Investors commit their capital with the expectation of receiving financial returns in companies whose prospects for growth and development are convincing over the investment horizon.
Investors look for key attractive characteristics in companies, such as…
High Growth Potential – Investors are attracted by companies with high growth potential. Although a Company’s growth can be measured in many ways, the first thing investors assess is the growth the Company is able to achieve by conducting its commercial activity, i.e. organic growth.
Companies with a track-record of high organic growth potential and looking to explore growth opportunities will attract investors, given consistent and sustainable organic growth is a good indicator of the business potential to reach higher future valuations.
Present and expected earnings are an aspect investors and analysts focus on. A Company’s earnings are influenced by various factors, including operational expenses, financing, assets, and liabilities. Investors often use metrics as Return on Equity (ROE) and Return on invested capital (ROIC) to measure’s the Company’s profitability relative to other investment alternatives. These types of measures are employed to assess a Company’s efficiency at allocating the capital to profitable investments and accordingly they provide a valuable insight regarding how well a Company is employing its capital to create value. Investors favour companies with higher ROE and ROIC as these are more lucrative.
Industry – Some investors specialize in specific industries and are more willing to invest on companies that operate in those industries. Additionally, some industries are more inherently attractive. Industry attractiveness depends on a number of factors but it is worth considering that when evaluating the industry attractiveness, investors analyze the following factors:
Sustainable leverage levels – Compared with other funding alternatives, debt is a cheap source of financing. This is accentuated by the fact that interest are deductible for tax purposes. However, high leverage increases the Company’s probability of default, namely when the market reverses the positive cycle, which in its turn will increase the cost of new debt. The growing indebtedness of a company is proportionally linked to less flexibility in its financial management and in the balance that must exist between debt and equity.
Even though the adequate leverage level depends on factors which are intrinsic to the Company, investors will compare the leverage of the Company with the average leverage of the industry, as an exercise to assess financial risk.
While some industries tend to have higher levels of debt (e.g. capital intensive companies with more predictable revenues or more mature businesses, such as utility providers), in other industries a high level of leverage is perceived as excessive financial risk for potential investors. To assure adequate levels of debt, ratios such as debt service coverage ratio, Debt/Equity and Debt/EBITDA must be analysed and compared with similar companies.
(Stable) Cash flow stream – Well managed companies, able to convert earnings into cash on a regular basis. Investors tend to privilege investing in companies with a stable cash-flow stream, especially if generated by recurring operating activity. For investors, a stable cash flow stream is often more valuable than earnings for the following reasons:
Companies may improve their cash flow generating capabilities by:
Accounting records – Investors rely on the Company’s disclosed Financial Statements accounts for their assessment of the Company as an investment prospect, thus high quality accounting is a sine qua non condition.
Investors’ relations – Communication can take many forms, from meetings with potential investors, news releases, annual reports and setting up and maintaining your Company website. The messaging across all channels should be the same and the sole goal is to inform stakeholders about the Company so that they can gain a better understanding about the business, the strategy, governance, financial performance and prospects. In this digital age, there are many methods of communication which can be used for establishing your presence with potential investors.
As a Company is preparing for an IPO—and especially after an IPO—the Investor Relations will play a prominent role in keeping the Company highly valued. If a Company doesn’t already have a dedicated investor relations team, then building one should be a priority whether the Company is pre or post IPO. There are several best practices that IR teams should follow:
The integration of Environmental, Social and Governance (ESG) features in the Company’s business enables the Company and its investors to assess the wider impact of its operations and long-term strategy.
Investors are becoming increasingly aware of the benefits of ESG investments, and as a consequence, their requirements and expectations of Issuers are increasing. Issuers, looking to improve access to capital and avoid negative activist situations, are expected to build their own ESG roadmap to disclose to investors real and measured KPIs. A relevant ESG strategy leverages the right narrative and ensures long-term financing.
Investors increasingly expect companies to recognise and address, in an accountable way, the short, medium and long-term risks and opportunities in relation to ESG factors that impact long-term value creation. In parallel, Asset Managers consider in their investment criteria, incorporating ESG factors into investment decision-making, and by supporting the allocation of capital to sustainable initiatives.
Early adoption of good governance practices primes companies to respond more effectively to the expectations of their various stakeholders (shareholders, employees, civil society, etc.), as well as increasing their visibility.
Here are some of the main points to consider:
Many private companies, especially start-ups, may lack the resources and expertise to develop and implement a strategy to manage ESG risks and opportunities. In such cases, companies may consider, among others, shifting existing staff into ESG-focused roles to develop internal expertise. Corporates may also consider working with consultants to jump-start a sustainability strategy.