IR Monitor – 20th October 2021

This week’s news

Investment narrative should be high on CFO to-do list as company goes public

Investors won’t be patient with companies who have failed to get their IR strategies optimised before going public, it has been suggested. With a record-setting 792 companies entering public markets in the last two years, an article in CFO Dive has argued that the difference between those who sink and those who swim may well be their approach to IR. Whether through IPOs, direct listings or SPACs, at the very core of a successful public company is the narrative they share with their investors – be that on days with good news, bad news, or no news at all. Three key pillars contribute to IR success in the USA: well-assembled teams, strong advisory input, and the ability to successfully balance the short-term expectations of Wall Street with the need to create long-term value.

Launch of the UK secondary capital raising review 

Earlier this year, Rishi Sunak said that Brexit would enable a Big Bang 2.0, in a nod to the deregulation of financial services that happened in the 1980s. As part of this regulatory overhaul, HM Treasury has ambitions to change the rules around capital raising for companies listed in London. Such changes would boost the City’s competitiveness – both improving conditions for established players and luring in more IPOs for the future. The review, due next Spring and chaired by Freshfields lawyer Mark Austin, will look at ways to make rights issues quicker and cheaper, and advances the key recommendation from Lord Hill’s UK Listings Review. Policy suggestions have so far included allowing blank-cheque SPACs to list, reducing capital requirements for insurance firms, changing regulatory barriers to attract more tech unicorns, and considering an increased role for technology to speed up the process of raising secondary capital.

Activism is back in the UK as campaigns double

Activist shareholder campaigns have almost doubled in the past 12 months, the IR Magazine has reported. Last year 42 UK companies were targeted, compared to 24 the previous year, with FTSE 250 and AIM companies being particularly affected by the increase. Most campaigns were prompted by private equity interest, or by the greater prominence of environmental and social issues – both trends that are likely to stick around. And whilst institutional investors tended to give only limited support to activists, there were a few areas where they were more vocal in agreeing with them: supporting climate-related proposals and opposing management proposals. The final advice to companies? Get a good understanding of shareholders well in advance of any campaigns which might seek to capitalise on differences between shareholders’ expectations and management’s position.

EY: Profit warning levels leap in Q3 2021

Though profit warning levels were low over the summer, they jumped dramatically in September to above-average levels, according to a quarterly report just released by Ernst & Young. The warnings come at an arguably curious point in the economic cycle; 70% of the 51 total warnings came from companies who had not previously warned in the last 12 months. The pressure is most evident on small and mid-market companies and on the day of a warning shares fell by an average of 12%. Certain themes dominated: 39% of profit warnings cited the impact of COVID-19, whilst 43% cited supply chain issues. Other stresses in the market include rising energy prices and changes in the labour market, largely because of Brexit and the end of the furlough scheme. Supply problems have caused the most grief amongst FTSE companies, particularly within consumer sectors and, to a lesser degree, industrial sectors. Food producers, construction, utilities, and retailers are not out of the woods yet either according to EY.

Shareholder democracy is getting bigger trial runs

Historically, people holding indirect shares – through mutual, index, pension and exchange-traded funds – have had almost no voice in the internal affairs of the companies in which they’re invested. Seldom are they asked what concerns them, despite having ownership stakes. The New York Times has delved into three substantial developments designed to give stakeholders a far more powerful say: innovations aimed directly at retail investors; redistribution of some of the power held by asset managers so institutions can better control their proxy votes; and proposals on the regulatory front that would reverse measures restricting proxy access and investor choice. Where it was once extremely difficult for individual investors to know how funds voted on board issues such as climate change, diversity, or corporate compensation, we are now seeing the curtains of secrecy start to fall.

And finally… Hedge funds are feasting on ESG’s profit leftovers

Bloomberg has suggested that disinvestment from polluting companies may not actually be the answer – and that engagement could be a greener way forward. Asset managers who disinvest from carbon-intensive industries such as oil and gas may find that their actions backfire. One problem is that hedge funds are swooping in to pick up discarded shares, making outsized profits in the process. Another problem is that taking money out of these companies could undermine their ability to fund the energy transition. An alternative option is to engage with such companies and persuade them to improve their environmental performance. One example is Calpers, the Californian pension fund, which pinpointed just 100 companies responsible for 85% of the combined emissions from the 10,000 companies it examined. It now plans to use its ownership stake in these top 100 polluters to steer them towards a greener agenda.

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