The financial crisis has disrupted the corporate access market, with established service providers being challenged by banks' market intelligence and new players.
Few have emerged unscathed from the debilitating effects of the financial crisis, and the sell side is certainly no exception. With commissions dwindling, it is perhaps not surprising that corporate access teams have been among the casualties. A growing force in the boom period, these have been retreating in recent times.
That said, it is not a universally bleak picture as banks increase their market intelligence offerings and new players enter the market in an attempt to win market share. So what does this metamorphosis mean for IR? And how can corporates get the best out of the broking services they ultimately choose?
Right time, wrong people
A key element of maximizing the relationship with corporate access is to understand which direction the revenue streams flow and how it will affect the investors your company is taken to see. A well-documented complaint about brokers from corporates is that, all too often, they end up sat in front of investors who are either of no interest to the company, or have little interest in investing in it.
Mark James, who has started his own corporate access firm, the Investor Brand, has firsthand experience of working for a UK corporate broker. ‘When I was at Collins Stewart, our clients would hear nothing until just before their next results announcement, when a junior colleague would hurry around trying to put names against time slots,’ he recalls. ‘The result of this is that companies got fed up with having their time wasted. Now they say, We don’t mind giving up our management time but we’re sick of it being misused.’
Nowadays, however, many sophisticated IROs feel they are able to exercise enough discretion to prevent this from happening. Some report that, having had their fingers burnt, they have made more of an effort to micro-manage the roadshow process.
‘We have had one bad experience, so now we always tell the brokers exactly who we want to see,’ explains Gunhild Grieve from RWE. ‘They can add suggestions but only once our target investors have been prioritized.’
Where does all the money come from?
The environment has undoubtedly changed and with it, the revenue streams. The wealthy hedge fund world – a favored class in the pre-credit crunch universe – is not the cash cow it once was for the big banks. The result, of course, is that there is less of an inclination to wheel out senior management members to hedge funds that are of little interest to corporates.
Interestingly, while hedge funds may be less of a concern as the numbers of funds and their spending power dwindle, it doesn’t necessarily mean companies are any less willing to meet with them.
‘We are often trying to get feedback from brokers to see whether we should change our approach, and we always try to keep in touch with the hedge fund community,’ Grieve says. ‘Hedge funds can be opinion leaders in the market, so you have to continue talking to brokers because they get a lot of insight, especially from players such as these.’
Some critics also feel the ongoing financial crisis has negatively affected broking services. Smaller rival firms are critical of what they call a diminishing quality of service from the ‘bulge bracket’ banks.
‘From my experience it seems the corporates in the UK and continental Europe have gone from being over-broked and over-serviced to virtually nothing,’ says Danielle Poulain, head of corporate relations at London-based institutional broker Execution. Like Evolution and Barclays, Execution is currently expanding its equities business.
‘I note that the sales teams on the ground are a little thinner in Europe,’ adds Michael Sullivan, vice president of investor relations at Applied Materials. ‘In the past you might have met with a technology specialist; now, he or she might be a generalist.’
Getting more from spending less
In addition to the staff changes, there have been implications for the nature of the events put on for companies and their investors. Low-key conferences and so-called reverse roadshows – where a single investor meets a series of companies – are in vogue, while the larger and flashier investment conferences of old take a back seat.
‘There has definitely been a trend of cutting back on the large conferences,’ says Ulrike Zeilberger, a managing director with UBS. ‘They have been either completely cancelled or scaled down. What you are seeing is an increased number of smaller, more targeted one-on-ones.’
One cannot underestimate the merits of sell-side corporate access, however, and many IROs find close proximity to the sell side a key benefit of corporate access at a large bank.
‘As a US company, it can be harder to reach out to European investors because of time differences and the fact that European investors are sometimes harder to reach by email than their peers in the US,’ explains Sullivan. ‘If the sales force has a good presence in key cities such as London, Geneva, Zurich or Frankfurt, that is a big advantage. Those regional sales representatives are also very useful when compiling a list of investors in those cities.’
Several issuers point out other advantages of working closely with equity sales teams. ‘If they come on the roadshow, the time they spend with you is a learning experience,’ says Sullivan. ‘They will continue to supply information about your company when you are long gone.’
Selling the story
Grieve maintains that it doesn’t matter whether a salesperson comes on the road as long as he or she gets properly briefed by corporate access.
‘Sometimes corporate access sits in sales and in some banks there would be an analyst as well as a salesperson on the road,’ she points out. ‘It doesn’t matter as long the team communicates and the salesperson is briefed on the company story.’
There is mounting evidence that brokers are becoming more amenable to the demands made of them. Increasingly, they are having to respect the wishes of institutions that don’t want them around when they are meeting issuers. ‘The trend, especially in Frankfurt and Boston, is for investors to request a no-broker meeting,’ explains Sullivan. ‘More and more, certain institutions will adopt that policy if they want to keep their strategy close to their chest, for example.’
‘There are clearly more players entering the market and, from a company’s perspective, they are getting approached more and more often by service providers,’ notes Zeilberger.
She recognizes that the fragmented landscape is getting more confusing for companies as they get inundated with offers from larger investment banks, IR agencies and smaller corporate access offerings. ‘Companies are being presented with arguments from corporate access teams and IR agencies,’ she points out. ‘IROs need to ask themselves what they want to achieve from a particular roadshow. They also need to ask themselves: who is best positioned to help me identify the key decision makers? This is a very different question from asking who was added to your share register three months ago.’
There is little doubt that, despite reservations about bias, the sell-side corporate access model is here to stay. IROs want as much intelligence as possible and the decisions made on the trading floor and immediate feedback of every rumble of investor sentiment undoubtedly add value for many issuers.
The challenge, therefore, is striking the right balance between sampling the new offerings and being more proactive with your existing providers.
As budgets squeeze tighter than ever, the free services provided by brokers will remain a valued part of most corporates’ investor relations programs. This context, coupled with the decline in hedge-fund influence, may also make issuers more likely to tour with a large bank.
Top tips for getting the best from corporate access
- Push back: ‘I’ve always said make sure you push back hard on the investment bank: take advice and ask it to justify each meeting,’ says Danielle Poulain, head of corporate relations at Execution. ‘The investor relations officer should be in control of the corporate access.’
- Ask for feedback: ‘Another important piece of advice is to be clear at the outset that you want feedback, then ask yourself whether it was constructive and/or helpful,’ advises Michael Sullivan, vice president of investor relations at Applied Materials. ‘You really need to work out what investors like about the company strategy. In my view, to know whether you did your job, there should be a paragraph of feedback from each investor.’
- Give and take: There is a balance to be struck between your own company’s immediate needs and those of the broker. ‘Of course you are looking for investors that will stay with you but you also have to realize that brokers have an important relationship with investors,’ Sullivan says. ‘I think you arrive at a win-win arrangement. In addition to your one-on-one meetings, you can do a breakfast or lunch meeting where the broker can invite all its clients along.’
- Use their intelligence: More corporate access teams are looking to push their market intelligence, so make use of your sell-side corporate access team by making the most of its market intelligence offerings. ‘We encourage corporates to come in and meet us,’ comments Casey Condron of Merrill Lynch/Bank of America. ‘We want them to see what is done on the trading floor. Corporate access used to be considered as an execution service provided by sell-side firms. Now, it has evolved into something much more sophisticated – more market intelligence and advisory.’
- Recognize their hard work: ‘After a particularly good European buy-side trip, I always send a note back to the lead analyst, copying in the many people who have helped us in the various cities,’ Sullivan says. ‘They work hard and their effort shouldn’t go unrecognized.’
