‘I’ve always believed that investor relations is a variegated market,’ says Chris Birks, director at London-based IR consultancy Frew MacMaster. ‘For some UK companies, the IR service offered by brokers is probably all they want and all they need. It’s not a question of black and white – more a question of horses for courses.’
It’s a veiled criticism of the competition, of course, although he’s careful not to refer to them as competitors. Birks has just spent the previous half hour outlining why brokers are not capable of delivering the type of strategic IR advice he says his agency can offer. It’s no skin off his nose to suggest there may be a lower level of IR service which brokers can offer. Heck, this town may even be big enough for the two of us.
Talk to those on the other side of the fence and, big surprise, you get a completely different answer. Robin Key, director of investor relations at SBC Warburg in London, insists that independent IR agencies just don’t have the resources at their fingertips to offer the kind of investor relations service that today’s companies need. Surprise number two: take a guess who does have those resources to hand.
Gloves On
Key and Birks had a chance to bash out their arguments at the UK Investor Relations Society conference in April. Billed as a ‘broker or consultant’ head-to-head, delegates were expecting a lively debate of the issues involved. Many were rather disappointed. Instead, they were treated to a sales pitch from either side with a few carefully chosen remarks pointing out the opponent’s weaknesses. Fisticuffs it certainly wasn’t. And to cap it all, Birks and Key were spotted having a friendly chat over a coffee in the post-session break. Far too professional.
However, the fact that conference time was set aside for such a discussion highlights the state of play in the UK’s IR market. US readers may be surprised at the paucity of IR consultancies in London serving the UK’s corporate community – Outside of London you can largely forget about it.
Sure, there’s a number of one or two-person operations, several non-domestic agencies touting for business, and a raft of financial PR agencies which offer IR type services. But when you come down to it, there are few agencies offering strategic IR consultancy services to UK companies. And even fewer have in-depth knowledge of – and regular contact with – UK institutions.
When you consider that one of these consultancies, Makinson Cowell, works for roughly a quarter of the FT-SE 100 companies and lays claim to a waiting list which most agencies would die for, you get an idea of the lack of competition.
Compare this to the US. Okay, it’s a bigger market with a wider institutional spread. Alright, it’s got a big lead on the rest of the world in IR. And, yes, there are still several leading agencies which corner the biggest clients. But just look at the diversity and number of consultancies available, not just in New York but right across the country. Indeed, it’s by no means strange for a newly-listed small cap to rely on the services of a financial PR agency as well as another independent agency for strategic IR advice.
Broking Option
In the UK, that role is invariably filled by IR support from brokers. In fact, it’s a rare case for anything but the largest cap companies to turn to anyone else. Some financial PR agencies tout their IR services, but few go far beyond managing relationships with the sell-side and the financial press. Relationships with the buy-side are the preserve of brokers and, since much of the financial PR business is handed out according to how well an agency gets on with a number of brokers, there’s little incentive for financial PR companies to break this mold. Cutting off your nose to spite your face is regularly cited.
But if, as is regularly assumed, the UK is playing catch-up with the US IR market, then surely there must come a point when the situation changes? Independent IR agencies will boom as companies get fed up hanging around on waiting lists for a chance to be served by the leading IR agency.
Robin Key at SBC Warburg does not see the same pressures for change, although he does concede that the UK market is playing catch-up with many aspects of the US investor relations market.
‘I think the reason why the US picture looks very different to the UK is partly regulatory,’ he says. ‘The transparency of shareholdings and shareholders in the UK has technically been very high for a long time, emphasized in the early 1980s by a series of financial legislation allowing you to see who owns the company and giving you the right to do so. This, of course, has not been the case in the US and there’s been an industry built up to establish that information.’
Indeed, despite acknowledging that the UK investor relations market may be moving more towards a US model, Key does not see any threat to the IR service provided by Warburgs from ’boutique’ agencies. In fact, he positively welcomes the competition.
Others aren’t so confident. The head of the IR operation at one of London’s other leading brokers sees room for the major growth of IR agencies in the UK in the years ahead. And he feels that it will undoubtedly impinge on the brokers’ IR business.
‘IR was developed by the UK’s broking community – largely without fees – to help retain corporate clients in-between issues,’ he says. ‘It was an assertive move but has become more defensive – you have to offer it now because the competition is offering it.’ Presumably, the defensive aspect can only increase as more agencies enter the fold – although some of London’s brokers do now charge fees for IR services.
Key is convinced that brokers don’t have to go on the defensive. And Warburgs has always charged for its IR operation. ‘We find we’re getting a lot of business from companies which have used boutiques,’ he says. ‘Clearly, sitting at the heart of an international equity operation, we are by definition very, very close to the big institutions.’
Being at the heart of hour-by-hour, day-by-day trading has its advantages. Anecdotal feedback comes from a number of sources. Sales teams at brokers are in a position to provide feedback on a regular basis as to the reasons for moves in the market. Maybe, for example, an institution is bailing out of a company’s stock due to its decision to pull out of the whole sector rather than pessimism about that company’s prospects.
Agency View
But being close to the market has its disadvantages, too. It leaves brokers open to the charge of conflicts of interest in their IR operations. How can you run a decent IR service when you’re inextricably tied up, linked with and working alongside all the other divisions which today’s integrated securities houses operate? Chinese walls just aren’t enough, charge the critics.
‘Clearly there are quite a lot of potentially conflicting relationships for investment banks providing an IR service to manage,’ says Chris Birks. ‘They’ve got analysts writing research, they’ve got market makers running a book in the company’s stock, they’ve got corporate finance arms doing M&A, and so on. In reality, sometimes those conflicts are harder to manage than the peer group would suggest.’
Backing from an international operation doesn’t matter either, he says. ‘The integrated houses tell you they’ve got enormous empires spanning the globe, but a massive Italian bonds division has little impact on the day-to-day IR role for a UK corporate.’
In Birks’ opinion, there are three main areas where good, independent agencies can be of more help than a broker in IR consultancy: feedback, relationships with analysts, and being a strategic sounding board.
Keith Williams, a director at London-based IR agency City Interface, agrees with many of the sentiments of Birks – no surprises there. But he adds that the changes imposed on the City by London’s Big Bang in 1987 radically altered the way that brokers interact with institutions: no longer do they have an independent role to play, they are tinged by conflicts of interest.
‘When we contact an institution, they know we are independent,’ says Williams. ‘There are no stars in our eyes regarding underwriting fees or extra dealing commissions. There’s nothing in it for us other than IR. How can an IR department in a bank offer the same service?’ He adds that continued reliance on brokers by UK corporates is possibly due to conservatism and traditions rather than good service.
Bob Cowell, a partner at Makinson Cowell, scoffs at the need to argue the relative merits of brokers over agencies or vice versa. ‘When it comes to IR, what matters is the experience and expertise of the individuals concerned much more than what type of operation] they’re located in.’ Access to information and institutions can be just as good in either environment, he believes.
And the backgrounds of key personnel at some of London’s IR agencies illustrate this point. Cowell and many of his colleagues come from broking; at Frew MacMaster, most of the directors were previously fund managers – the one exception is Birks who started his career in broking. Keith Williams at City Interface used to be a broker.
Yet some of today’s fund management fraternity still have their reservations as to whether broking firms really are in an ideal position to offer IR services. The contact, expertise, experience and so on are all there but the conflicts could color the feedback passed on to management. And IR is never going to be top of the broking tree – if it makes money it’s unlikely to be more than a tiny percentage of revenues – whereas IR agencies live or die by the business.
David Manning, managing director of institutional business at fund management house Foreign & Colonial in London, isn’t convinced by the ‘no conflict’ claims from brokers. He comes down firmly on the side of independent agency IR advice where he sees fewer conflicts and less need to give a client a story they may like – rather than the truth. He claims a fund manager wouldn’t tell anybody – broker or agency – the direction of their dealings. ‘But in terms of getting non-attributable feedback to the company, one is naturally suspicious of a broker,’ says Manning. ‘It’s not easy when a client is paying you a great deal of money to be that objective.’
Surely, independent agencies are as reliant on fees from management clients as their broking counterparts? ‘Everybody has a conflict,’ he says. ‘It’s a question of who has the most conflicts.’ Manning believes when a broker has a possible deal with associated fees riding on the back of a client, it’s less likely to risk telling management that they’re doing something wrong. ‘They don’t always want to hear the negative stories. Brokers can use the information when it suits them and not when it doesn’t.’
Manning says that employing a good, independent IR agency offering good feedback from the buy-side may be too much of a shock for some managements. Sometimes the truth hurts, he notes. It takes a forward-looking company to take the pain of accurate feedback from the market.
View from Here
Barrie Cornes, group IR manager at Royal Sun Alliance, does think it really is a matter of horses for courses. ‘We use both corporate brokers and consultants. It’s a matter of different views from different people,’ he says. ‘The consultants are particularly good as tame fund managers and for communications advice. We use the brokers to talk about rules and regulations, what might constitute price sensitive information, and anything to do with ongoing issues and advice at results time. The more views the better to gain a consensus. It’s a balance.’
Balance it may be. But signs are that the future of the UK investor relations market requires more consultants offering quality IR services – whether from the broking or independent agency route. Robin Key believes there’s room for all to prosper – the UK won’t necessarily go in the direction of the US with lots of independent agencies and less reliance on banks for strategic IR advice. ‘The big US banks are very M&A driven which is a different approach than the UK – there’s a different experience and a different background. Part of that for us has been in providing a careful ongoing service in terms of IR services to clients. There’s a gap with the US because of a difference in history, a difference in geography and different expectations from the institutions.’
Doubtless, those different expectations are colored by some ten institutions dominating the UK market. There are also different expectations from corporate clients. In the US, there is no history of strong company/broker relationships – as Key points out, things are more transaction based.
In contrast, UK companies exhibit strong loyalty to their corporate brokers. Paul Jellicoe, managing director of investor relations at James Capel, feels that those strong ties will prevent IR agencies from snatching too much of the business. ‘As long as those long, ongoing relationships continue to exist, there won’t be too much of a change,’ he says. ‘If you are broker to a company, the client sees you as a conduit to the City. And there’s less tendency in the UK to hop to and from different advisers.’
Until that changes, brokers will probably retain the upper hand in investor relations services in the UK.
Not Our Job
‘Brokers are much better placed to do IR,’ insists Jonathan Gillen, director of Focus Communications, a financial PR agency and the sort of business you’d think might be following a trend and trying to expand into IR services. Not so.
‘It isn’t our marketplace and we should leave it alone.’ He says financial PR agencies should concentrate on maintaining relationships with the media and analysts – not venturing into contacts with the buy-side.
He believes the reason is based on a ‘commercial’ relationship between the respective audiences of each type of business. For financial PR agencies there’s nothing to be gained from lying to the media or analysts for a client due to the nature of the relationship. It only backfires when working for other clients. Word will soon get around the UK community that you can’t be trusted.
The same goes for brokers’ relationships with the buy-side on which they rely for commission revenue on dealing. Gillen claims that no such ‘commercial’ relationship exists between financial PR agencies and the institutional investor. The universe is too large to ensure a bond of trust exists to tell the right story and, obviously, there will be no exchange of fees between the two parties for IR work.
That argument doesn’t account for why independent IR agencies manage so well in the US. Different market, different boundaries, says Gillen. He argues that the stronger retail market in the US largely accounts for the ability of independent agencies to prosper in the IR world.
When it is pointed out that many US agencies concentrate their communication efforts on the large institutions on behalf of their clients, Gillen again stresses, ‘It’s a much more retail-based market.’
Others may argue that the depth and spread of the fund management community in the US is more of an incentive. If you don’t do good IR, chances are you’ll be lost in a much bigger crowd. If that’s the case, the UK market still has a long way to go before it catches up.
