Companies need to grab the long tail of disparate pools of capital

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Fraser Thorne, CEO of Edison Group spoke to Business Leader about the importance of raising capital as the UK moves towards a post-pandemic economy.

Focus is beginning to shift in the UK. Limiting the pandemic’s damage was the priority until the beginning of this year. Now, the successful vaccine roll-out has helped switch the emphasis to fostering recovery. However, reigniting the UK economy is a complex task. Probably one of the most important elements will be ensuring that companies can raise the funding they need to underpin their growth plans. While capital is available, it is more fragmented and much more international, so not as easy to reach as it used to be. Businesses also need to work harder to stay in control of their investment proposition as active investors gain more traction in European markets.

Corona’s winners and losers 

The initial impact of the pandemic dealt a hammer blow to investor confidence. But this soon recovered as governments stepped in to shore up their economies and wages. Unprecedented volumes of money have been poured into various government-sponsored schemes and these provided much-needed support and certainty. The economy was split between the old economy and the new, the corona losers and the winners. And the winners have done very well indeed. The tech and online media sectors delivered a decade of share performance in 10 months as investors scrambled to buy into the few available stocks listed, Behemoth Apple climbed 120% in 12 months – who says elephants don’t run?

Challenges to the supply of investment opportunities  

These mega successes mask a much wider issue, one which has much wider implications for international economies and equal distribution of wealth – de-equitisation.

There has been a historic decline in the amount of new equity capital raised in public markets over the last decade. In Europe, the rates of raising fresh capital have fallen by nearly 50%, from 380 annually between 1997 and 2007 to 220 per year between 2008 and 2018. In the US, the average number of IPOs annually has exactly halved from 300 IPOs 20 years ago to 150 IPOs today. Over 3,600 companies have raised money on AIM in 25 years – a huge success story, but the underlying number of stocks currently trading on AIM is 850, way below the peak of 1,694 in 2007. While some are taken over, and others might fail, the fact that the base number of stocks is falling over time is a concern.

More recently, certainly in the UK, there has been more optimism around public markets. In spite of the events of 2020, fundraising hit its highest level in London for over a decade last year. Moreover, and encouragingly, this was the case not just for the constituents at the higher end of the market, but also mid and small-cap stocks, with the AIM Index seeing secondary raises total of £5.2bn – the most since 2010.

Capital is more disparate and harder to reach

However, attracting capital can no longer be taken for granted. This is because the model of a concentrated number of active institutions mopping up IPOs has weakened in the tsunami of passive funds.

As the influence of the active institutional investor wains, so does the infrastructure which services it. The increasing regulatory collar on advisers and the limited regional focus of all but the largest brokers diminishes a company’s access to the right type of investor.

We have entered a new era of harder to reach, more disparate pools of capital in the form of institutional funds, sector specialists, family offices, boutiques, wealth managers, high net worths and private investors, all requiring a different form of communication and engagement.

This is the new audience of long term, supportive capita and it is growing fast.

In the UK, the ‘long tail’ of boutique funds, wealth managers and family offices, grew assets by a staggering 41% in the last third of the last decade. It is estimated that private investors hold 20% of AIM. This growing retail investor base is perfectly prepared for the digital age and the infrastructure of online platforms and low-cost robo funds have adapted to this far quicker than the institutional market.

The widening participation in IPOS through platforms such as PrimaryBid, is further evidence that this investor base is in rude health.

A significant portion of the potential audience is outside the UK, many in the US, the largest and deepest pool of capital in the world. The proportion of UK shares held by the rest of the world is currently at a record high of over 50%, with US-based investors accounting for half of this.

Learn from the best in the digital world – why is IR any different?

Companies now have more tools at their disposal than ever before to help them craft and communicate their investment case and then build engagement with a long term supportive investor base. Many of these same companies already build digital communities with their own customers so why not treat investors in the same way?

Well informed investors are more open to active investment opportunities. The more transparent a company is with its risks and opportunities, the more investor confidence grows, the more confidence in the market, the lower the cost of capital. As we have seen during lockdown, one message can be communicated to all investors from a home office and a website. All that time saved in travel can be ploughed back into more productive business activities, which will ultimately benefit shareholders – a virtuous circle.

At Edison, we have developed a market-leading approach that harnesses the latest in data and tech-driven tools to match the right investor with the right investment opportunity. The starting point is to monitor the behaviours of tens of thousands of investors by using smart targeting, with algorithms identifying interest – and even intent – to buy particular stocks.

These ‘propensity to purchase signals’ are detected via Edison’s digital content tracking system, InvestorTrack® which maps which investors are following what trends, themes, news flow, content and even stocks. The investor audience is drawn up of every major global fund as well as all the new players and even the harder to find private investors. This audience is collated via Edison’s own database and aggregated via 60 global financial platforms, including Bloomberg, Refinitiv and S&P.

Edison then combines the best of the old relationship world, voice broking, conferences, 121 meetings with those of the new; webinars, online Think Tanks and zoom meetings to ensure personal introductions between investors and companies are as bespoke and tailored as possible.

Unlocking the long tail of opportunity presented in a newer, innovative digital style could more than address the acute need for corporate funding – on which a swift recovery for the UK economy depends.

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