Small and micro-cap companies have long struggled to secure a respectable group of sell-side research analysts to cover their stocks given their smaller float and more limited M&A opportunities. That’s only been exacerbated by Wall Street’s multi-decade transformation which has made it even harder to maintain, much less expand, research coverage. Our team at Alpha has seen this dynamic evolve in real time, and while the landscape for sell-side research has become more challenging on its face, viable options do exist, even for corporates on the smaller end of the market cap spectrum.

As companies consider options for sell-side research coverage, many are facing the challenge of balancing traditional coverage with the stigma associated with paying for coverage, while deciding how best to allocate their time and resources. The avenues of gaining sell-side research coverage significantly differ and are heavily dependent on the size of the company and its ability to drive fees for the covering firm. The reality is if you’re not a hot stock that brings strong trading commissions and/or an active acquirer of other businesses that generates banking fees, you will struggle to attract and/or maintain sell-side coverage as a small-cap company. As a result, an increasing number of publicly traded companies are turning to Corporate Sponsored Research (“CSR”), often known as Pay-for-Play (“PFP”) research, to enhance investor visibility, ensure active Q&A on earnings calls, and strengthen their narratives with the Street.

The Data

Alpha’s research team conducted a detailed examination of small/micro-cap companies between $50 million and $2 billion in market-cap that are listed on major U.S. exchanges. Out of those companies, 85% presently have coverage in some form today, and thus, 15% did not. But as you pull that data apart, you see that companies between $50 million to $300 million in market-cap have much less coverage. In fact, roughly 25% of those smaller companies have no coverage and over 12% are currently paying for coverage.

 

 

The Tradeoff

Traditional sell-side coverage from established financial institutions certainly offers notable benefits, including the perception of stronger credibility, increased investor visibility, conference attendance, roadshow opportunities, and broader institutional interest. However, traditional sell-side coverage is usually only offered to companies that meet certain criteria, including substantial market presence, active trading volume in the stock, and the potential for future transaction work such as M&A or capital raising.

Given that, PFP research can provide a compelling alternative for companies that may not meet the high thresholds for traditional coverage from bulge-bracket banks. There are some key similarities and differences between these two types of models. The one positive for PFP coverage is access to that research is often publicly available through those firms’ websites or portals that are often free to access; encouraging more retail investors who monitor those sites for new investment ideas. Both services bring active participation in earnings call Q&A sessions and at least the top firms on the PFP side are included in consensus earnings estimates.

 

However, PFP is not without its own challenges as these firms often do not carry the same level of brand recognition as larger global banks. Most importantly, the PFP model does not offer the same kind of consistent outreach and prospecting to potential investors as traditional coverage. Some of the firms offer conferences for an additional fee, but most do not host NDRs or will charge an additional fee for those activities. As a result, companies need to consider additional investment in their IR function to replace this critical investor visibility effort.

Conclusion

For those companies with a small market cap or that might be in under-covered industries, Pay-for-Play firms can act as a crucial steppingstone to help build market presence and gain traction with the Street as the company grows. Our team at Alpha often helps to supplement this initial PFP coverage through other proactive IR outreach efforts until the time is right for us to introduce more traditional banking/sell-side relationships as the Company grows larger with additional financial needs. As you consider your options, you need to get a better sense of the reach, distribution, and the target audience of a PFP firm as there are only a small handful of credible offerings today. That said, we are seeing more options emerge as Wall Street continues to evolve and transform, and our team would be happy to offer additional advice if you are ready to consider investing in this new form of research.