Advisory intelligence: How a 'perfect storm' has affected capital deployment strategies

Apr 18, 2018
Mifid II, passive funds, rising rates and governance requirements are changing the landscape

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Dan Romito, who leads the Investor Analytics team at Nasdaq Advisory Services, sums up the current environment succinctly: ‘We are living in interesting times. It is something of a perfect storm,’ he notes.

‘You have MiFID II, you have the emergence of index money – which active managers have had to adjust to – you have the rising interest rate environment and you have corporate governance, which is introducing intensive scrutiny over capital allocation strategies,’ Romito observes. ‘When you combine all these, it shows a rapidly changing landscape.’

Among these issues, MiFID II will impact the research access for mid and small caps. ‘Many of our small and mid-cap clients could face challenges with getting analyst coverage,’ Romito says. ‘So it is a case of thinking outside the box to maximize the story: reviewing their conference strategy, and expanding their investor targeting approach to include generalist capital.’

As a result, there is an analytical process to consider on messaging. ‘How do corporates capitalize on investors and appeal to a particular story? For IR teams it is a case of prioritization and pinpointing opportunity,’ Romito says.

Another challenge is that the window of opportunity to attract ‘gold’ investors is small. ‘In the mid-cap arena, it is not that big a pool,’ Romito notes. ‘And more importantly, with a growth story, the corporate can increase is potential to attract a set number of analysts that would want to cover them.’

Therefore, part of the evaluation is not only what it is going to do to the company multiples, but what it is going to do to the shareholder base. ‘What are the opportunity pools of capital that are going to open up, and who are the individuals who are going to have an appeal to the story?’ Romito asks, with a nod to IR professionals.

There is, he notes, a fascinating ESG and long-term focused investing narrative within the U.S. tax reforms that will have an impact. ‘Within ESG, the “g” or governance part has been a point of focus because if you consider what the world looks like 20 years from now you have to take into account social and environment paradigm shifts.’

‘Importantly, there is a clear correlation between top quality governance and the minimizing of risk per cash flow. That is very important due to the tax reform. As you now have corporates with a new pot of money. And that makes investors very nervous. How are you going to allocate that new pot? And will that new pot invest long-term?’

Within a wider political perspective is there uncertainty created around President Trump? Romito doesn’t think that is the focus. ‘I think what corporates are looking at is that they have new pools of money they have to allocate in the most efficient manner possible,’ he says. ‘They then have to ask: does it align with the corporate governance framework that is expected from our long-term holders?’

Romito adds a possible solution: ‘Nasdaq Strategic Capital Intelligence is in a very unique position to support IR teams. The analysis we provide is unique based on our first-hand experience and we take the time to understand the fundamentals behind how our clients’ stocks trade.’

This content was produced by Nasdaq Corporate Solutions and first appeared on Nasdaq's website

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