The importance of retail investors

The much-neglected area of investor relations

They are often deemed unsophisticated, short-termist, of negligible significance, or just too difficult to include in the investor relations process. Some even view them as being primarily interested in ‘lottery stocks’ and impossible to engage with in a professional way. Such prejudices are as widespread as they are ill-informed. Private (also known as ‘retail’) investors are a much- neglected area of investor relations. Not only is this a lost opportunity; it also represents a real risk for public companies.

The majority of the world’s equity investments are now in the hands of less than 100 financial intermediaries. Engaging with them can mostly be done through organising meetings in a small number of financial centres; and there is a large and diverse service industry to help you go through this process.

The opportunity

Focusing your investor relations solely on so-called professional investors leaves you exposed to the finance industry’s herd mentality, and leaves a surprisingly sizeable investor relations opportunity unexploited.

As a case in point, look at an AIM-listed real estate fund I helped launch in 2005, Speymill Macau Residential Property plc. The company raised $150m in equity from just 20 institutional investors. The concentrated shareholder base made for an efficient fundraising and straightforward investor relations. However, it also ultimately led to disaster.

In 2007/08, redemptions turned several of the company’s mutual fund shareholders into forced sellers. Its share price tanked and eventually traded at an 80% discount to net asset value. A hedge fund bought out several mutual funds, replaced all the directors (including me), and proceeded to liquidate the portfolio.

This was an extreme case but it illustrates the danger of public companies placing too much emphasis on any single group of investors. There is solid evidence that having a base of retail investors helps to ameliorate the risks brought by market fluctuations.

Long-term investors

Research carried out by Barclays Stockbrokers found that of those private investors who invest into IPOs, 76% are still invested after the first year, and 42% are still holders after three years. This compares to institutional and foreign investors holding on to their UK equity investments for less than two years, according to Capita Asset Services.

Somewhat off the radar screen of many public companies, retail investors have become a growing and increasingly attractive participant in equity markets, for reasons such as the following:

• There is a decent amount of high-quality research, some of which is being written by private investors who even build stakes above the disclosure requirement. The retail investor event I run, the Master Investor Show, also saw record attendance in 2017.
• In the 1960s, private investors owned 54% of the British stock market; but in 2010, this figure was down to just 10%, according to the Office for National Statistics (ONS). However, this widely-quoted statistic is severely flawed; for example, it was based on an analysis that left out the entire AIM market. The Wealth Management Association estimated in 2014 that the real figure was likely to be closer to 20%. That compares with 16% held by pension funds, insurance companies, and other financial institutions. Also, even the ONS figure has most recently been trending upwards again and should now be around 15%.

Taking all these factors together, it is evident that engaging with this audience can bring a whole number of benefits to public companies. ‘Retail’ investors, who should always be called private investors to account for their increasing level of sophistication and investment potential, can benefit a public company’s liquidity, price volatility, and market efficiency. This, in turn, leads to fair valuations.

Investor relations efforts targeted at private investors pay for themselves, if done consistently and with the seriousness that such an undertaking deserves.

By Swen Lorenz – successful entrepreneur, investor and CEO