Where will banks get their next dollar of capital?
As if the shifting focus of the institutional investor wasn’t challenging enough, what about the difference in what retail versus institutional investors value, and how they plan to exit their investment (see table below).
Tough luck finding your institutional investor at the local coffee shop bragging that they own stock in your institution. They could care less about how much resources your FI dedicated to the local food bank.
Here is what I think community FIs can do now to prepare for this shift in attitude:
1. Maximize retained earnings to reduce the need to visit the capital markets.
We have gotten a multi-year pass in generating profits because of the financial crisis and the subsequent teetering economy. Now it’s time to cowboy up. How productive are your front line employees? How efficient is your back office? How well have you leveraged technology? Have you over-reached with your compliance program? If you don’t have the answers, you better start looking for them.
2. Get a real investor relations program.
Investor relations is marketing. Marketing is much more than advertising. And your marketing message must be delivered long before you ever need capital. You must spin a story that gets locals excited about your bank. Yes, financial performance will play a significant role, but a supporting role to the story you tell about how your FI is a critical component to local communities. Retail investors may have shifted to investing in mutual funds, but the local community bank is probably one of few chances locals can invest in a company down the street.
3. If you must tap the institutional market, choose your partners carefully.
Ms. Schultz specifically addressed this issue in her presentation. Search for institutional investors that share your FIs objectives. Where did this fund invest? How long did it hold the investment? How did it exit?
4. Prepare for the exit strategy from the time of investment.
Receiving significant institutional investor dollars does not mean a fait accompli in terms of having to sell your FI so the investor can get out of the stock. However, if you don’t plan for the investor’s exit when they make their investment, the clock may run out when they are ready to go. Make evaluating strategic alternatives a regular part of your strategic planning, developing financial projections for a stretch case, base case, and stress case. See my post on this subject here. Also, make financial performance, investor relations, and stock trading liquidity a part of your strategy from the git go. If not, you’ll find your FI might have up and went.
Where will your FI get it’s next dollar of capital? I would like to know.