During 2017 we saw a plethora of reports and articles citing new legislation we have all become too familiar with and are about to incorporate into our daily lives. Typically, these articles took a negative view on the changes, predicting the downfall for small and mid-cap companies’ research and corporate access. We think there is some truth to some of these claims, but we also feel there are some major positives from the implementation of Mifid II and the impact it will have on small and mid-cap companies.
There is no question we will see a reduction in research coverage but, if we are honest with ourselves, a lot of the research that is disappearing was not the best work. Some research was a reaction to a market movement, or an opportunity for cross-selling, or simply because everyone else covered that name. I would go so far as to say that some of the companies that received coverage by sell-side analysts should not have had any research at all as the corporate was simply not at a point to have shareholders.
In the new legislative environment, our hope is that the sell side will look at companies in more detail before initiating coverage, and produce better research materials. A higher quality of research will make the job of investor relations easier – especially in terms of managing investor expectations.
Mifid II will see corporates having to foot the bill for corporate access. An often-overlooked item by management teams is the fact that brokers have for many years covered transportation costs for non-deal roadshows (NDRs). IR teams must consider, for example, that a car and driver cost approximately $1,500 a day in locations like New York City.
From my experience running a corporate access desk, I would get requests from internal bankers and management teams to organize roadshows for companies that had no reason to meet with investors, especially US investors. I asked: ‘Why is a UK-centric business with a market cap of $120 mn requesting meetings with North American investors?’ To me it seemed a waste of IR budget and management time. Most of the meetings with investors were simply a sector read or a favor to the sales person.
In the brave new world of Mifid II, the sell side will be increasingly selective as to which corporates it takes on roadshows, which in turn will result in better-quality NDRs. Many IR departments will have to self-fund their management roadshows and thus have greater control over whom they meet.
OTC Markets recently released a report for small-cap companies highlighting the negative aspect of the ‘pump and dump’ style of stock promotion. The team at OTC Markets is helping to increase disclosure and transparency among pink stocks with increased regulation and reporting requirements. This has gone a long way in helping companies access US investors and giving those investors some level of comfort with their meetings.
We see positive outcomes from Mifid II and welcome the changes. After all, many of the buy-side investors we interact with on a regular basis think the small and mid-cap corporates are the key to improving their performance and delivering Alpha.
Jonathan Paterson is a managing partner at IR and corporate access specialist Harbor Access