In the wake of the securities scandals, the collective opinion of the sell side still carries a significant cachet with institutional
investors. But to generate interest from potential investors, communicating a company's equity story directly to the buy side
or portfolio managers has never been more important for investor relations officers of large- and small-cap companies.
During the past four years, the weakness in the equity market has driven the decline of sell-side coverage by 27 percent,
according to Reuters Research. As the sell side shrinks, the buy side is beefing up its internal research capabilities, and
many analysts are joining the ranks of their buy-side brethren and third-party research providers. Reverberations from the
reconfiguration of research can be felt throughout the financial community.
The remaining sell-side analysts are gravitating to lucrative large caps that are more likely to provide the financial support
for coverage. Consequently, small caps that have long relied on the research arms of investment banks to spread the word about
their stock to potential investors may have no other choice but to make a beeline for the buy-side to generate interest.
In addition to focusing their research on large caps to offset the market shortfall, investment banks have begun arranging
more one-on-one meetings for their large-cap clientele with portfolio managers to spur trading activity. Large caps are being
lavished with attention, but they are also being challenged to maintain a healthy balance between the short-term benefits
of bank-sponsored meetings and the long-term financial goals of the company.
Success Is Simple
First, ask those people who are recommending the meeting to justify their rationale for why they would make an ideal investor
for the long term. Second, conduct your own research into the historical investing patterns of portfolio managers and analyze
why they pair well with your vision of the company. An approach that coordinates institutional salesperson efforts with your
company's investor targeting objectives ensures that you are only meeting with ideal investors, which maximizes your time,
enhances shareholder value, and reduces unnecessary volatility in the stock price.
Targeting the buy side effectively can be a much more sophisticated and time-consuming exercise than reaching the sell side,
but regardless of whether your company falls into the large- or small-cap category, the onus really is on you to understand
the complexities of courting portfolio managers. Carving a direct path to the buy side puts you in control of shaping your
company's investor base and the long-term relationships that go with it. And when it speaks instead of being spoken for,
a company moves from being a passed-around product to a brand ambassador in charge of its own financial fate. Put yourself
in the driver's seat of the buy side: Would you buy a car simply after reading an article in Road & Track, or would you then go directly to the dealer for a test drive?
Do It Right
There are some bumps in the road, however, when dealing with the buy side. Keep in mind these common issues and recommendations
for developing an effective and efficient targeting process.
Who and when. How do you know you're targeting the right buy-side firm at the right time in the right way? All investment firms have a
stated strategy that defines their investment style. Some firms are more disciplined than others in adhering to it, but matching
the strategy with your company's investment merits is the first step in ensuring productive meetings. Assess the other holdings
in the firm's portfolio. Examine the quarterly buying and selling trends as reported in its public filings to get a quick
view of where it is invested, the size of the investments, and the rate at which the investments turn over. This is a relatively
simple but often-neglected step that can be an eye-opener for many senior executives when they see for themselves how investment
managers act compared with what they say their intentions are.
As a senior executive with limited time, there are few things more frustrating than a meeting with an investor who clearly
has no interest in making an investment. By conducting minimal planning, such meetings are easily avoidable.