If you’re like many of our IRO (Investor Relations Officer) and CFO clients, your voicemail has likely been full of calls this year from a new Wall Street animal calling themselves “corporate access” experts. The simple explanation for these firms is that they are sell-side or research shops, minus the research.
For those newer to IR, a typical sell-side shop has two primary groups: one that writes research on a set of companies and a separate team of brokers that peddles that research to the firms’ institutional clients. Since the bursting of the dot-com bubble, the sell-side has been mired in a long, slow decline in their business model. Today, the primary method of revenue generation is not the research reports these firms publish, but the access they provide to the management teams of the companies they follow. So the research teams have really become cost centers and in many cases have had to increase their workloads dramatically and cover 2-3 times as many stocks as they did in the past.
Enter the corporate access firm. This is basically the money generating part of the research shop without the costs. They promise to introduce you and your management teams to high profile institutional investors. I’ve heard arrangements as simple as buy-siders paying these shops $5K for CEO access, $3.5K for the CFO, and $1.5K for the IR team. Sorry IR team.
The question is, do these new entities have a value proposition for today’s IR programs? The cost to your company is just time, so it’s at least worth some analysis. For underfollowed companies (two or less covering analysts), it’s hard to argue that more investor visibility wouldn’t be a good thing. We often send our very small-cap clients on the road ourselves, and we’ve seen a few of these new corporate access firms add some value for these under covered companies.
But what if you’re a more established company with solid Wall Street coverage? Here I see two issues:
While small hedge funds certainly have a place in the world for some companies, for larger, more established companies, it’s very hard to argue that the CEO & CFO should take a few days away from the business to court a set of investors with 200%+ turnover and limited buying power. That time could be much better served back at home, or focused on long-term investors that should be natural “partnership” buyers of the stock in the future.
To conclude, the incentive structure for these corporate access firms is off base. Their number one priority is to set-up as many meetings as possible, not necessarily to maximize the quality and fit of the investors with your long-term investment thesis. This is technically a flaw in the sell-side model as well, but I’d argue it’s a more acceptable flaw when those firms are providing a visibility building service like research coverage for the company.