A Mifid II briefing is just how every IRO likes to start the day. And the just under 200 delegates from 24 countries who gathered in Paris for the IR Magazine Global Forum Conference & Awards last week certainly weren’t disappointed.
But while the big regulation might have been on radars in Europe for a while, it’s only recently starting to become an international issue, said Qian Chen, associate director and head of European operations at Ipreo. ‘Tweleve months ago I was at another conference where this topic came up and the acronym [Mifid II] was shown on the screen,’ she said. ‘And two questions popped up: How do you say it? and What is it?’
But as Chen and Ipreo stablemate Nick Arbuthnott, managing director of European research at the firm, kicked off the first session of the first day, diving into the potential repercussions of the mammoth European regulation on IR, it’s clear that understanding of the new rules has come a long way.
On the table were issues such as how research cuts are likely to play out, whether or not companies will have to start paying for their own roadshows and other corporate access when the regulation kicks in, and how to get management on board to support IR.
Research and access
Having set out the main scope of Mifid II, Arbuthnott and Chen tackled research. While there are predictions the sell side could hit a wall when the regulation comes in on January 3, 2018, with issuers experiencing a 30 percent reduction in sell-side research, Arbuthnott highlighted that this is in fact part of a long-term trend.
That doesn’t mean it isn’t a key issue, however. Citing the example of one IRO, Arbuthnott said this IR professional was expecting his 23-25 analysts to drop to around 15 over the course of 2018: ‘When asked what that means, he said, If I keep the five or six core analysts who really cover my stock I’m fine, but will [they] stay with the firm? If I lose the core five or six, the game changes.’
Cost, of course, is also an issue, though Arbuthnott noted that the past three months have seen an increasing number of buy-side firms saying they’ll absorb costs – with some even doing a U-turn after previously announcing otherwise.
But while there might be increasing clarity on research – at least when it comes to who’ll pay – the picture surrounding corporate access is quite different. ‘Rather than research where there have been a couple of explicit statements about how buy-side and sell-side institutions will be treating [it], corporate access has a lot more uncertainty in the market place,’ said Chen.
Using information from the World Bank, IR Magazine and its own data, Ipreo predicts a rise in demand for events heading into 2020, with access to management becoming increasingly important for many investors – especially at small and mid-cap companies, where management might be less well known and where there’s a perception that there’s less publicly available information out there. But Ipreo forecasts the number of meetings facilitated by the sell side to fall from around 85 percent in 2016 to less than 30 percent in 2020 as a result of Mifid II.
So what’s an IRO to do? Following interviews with 50 institutional investors across 13 countries, whose firms manage $1.5 tn in combined equity assets, Ipreo says issuers will be expected to engage more in direct access, as well as taking an increasingly proactive approach to outreach.
‘When you look at your top 20, 30 or 50 shareholders, you might have relationships with them already so it’s quite easy to call them up and tell them you’re going to be in their city and you want to schedule a meeting with them,’ Chen pointed out at the Global Forum. ‘[But] for the non-holders or target investors, there’s a much bigger question mark. How do you identify those that would be willing to take a meeting with you and then how do you prepare management for that meeting so that it’s an efficient and effective use of management’s time on the road?’
Chen pointed to two options: expand your team size or resources, or increase your use of outside help. ‘One IRO I’ve spoken with has hired a dedicated corporate access person for the IR team,’ she noted. ‘Others might take on more support staff to help with the event and logistics planning.’
And if you’re going for option two? ‘Look at the third-party resources available to you and really rely on those connectivity platforms, those consultants, those providers to help you through all the things the sell side used to help you with,’ Chen said.
There are other simple solutions too, added Arbuthnott. If, for example, you’re looking at how many meetings senior managers need to attend and it’s too many, simply have them travel separately rather than together.
Essentially, IROs need to ask themselves two questions, Chen said: ‘Will my analyst coverage change over the next 12 months, either in terms of numbers or quality of analyst coverage? And will the way I engage with buy side have to change as a result of Mifid II?’
Arbuthnott and Chen also stressed the IR role in prepping management for the changes to come and making sure the C-suite can in turn provide the support IR will need going into 2018. ‘Responsible IROs have to bring managers on board because if they have not budgeted for what they may need to spend next year, they could be significantly caught out between the market change on the buy side and the sell side,’ warned Arbuthnott.
But with less than 100 days to go until the regulation becomes law, the end of the first session certainly wasn’t the end of the discussion on Mifid II. In fact, the beast crept into conversations over coffee, and made it into panel discussions on everything from next-gen targeting to sustainability communications and the future of IR.
Despite the many mentions of Mifid over the course of the event, however, the prevailing view remains: wait and see. ‘I don’t think we’re of the philosophy that come January 4, 2018 the world will have changed overnight,’ noted Chen. ‘Some of these trends have been a long time coming and perhaps Mifid II will be the catalyst that drives [them] forward. We need to see who will make the first move and we need to see what the environment will actually look like in 2018.’
There’s also anticipation over how regulators will handle non-compliance. ‘When the regulator actually bares its teeth and holds an individual accountable for not being Mifid-compliant, maybe that’s what will spur actual change in the marketplace,’ Chen concluded.