Corporate Solutions

We have heard frequently from European companies over the past 12-18 months that conversations with US investors have been dominated to a large degree by macro economic issues and questions rather than company specific dialogue.

So to what extent have US investor concerns on the European market fed through to their buying and selling decisions?

Well, despite the fear that US investors are running scared from European equities, the real evidence suggests otherwise. While there has certainly been somewhat of a recalibration of Eurozone portfolios by US funds, with Europe representing a smaller portion of the US investor portfolio than it did 12 months ago, there has not been the widespread pull back that many had anticipated.

Fund Redemptions

Stories of redemptions at some large US institutional managers have featured over recent months across the financial media. Data from Thomson Reuters Lipper confirms that net outflows from US domiciled equity market funds have continued through 2012. But, when assessing the impact this would have for European companies looking to target US funds, we classified the funds based on where they invest i.e. are they a domestic or globally focused fund or do they invest predominantly in emerging markets.

Interestingly, flows into domestically oriented US funds were the hardest hit, while globally focused and emerging markets funds were relatively resilient – even recording modest inflows over the last 12 months.

What are US funds focused on?

So the money is still potentially there for European corporates to tap into. But it is hardly low-hanging fruit. Companies need to target US investors carefully, to ensure their story matches the investors’ profile. So, what are the factors which matter  to US funds in their investment decisions versus their European fund counterparts?

Some things are the same both sides of the pond. We found that profitability factors such as RoE and RoA mattered most to both groups, while stock liquidity and interest coverage proved important gating factors in investment decisions.

Dividend yield and debt are areas of divergence. US investors will accept a lower level of dividend yield than European funds; while also being comfortable with a higher level of long term debt than their European equivalents.

Which US markets?

Every company is seeking out the Shangri-La of long term stable shareholders. Yet by far the most visited location in the US is New York – where portfolio turnover rates are at their highest.  Indeed, three quarters of European companies go at least twice per year to New York according to the Extel Survey 2012.

New York obviously represents a huge pool of assets, but also a huge number of firms that are not very likely to be suitable to meet, and which don’t fit the profile of the kind of funds you want in the shareholder base.

West Coast markets do offer longer term investors with significant purchasing power but a slightly different set of problems, not least logistical ones associated with the geographical spread of the funds.

Having low turnover also has its downsides of course, particularly in terms of longer lead times before taking a position. But your investment in time can generate investors in return. We have seen this work successfully for European companies, where they have visited the large West Coast value funds on an IR only basis initially, validated interest and then management would come only for the second / third meeting.

And European companies should not forget the big bit in the middle. Markets such as Chicago or Houston and Dallas in Texas also offer a number of interesting opportunities for European companies, with genuine long term holders, interested in cogent corporate narratives.  For more information on these second tier markets or any of the topics discussed here please listen to our recorded webinar on the topic at the link below.

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