How are factors from new regulation to market volatility affecting corporate access services offered by brokers?
Despite experiencing more than its fair share of regulatory scrutiny and rule implementation, corporate access is thriving, with the sell side maintaining its position within the investment community as the primary provider of the practice. But the current corporate access landscape looks set to change further with the much-publicized Mifid II looming on the horizon, which – when coupled with existing regulation and continuing market volatility – casts a degree of uncertainty over the future of corporate access.
Regulatory impacts
Opinions regarding regulation are mixed, ranging from calls for further transparency to doubts around whether new rules were actually needed in the first place. The effectiveness of regulation in achieving its desired outcome is also questionable, says Sanford Bragg, principal at Integrity Research, referencing the decision by the UK’s Financial Conduct Authority (FCA) two years ago to tighten payment rules around corporate access.
‘The FCA expected that banning the use of client commissions to pay for corporate access would yield significant savings, but now substantial payments are instead being made for more value-added types of events that meet the FCA’s criteria,’ explains Bragg. ‘While there’s no longer any payment being made for plain vanilla corporate access, [overall] there certainly haven’t been the cost savings the FCA originally envisioned.’
So what impact has been felt by corporate access teams globally? From an Asian perspective, dayto- day working is seemingly unaffected by both current and future regulation. ‘There’s a lot of talk but realistically I can’t say corporates are talking any less to investors or that we’re having to make any major adjustments yet,’ notes Alex Lupis, managing director and head of corporate access & client management for global markets in Asia at HSBC. ‘The only small concession might be that it takes slightly longer to fill schedules, but that’s more around market issues and sentiment than regulation. The reality is that most clients still feel it’s imperative to meet company management and, especially in Asia, see the environment and operations.’
The general consensus appears to be that Mifid II’s reach will be felt outside the UK and Europe, especially for those investors that work across different regions. ‘Large asset managers that have global operations will need to have a consistent approach across their geographies,’ says Robert Meyers, head of corporate access at RBC. ‘This need for uniformity has raised the intensity with which they track and measure their sell-side resources.’
Lupis agrees, but adds that some investors may choose to differentiate between specific regions when thinking about research and related payments. ‘More broadly speaking, we’re seeing some clients looking at it from the point of view that it’s something that’s going to affect only Europe-managed money, and others looking at the bigger picture and assuming the view that it’s an opportunity to adopt best practice globally,’ he says.
Smaller concerns
It’s small and mid-cap companies that will be most at risk from Mifid II, observes Mary Turnbull, corporate access director at Raymond James & Associates, as the reduction of income stemming from corporate access fees means these smaller companies are less attractive for brokers once the importance of capitalization-related trading commissions becomes greater. In a market where it’s already a challenge for these companies to attract investors’ (and brokers’) attention, further regulation will serve only to exacerbate the problem. ‘Everyone is going to be taking a harder look at what services they’re providing,’ says Turnbull.’
But Charles Hamlyn, managing director at QuantiFire, argues that the regulation could bring advantages for these companies. ‘If broker support diminishes, company investor relations will have to be increasingly proactive in order to achieve and maintain fair valuations, especially outside of the FTSE 100,’ he points out. ‘It is fortunate that just as this regulatory change starts to bite, plenty of innovative, next-generation services are now ready and waiting to fill the gap.’
While regulation has been the topic du jour when it comes to corporate access, current market conditions are having a more immediate impact on how meetings are being organized. ‘Budgetary concerns have led to a focus on making practices more efficient and relevant,’ says Meyers. ‘In real terms, we’re implementing longer vetting processes to ensure we’re bringing the right types of companies and the right types of investors together and delivering an effective outreach.’
Meyers also observes that companies operating in the hardest-hit sectors are diversifying from their main brand messaging and seeking support from the sell side to communicate sub-brand messages to potential investors.
‘We’ve worked on some interesting initiatives recently, such as a large-cap energy company looking to rebrand the industrial components of its business and show investors how they rank and stack against both its peers and its core industry,’ he says. ‘These types of initiatives – bolstering investment interest by developing a different perspective – look set to continue.’
Current trends
While virtual solutions, such as videoconferencing, appear to be regarded as useful tools, it’s face time that continues to be the most coveted and well-regarded method of investor engagement. ‘Videoconferencing in Asia, with US and European investors, is challenging due to difficult time zone differences,’ observes Lupis. ‘It can be useful for relationship maintenance, but it isn’t a substitute for the gains made from going to somebody’s office, looking at their location, shaking their hand and looking at the whites of their eyes in person, especially for the first meeting with a company.’
That said, use of virtual meetings for corporate access is growing fast. OpenExchange, an online exchange for financial professionals, saw meeting activity in 2015 rise 2.5 times on 2014. The sell side remains heavily involved, taking part in more than 90 percent of corporate access meetings on the OpenExchange platform, says CEO Mark Loehr.
With high levels of investor demand for meetings with management remaining as strong as ever, companies are working with brokers to think of ways to maximize management time wherever possible. ‘Look for creative ways to increase investor meetings,’ suggests Turnbull. ‘Can you have a dinner when in town for another event? Can you squeeze in one more investor meeting in a day? We’ve found companies are very happy to have investors come and visit; it’s easier on their management team’s time and gets them more exposure.’
And what about the newer digital corporate access platforms? While reactions from the sell side are generally quite muted on this, the argument exists that small caps could see the benefit. ‘These matchmaker-type platforms concentrate on the underserved companies that don’t tend to enjoy the same level of attention from the sell side [as the bigger caps],’ notes Bragg. ‘It could be win/ win: they’re trying to build themselves as a new business by focusing on overlooked customers – and that might just work.’ (To read more about new digital corporate access platforms, please see Digital disruptions: A field guide to online corporate access providers.)
Future focus
So what does the future hold for corporate access and the sell side? Lupis notes a growing dynamic of bringing research and corporate access closer together. ‘If a buy-side analyst or portfolio manager takes a meeting with a company, we can expect that sell-side research analyst to call into the buy side ahead of time and email it with his or her model, sample questions or latest research report,’ he observes. ‘This is best practice. Paying for pure stand-alone corporate access for companies will be much more difficult but, if it can be linked to research, one can argue there’s value-add.’
Despite the uncertainty surrounding Mifid II, Turnbull remains optimistic. ‘We all know 2018 will bring new regulation, but the most important thing for us to remember is that the sell side provides a lot of services to buy-side clients, and those services are highly valued,’ she says. ‘Things may change, but the industry is pretty adaptable and we’ll make adjustments as needed.’
The sell side needn’t be unduly concerned about its future, Bragg agrees, as corporate access consistently ranks among the most useful services offered to investors. ‘We expect it to continue to be highly valued and an important aspect of the research landscape in the future, irrespective of regulatory reforms or market volatility,’ he says.
The corporate view: Q&A with David Walker, group head of IR & corporate development at Hays How does the issue of curr ent regulation affect you? We hear a lot of chatter about changes to regulations and pressures on the sell side, but we haven’t noticed any real difference in how that group of banks, advisers and brokers interacts with us. It’s still a very competitive market – as a mid-cap company, we have found no change in the sell side’s willingness to work with us from a corporate access perspective. Do you have any concerns about the introduction of Mifid II? We haven’t seen any real changes in behavior yet, although I do have a theoretical concern. Currently, if a broker takes us on a roadshow to a European market, it will organize (not pay for) the top-to-bottom logistics such as transport and accommodation. [In the event that changes], the logistical burden will increase dramatically and the physical cost of corporate access to a company our size will be driven up. Have you noticed any corporate access changes recently? Increasingly, we have noticed investors have been contacting us directly to seek access, but it’s difficult to say whether this is down to a change in investor behavior, or just due to the fact that my CFO and I have been in our respective roles for a number of years now and we’re better known within the industry. One area that has worsened, however, is feedback: we are now receiving far less detailed reaction than previously, which is a definite negative. It’s hard to determine whether this change is due to sell-side brokers being more stretched and working with fewer resources or is down to investors being less willing than previously to share this feedback via brokers. How else are brokers adapting their services? It’s clear to me that certain brokers are investing quite heavily in their corporate access and investor relations advisory teams. They are starting to really stand out in terms of the quality of their service and the offering they are able to provide to teams like ours. This could be down to companies preparing for the new regulatory environment but, whatever the reason, there are definitely winners and losers emerging, with some brokers clearly taking it very seriously. |
This article appeared in the Summer 2016 issue of IR Magazine