How are MiFID II regulations affecting IR and what’s still to come?

Financial markets and the world of IR have been impacted by the start of MiFID II in January, after lengthy debate and preparation. Sandra Novakov reviews the new landscape.

The likely impact of MiFID II on investor relations was the subject of extensive discussion during 2017 –  in 2018, the question on everyone’s mind is to what extent things have actually changed and what the consequences of the revised regulation really mean for IROs.

What’s changed?
Equity research
As institutions chose to expand internal research teams rather than justify the cost of external research to investors, a reduction in fund manager budgets for external equity research, estimated at around 20%, was largely expected.

Not quite as expected, however, was a sharp drop in the price of equity research. Bulge bracket banks are said to be offering full access to research notes for as little as $10,000 per year, a far cry from fee levels quoted when negotiations commenced in 2017. However, akin to low-cost airline pricing models, extra services, including access to analysts and the corporates themselves, come at an additional cost.

In parallel, we continue to see signs of research teams being streamlined, with some companies experiencing a reduction in the number of analysts covering them since the start of the year.
Distribution lists for equity research have been carefully reviewed, and access to research has become noticeably more restricted in 2018. IROs are reporting difficulties in obtaining research notes written on their company.  Many investors have reportedly also requested that analysts stop sending them research notes for which they have not agreed to pay, with some going as far as to block incoming emails as a precautionary measure.

Corporate access
At this early stage, the extent to which MiFID II has affected corporate access has been harder to assess.

Whilst the number of agreements between brokers and fund managers with respect to corporate access appears far higher than was expected in 2017, broker networks have undoubtedly decreased. Low visibility regarding relationships between brokers and fund managers has also resulted in some companies discovering that their brokers had no corporate access agreement in place with some of their largest shareholders, an issue that has come to light during preparation for non-deal roadshows in 2018.

When it comes to broker-hosted conferences, the picture is mixed. The start of the year saw the postponement of several conferences as negotiations between brokers and fund managers regarding corporate access fees continued. Other conferences went ahead as planned, with some even reporting an uptick in attendance.  Our expectation is for brokers to increasingly specialise in sectors where they have an inherent strength, both in terms of research and corporate access.

Fund managers are also building corporate access teams, a trend which should accelerate the continued rise in direct engagement between companies and fund managers.

What does it all mean?
Many argue that MiFID II has inadvertently sparked the gradual creation of a two-tier market among listed companies. On the one hand, large-cap companies are looking forward to a lower volume of higher quality research and, on the other, companies with only a handful of analysts covering them are preparing for a more fundamental change.

In addition to reducing the visibility of smaller companies within the market, MiFID II will have implications for the way in which expectations are managed. As it becomes increasingly difficult for aggregators to measure what ‘true’ market expectations are, companies will have to produce – and make available on their websites – market consensus forecasts. In many cases, however, a paucity of forecasts will render the consensus figure largely meaningless as an indicator of market expectations. As a result, the company’s own guidance will take greater prominence and more regular feedback from the market may be required to keep track of expectations throughout the year.

To attract investor attention going forward, it will be critical for companies to review their investment proposition and ensure key messages are reflected across all their information materials and the IR website.

Greater internal understanding of a company’s investment proposition should facilitate more sophisticated investor targeting, moving away from a basic sector peer group analysis towards a comparison based on financial characteristics. Increased dialogue between companies and investors, as well as regular perceptions research, should support these efforts as IR teams expand their contacts and knowledge of fund managers’ investment triggers.

IROs that have not already adopted a proactive approach will need to step up direct engagement with both existing and potential investors by conducting missionary roadshows and taking greater direct control of non-deal roadshows and company-hosted events.

Whilst it may take months, perhaps even years, to truly understand the full extent of the revised regulation’s impact on IR, there remains little doubt that MiFID II has brought about both new challenges and opportunities for IROs.

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