MIFID 2 rebates the cards of a triangular process, old as the Stock market: corporate access. Brokers put investors in touch with listed companies by organizing seemingly free, the roadshows. MIFID 2 will impose, from 3rd January 2018, the invoicing of roadshows to investors. Are the roadshows going to disappear? This is unlikely because they are strategic for corporates as for investors.
But the business model must reinvent itself and be funded by investors and/or by listed companies. Our conviction is that the cleavage will be made according to the size of companies: large caps, essential for the managers, will continue to benefit from “free” roadshows financed by investors; the smaller (the term “midcaps” refers to all capitalizations in under $ 5 Billions) will have to finance the marketing effort themselves, probably largely by internalizing the expertise of targeting and thus increasing their own costs.
Corporate access today is not directly remunerated: the remuneration is by brokerage commission on market flows and by selling the research to the funds. From January 3, 2018, this economic model will become impossible with enforcement of MIFID2: in the name of transparency, Articles 12.3, 24.7 and 25.8 stipulate that the services rendered must be invoiced at their price. We are moving fast to a model where all services will be based on the “Pay per use”. The financial industry is passing so, from Canal + to Netflix.
What are the issues? As the Anglo-Saxons say: The free lunch is over.
For brokers, the European Securities and Markets Authority (ESMA) has taken a position, in its publication of April 4: the corporate access is not research, in any case the broker can not continue to propose this service for free to its customers. For investors, corporate access remains one of the main determinants of the investment decision. A study by Peel Hunt and Extel (November 2015) asked the managers to rank from 1 to 4 the main services required to the investment decision. This study conducted with 300 listed companies in Europe, the US and Asia, and investors representing more than 100 trillions of funds under management, designates corporate access as the main service necessary for the investment decision. Far ahead of sell-side research or contacts with analysts who arrive elsewhere in 3rd or 4th position. Managers will henceforth be confronted with the following problem: “for budget reasons, I have to cut my list of brokers because I cannot anymore “Sprinkle” the brokerage commissions, so I’ll have more and more difficult access to companies, unless you approach them directly, which supposes internal recruitment of human resources “.
Investors can be expected to study with a glance more attentive brokers proposals, always strategic but now billable. For listed companies, the pressure will focus on small & mid caps (up to 5 billion euros in market capitalization), of course less courted by the managers than those of the CAC 40. Today, it is through roadshows offered by brokers that listed companies meet with investors, can deliver their message and take the time to detail their strategy or explain their results. According to the study Annual Review (“Global Roadshow Report 2016” IR Magazine, September 2016), 90% of listed companies make roadshows, these companies spend an average of 16 days a year on the road and meet in addition to these roadshows nearly 150 investors in “one-on-one” per year.
A new ecosystem emerges. There are of course platforms like Researchpool or Alphametry that offers on-demand research. Alpha Value built its model on research payment unbundled for execution commissions. MyDCA for corporate access. A broker In January 2017, Macquarie launched its “pay per use” offer for his research with Macquarie Dimension.
In conclusion, it is likely that companies will have to mobilize more resources to access investors: disintermediation will progress.