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The New Reality of Corporate Aftermarket Support in the Era of Alternative Capital Raising
By Tad Gage
Executive Vice President, Capital Insight Partners

The need for growth and operating capital leads companies to pursue a variety of options, including so-called non-traditional alternatives such as PIPEs (Private Investment in Public Equities) and numerous iterations of private equity placements. Traditional investment banks, and the aftermarket services they have provided such as institutional sales, market making, non-offering road shows and research coverage, have become far less accessible except to the largest corporations.

More of the burden for maintaining visibility following a capital raise is falling to the corporation. Although there is still plenty of capital available, many of the new funding sources simply don't have an aftermarket support infrastructure. Following a completed equity transaction, the first priority for the company and its management team get down to the business of putting that capital to good use – running a business.

But it's unfortunate if a company loses all the momentum it gained from its significant efforts to raise capital through marketing and presenting a company in the best light possible. Corporations that don't initiate an aftermarket communications and investor relations strategy run the risk of becoming invisible – lost in the noise created by thousands of other companies, indices, investment opportunities, market news and financial information.

Of course, sound financial performance is the best reward for the company and those who helped generate the capital. However, a company can do itself and its stakeholders a great service by establishing a high level of communication and information flow during the critical months and years following a successful capital raising transaction.

As long as a stock is traded on a public exchange, there are significant potential benefits to keeping the lines of communication to the investment community open. What company doesn't want additional investors, increased trading volume, improved liquidity, and more attention from potential stakeholders? Even the smallest publicly held company can cut the swath of a much larger company. In other words, if you're not a Fortune 500 company, you can still communicate like one. There are rewards for doing this.

Let's backtrack for a moment. In the traditional IPO or follow-on equity offering conducted by an investment banking firm, companies expected to turn over a significant amount of cash and stock to the firm in exchange for the deal getting done at an attractive per-share price. Following the deal, support was expected in the form of market making, a bustling institutional sales force working on your behalf, and well-publicized equity research. In other words: ongoing visibility.

That remains the classic and ideal capital-raising scenario in the minds of many corporate executives. However, a more realistic scenario for most companies, particular micro- and small-cap corporations, is that a capital raise will be a relatively low-key affair involving a few critical players. Still, the good work done to prepare for and make these deals happen shouldn't go to waste once the deal is completed.

One of the most effective ways is to establish a solid aftermarket presence is an investor outreach and communication program, utilizing skilled and serious investor relations professionals to assist with a long-term strategy to maximize shareholder value by disseminating the right messages to the right investors. News releases – a powerful way to communicate with the entire investment community via the Internet and other means of electronic distribution – can keep the Street posted on a company's accomplishments and financial goals. Credible company-sponsored equity research is available, and increasingly respected by investors. Virtual and in-person investor meetings enable management to reach out to money managers and brokers.

The keywords for a successful long-term aftermarket effort are “consistency” and “credibility.” Who isn't familiar with the newsletters and emails promising “the next big price move” or touting the rapid price escalation of a particular stock due to their outreach efforts? Many of these are funded by the companies themselves. Unfortunately, they yield spotty and often short-term results, if they generate any positive results at all.

After years of tracking such activities, it's clear that in virtually all cases, the only winners in this game are the few investors who bought, got lucky, and sold quickly before the stock sagged back to previous levels. The prospect of quick appreciation and increased volume sounds appealing to many corporate executives, but these methods don't produce long-term results. They hurt management's credibility more than they help.

A more viable approach to attracting long-term investors and generating sustainable share price increases is to establish a commitment to best-practices communications with the investment community. Reporting hard and soft metrics, discussing cash flow, burn rate objectives (for younger companies), margins, capital expenditures, returns on invested capital – these are the ways to impress potential investors.

Even individual investors have access to more technical analysis, historical trend information, ratios, performance data and expert opinion than the most sophisticated institutional investor of 20 years ago. And with a few mouse clicks, investment professionals, using an unprecedented number of analytical and informational tools, can identify all the performance metrics and information they need to include or exclude a company.

In the months and years following an equity financing, a company can dazzle investors with performance. The plethora of available information makes it impossible to dazzle the Street with hyperbole or by selectively sharing only the most positive news and financial metrics. Traditionally, equity analysts and the financial media shouldered the burden of sifting through and objectively reporting information and expectations about public companies. With fewer analysts and a diminishing number of “authoritative” media outlets, the responsibility of providing investors with clear, detailed, honest information increasingly rests with the corporation itself. This is a challenge, and also an opportunity. Even small corporations can impress the Street with their reporting, integrity, management credibility and sophisticated financial communication.

The long-term rewards are potentially significant, attracting the attention and respect of potential investors while assuring shareholders the company is doing everything possible to enhance visibility. An investor relations consultant with thousands of affiliations and contacts can help target long-term, committed investors who would move such a company to the top of their watch lists. By employing this type of aftermarket effort, a corporation is far less likely to find itself orphaned, lost in the shuffle and followed only by handful of increasingly disgruntled stakeholders.

With the responsibility for aftermarket outreach increasingly shifting to the corporations themselves, a company with a cogent communications and outreach strategy has a distinct advantage. This enhances opportunities to achieve for maximum forward valuation for anticipated performance and to build a growing, diversified shareholder base, resulting in contented early-stage investors and improving its odds to obtain additional financing should the need arise.