Mifid II: Prepare for impact
Was Mifid II the 2018 version of the Millennium Bug? The newest iteration of the Markets in Financial Instruments Directive landed at the start of the year and, while there were some strong claims about its effect on the markets from its implementation on the second trading day of the year, the impact has been more of a step change than a cliff fall.
Depending on which European market you visit, issuers will give you varying stories about how Mifid II has affected their workflow so far this year, from ‘no change seen’ to ‘I am no longer being taken on the road by my brokers’.
The reality is that we had until July 1, 2018 – after a six-month extension was granted, two weeks before implementation – before the real change started to kick in. That was the date when the unbundling of fees and services had to be implemented by the sell side. Certainly, the smaller end of the market may start to feel all alone in the world as the corporate access services previously provided now start to dry up. ‘No interest in London’ may become a common phrase heard by European IROs in the coming months.
The old model of corporate access was already on its knees for much of the market, however, so the new regulations should provide a springboard for IR professionals to be able to take control of their IR program. Fees will need to be paid for any roadshow activities as this has been unbundled and, as with any paid-for service, there will now be an expected level of quality and integrity.
The flaws in the old process have been evident for some time. How often have you received a roadshow schedule filled with familiar names that have never invested in your stock? Investors that are unprepared for the meeting? Have you ever identified an investor you want to see only to be told that you cannot see it because it is not a client of your broker? Or, according to the new riposte, that it has not paid the broker’s ‘concierge’ fee?
The power now resides with the IR function to drive the investor targeting effort and to reach out directly to target shareholders. Time is increasingly not a friend of IR professionals, so maximizing it to find the right potential investors and being on the road are essential.
Understanding the limitations of various sources of information will help you focus on the task at hand. Public filing databases – FactSet and Thomson Reuters, to quote just two examples – are a great resource for understanding the landscape, which investors are bullish or bearish on your sector and your region, and so on. But using databases alone can only take you so far. The data on platforms is often questionable, so you must understand how your target investor is structured, where you meet the decision-makers and at which office they will take a meeting.
For example, if you are a European issuer coming to see BlackRock in the UK, the public data would show most of the money is managed out of London, but where does the buy-side analyst really sit? Or maybe a trip to Los Angeles to visit Capital Group sounds like an attractive proposition, as the public data would suggest, but is the main contact for the fund you want to speak to actually working in New York, London or Singapore?
We also find holes in the methodology of the public databases. The S808 registers for UK issuers are a great resource, yet not all UK issuers will allow access to the full s808 register for the people who compile this data. And any view you take on the portfolio of an investor is likely to be spread across several months of positions, rather than a time-stamped portfolio view, such as you would expect to see from US investors and the 13F database, although this data is also deeply flawed.
Not all investors will appear on public databases. Some may hold a concentrated portfolio of deep positions. It is always an interesting exercise to review your bespoke shareholder analysis against what is available via the public filing databases; you will start to get a feel for what is missing from the public data.
There is absolutely a place in the market for public databases and quantitative screening for investors, but true investor targeting involves analyzing your IR activity, understanding investors that do not appear on these databases, and ultimately speaking to the prospects to see whether your numbers add up for them. Sometimes an investor will not invest in a stock when the quant figures suggest it is a perfect fit for a portfolio for a wide variety of reasons – you will only know whether any possible meeting will be fruitful if you talk to the investor first.
So what can you do to take control of the data available to you and drive your IR program forward? Public data can still be powerful – but you have to understand its limitations. Good targeting requires a detailed knowledge of the buy-side firms and funds that are suitable for your stock, the best possible presentation of your equity story in your marketing documents, and ongoing dialogue with relevant fund managers.
Quantitative data analysis of the market can take you only so far – we believe this is just the first step of the process. Talking to fund managers about your story is essential to identify their interest in your company.
Mark Robinson is head of EMEA issuer services at London-based RD:IR