was “absolutely not the case” that AIM was all retail and insisted that “pretty much all of the long-only institutional community, with very few exceptions,” were buying AIM stocks.

He added that those institutional shareholders not only included long-only firms, but also comprised indexed funds, activist shareholders and life and pension funds. “We see a broad church of institutional investors on AIM, that has always been the case and I think they are coming back in increasing numbers,” he said.

Moving on to private client brokers and retail investors, Mr Bridges highlighted the importance of a number of funds run by firms such like Rathbones, Brewin Dolphin and Charles Stanley, that were wielding large amounts of private client money. Brewin Dolphin, he said, was managing £20bn on behalf of its underlying clients, who were predominantly middle-market, middle-Britain doctors, dentists, accountants, lawyers and self-made people who have spare funds they want to invest.

While the private client market is familiar territory for many companies on AIM and “big generators of retail activity in the market”, Mr Bridges said it was also important to recognise the “Mr and Mrs Smiths” of the world who are trading through the execution-only stockbrokers, bank networks and internet platforms. “They are trading and you can’t dispute that,” he said.

Indeed, according to market figures retail activity has not been significantly affected during the economic downturn, meaning that month-on-month increases in the flow of money into the market so far during 2009 has been substantially down to improving institutional confidence.

“On the Main Market there has been an enormous amount of fundraising going on over the last ten or so months, with over £58bn put into the market,” he said. “The money has gone into the larger caps first, counter-cyclical investments and more liquid stocks. My view is that the money is now heading into smaller caps.”

How to capture investors

Coming from an AIM nominated advisor and broker, it was unsurprising to hear that Mr Bridges thought it a key priority to hire effective advisors in order to get a proper hearing from institutional investors. Nevertheless, with 93 companies having delisted from AIM in the last two years because of a lack of a Nomad, it is certainly clear that getting the right advisor is vital.

“They are your primary mouthpiece to the largest source of these funds, the institutional community,” he said. “You also need to be clear that you have got the right broker – a broker that understands your business and that has the right relationships.”

With the subject of brokers came the issue of research. Mr Bridges maintained that having a house analyst – attached to the broking firm – was essential.

“Coverage is just vital in terms of educating the market about the intrinsic attractions of the stock, setting out the investment case, setting out the forecasting and the expectations that the market is going to work to,” he said.

He pointed out that the market paid very close attention to analysts’ forecasts, particularly house analysts’ forecasts, and that if companies could encourage other analysts to cover their stock as well, that could only be good news. “The objective here is to have good research coverage that explains the proposition,” he said. “Institutions pledge real reliance on quality coverage.”

In addition, Mr Bridges advised companies that they needed to do the “hard yards” of maintaining regular contact with both the institutional and retail investor communities through roadshows. “Without getting out there and doing face time with institutions and with the private client community on the retail roadshows then you are just not going to succeed,” he said.

Turning to retail investors, Mr Bridges said private individuals were a vital part of almost any share register and that companies should have a strategy for capturing them. He said that while a broker would almost certainly be able to reach the larger elements of this community, it was appropriate for most small companies to have a strategy of reaching beyond private client institutions.

Public relations – or hiring a public relations firm – turned out to be the key advice on this point. “Some will be better at it than others and be able to manage retail roadshows; they will also help with the media coverage,” he said. “Like any other investor, they [private investors] are looking for every piece of information they can get. I genuinely believe that having the right PR firm is important to help communicate with the media and the private client community.”

Mr Bridges also said it was essential for a company to ensure that its broker could trade electronically with all the retail service providers. “Without that facility you are playing with one arm behind your back because you will not be able to reach that retail community in the form of execution,” he said. “It’s all well and good doing the marketing, but you need the electronic trading platform in your team to capture it.”

Building trust

Mr Bridges insisted that his ideas were simple but vitally important. “When you are thinking about the messages you give the retail and institutional community, they should be the same messages, they should be relatively simple and they should come coupled with milestones so people can appraise you,” he said.

He insisted that companies should have a news flow strategy, without froth and hot air, which delivered regular updates to the media and financial community – and not just half-year and full-year results. “Meet and beat expectations and give people relevant information and think about what they need,” he said.

“Ultimately you need to build trust – build trust with your advisors, build trust with your analysts and build trust with you investors, retail and institutional. Without that trust, you do end up in a more volatile situation where people really do hold you to account and in a situation where it is hard to generate and sustain institutional demand.

“On the balance of retail and institutional investors, I think it is important to have both with a strategy focused on both communities and with the right communication you can and will get there.”

Ben Hobson, SmallCapNews.co.uk