Investor Relations for Private Firms
Not just a practice confined to listed companies, IR can provide a vital communications conduit for private firms. Sandra Novakov, head of IR at Citigate Dewe Rogerson, and Simon Young, founder and partner at Heartwood Partners, share their perspectives on how and why private companies run IR programs.
In your experience, why do private firms choose to run IR programs?
Sandra Novakov: We recommend that, as they grow, private companies start educating investors on their investment case well before a potential fund-raise by adopting an ‘as-if-listed’ approach. This entails increased transparency regarding financial performance – albeit more limited than financial reporting by listed companies – and relationship building with key sector analysts and selected investors.
Private companies often turn to us for IR support once they have been acquired by a private equity firm. Such transactions are usually followed by bond issuance, which triggers reporting obligations and increased internal awareness regarding the benefits of proactive communications with the financial markets. Private equity owners also have an interest in ensuring their investees build and maintain a good reputation within the investment community, to support a successful exit further down the line. Companies with no bonds in issue often approach us up to three years ahead of a planned IPO as they start preparation for the next phase in their corporate development.
Simon Young: For many private firms, running a scaled-down investor relations program is just good business practice. Private firms often attract external investment from private individuals or private equity, giving them access to funding to grow the business. These investors are keen to understand the progress the company is making and an investor relations program helps investors to judge this progress.
A program will typically encompass reporting of financial metrics beyond the company’s minimum reporting requirements, such as a detailed management commentary on operational progress and updates on key performance indicators. Private equity owners may want the company to maintain the discipline of investor relations if there is a real chance of returning to the listed markets. This was the case with FTSE 250 constituent Merlin Entertainments, which maintained many of the reporting disciplines of a listed company and an active dialogue program with public market investors when owned by private equity.
What are the benefits of running an IR program at a private company?
SY: IR at private companies can be less comprehensive given they have fewer regulatory reporting responsibilities, and this can be reflected in the resourcing and budget. At a listed company – such as GlaxoSmithKline – there’s a team of four or five dedicated to investor relations, but IR at a private company often forms part of an employee’s other duties.
Regardless of size or type, it’s good discipline for management to keep all stakeholders informed of the company’s progress. Private companies are not bound by the same level of regulation, such as Alternative Investment Market rules, so can be more open with investors about future forecasts and share-trading expectations in a way that listed companies are prevented from being by the regulatory authorities.
SN: Early investor education through an ‘as-if-listed’ approach can make a future fund-raise much smoother and help optimize cost of funding. An IPO candidate that ‘walks and talks’ like a listed company is more likely to inspire confidence and instill trust in investors.
What are the key things investors at private firms want to know from the IR team, and how do these differ – if at all – from listed company investors?
SY: Investors the world over tend to be very similar. They are keen to understand how their investment is performing and what opportunities or challenges lie ahead. A key difference between private and listed companies is that private companies are less restricted by stock exchange listing rules, so may be more open about the challenges or opportunities. It must be said that this isn’t always the case and some private companies are very much that – private!
SN: Often when a company is private, analysts and investors are mainly interested in the management team’s view of the market and the implications of its insights on listed companies under their coverage.
Do IR teams at private companies tend to encompass a broader range of additional functions than teams at listed companies, such as PR or finance, for example?
SN: In our experience, day-to-day IR at private companies is usually handled by a member of the finance team, with the CEO and CFO taking responsibility for engagement with analysts and investors. Marketing teams at private companies tend not to have extensive experience in financial communications and are hence less likely to take primary responsibility for IR.
SY: Private companies and small and micro-cap companies are in many ways similar. There is less need for a full-time IRO and, for many, they simply cannot afford one. This means that any person in the IR role is likely to perform a number of other functions, be it finance or marketing. We see with a number of start-ups that the CEO is also the IR specialist – after all, he or she has to regularly update investors on the company’s progress and then ask for more funding.
What, if any, are the key lessons private company IROs can learn and apply from their listed company counterparts, and vice versa?
SY: An IR position is about communicating the investment proposition to stakeholders and gathering feedback to understand where the investment message may need reinforcing. This is essentially the same whether in a private or listed environment. Openness goes a long way to establishing trust. We tell all clients to try to be as transparent as their business model will allow. Don’t clam up when trading is poor.
If the business is performing below plan, be upfront about the reasons and, importantly, what you are doing to counteract them. Investors who trust management will give it more time to fix any problems before seeking change. Also, greater trust means it is easier to raise further capital, either from a position of strength to expand or to bolster a balance sheet if trading is poor.