Frankfurt has never quite been the darling of Europe. As a trendy tourist attraction, it suffers in comparison to the chic of Paris or the grandiosity of London. Historically, it has nothing on Rome or Athens and aesthetically, it can’t match the flair of Barcelona or the beauty of Geneva – it’s a sprawling, largely concrete conurbation, functional rather than inspirational. But Frankfurt has never claimed to be an A-list holiday destination. If you want a break, look for a beach. If you’re after an investment city, think about Frankfurt.
Frankfurt, in terms of both geography and status, conjures up words such as ‘center’ and ‘hub’ and it’s true that the city is a hive of industry and financial activity. Not only is it home to the Deutsche Börse and the Neuer Markt, it is the base of the European Central Bank as well as HQ for some of Germany’s leading banks – Deutsche, Dresdner and Commerz are all centered here. It is the fifth largest fund management center in Europe and the 13th largest in the world, with institutional equity holdings of some $310.9 bn. Companies considering Frankfurt as a roadshow stop might like to know that it is home to over 400 portfolio managers and 250 equity analysts.
Frankfurt might not enjoy the cultural vivacity of some of its European neighbors but that doesn’t mean it is staid or stagnating. Most agree the city is in a state of flux.
‘It’s changing rapidly,’ declares Wilhelm Scior, MD of Frankfurt-based IR consultancy Morgen Walke Scior. ‘That is largely because of two main factors. Firstly, we saw European harmonization in financial markets three years ago. Secondly, the Neuer Markt was performing strongly for over a year which led to an increase in new economy stocks. These factors caused a change in attitude.’
Causing a stir
And this new attitude is causing a stir in the world of investment. ‘There’s been an increase in the shift from bonds to equity investments,’ claims Edda Schroder, MD of Schroder Fonds-Service in Frankfurt. ‘That’s been prompted by a change in the law.’ Reforms include authorization of UK and US-style pension funds for the first time and a possible lifting of insurance companies’ 30 percent limit on equity investment.
‘Germany is getting more interested in equity and involvement in equity has become a lot more normal,’ echoes Scior, asserting that this trend extends beyond Frankfurt’s institutional investment community to the private investor. Perhaps it was this shift in institutional investment behavior that prompted private investors to follow suit. Or maybe the performance of the erstwhile bullish Neuer Markt was responsible for firing the imagination of the German public. Whatever the reason, the level of retail investment has soared in recent times and that means there’s a larger pool of potential investment to tap. But still, 80 percent of Germans have no exposure to the equity market, though the expected shift of savings from banks to equities should represent a sea change for the market. ‘Previously, everything went through banks and insurance companies,’ recalls Scior, ‘but what we’ve seen in the last few years is a real growth in mutual funds and Spezialfonds.’
Mind you, some retail investors have not been afraid to dip into the market directly – although not everyone has succeeded in this gold rush. With the Neuer Markt soaring, private investors may have latched onto equity but, during the bearish months of November and December, many retail investors had their fingers burnt.
‘The retail investment community swelled to something like 30 mn by the end of 2000,’ explains Schroder. ‘That rise came from the boom in the Neuer Markt. But what we’ve seen in the last few months is that these investors want more consulting and counseling. Before, the retail investor thought he was his own broker.’
New approach
Scior has also detected a much more circumspect approach. ‘There’s been a change in their attitudes,’ he says. ‘Before November, retail investors were not critical investors. They would just invest. Now they are a lot more discerning.’
Frankfurt’s burgeoning interest in the equity market has given rise to corollary developments. Financial media, for example, is booming in the city, creating a snowball effect in the amount of attention that is afforded to the markets: as public interest grows, financial media springs up to feed the demand; and as more financial news is disseminated, the public’s knowledge and interest develop.
Scior puts much of the media explosion down to a new name on the scene. ‘I think the situation has changed a great deal since the Financial Times brought out a German edition,’ he says. ‘As well as providing strong coverage of German markets, it has also provoked change in other financial newspapers such as Handelsblatt. And in general, the circulation of financial newspapers has increased – the change has been quite revolutionary, in a positive way.’ Similarly, myriad web sites have sprung up to circulate financial news.
Institutional change
Frankfurt’s investment institutions are also evolving, albeit gradually. Until recently, the city’s investment banks did not bear serious comparison with, for example, London. While many had dealing rooms in Frankfurt, they would often prefer to execute business – such as M&A transactions – from London. Now that Germany has become more open to the idea of cross-border M&A, and with the equity culture maturing, banks are expanding their Frankfurt-based operations.
The city’s fund management houses have traditionally been characterized as conservative and risk-averse. Schroder maintains the city still favors long-term investment. Moreover, the rigid structure of investment institutions has gone some way to reinforcing these conservative traits – firms have almost invariably been arranged on a strict hierarchial basis, which hasn’t exactly encouraged innovation.
While there’s no sign of a complete personality overhaul, Scior believes that nowadays the institutions’ teutonic nature is a little overstated. ‘I think institutions are much less conservative than they were and much more flexible,’ he says. Thomson Financial/Carson’s Target Cities Report 2000 does suggest that Frankfurt isn’t clinging to steady bricks and mortar stocks. Some 17.9 percent of the city’s investment is in the technology sector; in London, by way of a comparison, technology accounts for 16.7 percent. Frankfurt’s investors also favor capital goods and utilities stocks, while financial stocks account for some 29.5 percent of total investment.
Schroder points out, however, that the recent bumpy form of the Neuer Markt has altered investment strategy. ‘There’s been a definite shift away from new market investment,’ she states. ‘There’s now more investment in old economy stocks. Investors in Frankfurt are more responsible and more careful than they were a few months ago.’
Face-to-face
So how should companies pitch their roadshow presentations and what should be borne in mind when meeting professional investors face-to-face?
The advice from Morgan Walke Scior is that meetings should in general be conducted over a meal, preferably before noon. As Frankfurt is blessed with a large number of excellent Italian restaurants in the salubrious west end of the city, there are plenty of fine venues in the chic residential suburbs of the Taunus hills or even Wiesbaden. Mind you, Morgan Walke Scior generally warns that, in order to do justice to the subject, the presentation should not take place in too relaxed an environment. After all, ‘The formality of the event illustrates the significance of the subject.’ To that end, place considerable emphasis on Punktlichkeit – punctuality. A delay of even a few minutes will be regarded as incompetent.
At the same time, presentations should be as personal as possible. Scior states that no more than three company representatives should present. As for the size of the audience, Schroder errs on the side of intimacy. ‘I think it’s better to talk directly to the investor,’ she says. ‘I’d always advise one-on-ones.’
When it comes to the message that your company projects, how should you shape the content of presentations? ‘In terms of what information to give, the core information is the same as you would present in the UK or anywhere else,’ opines Scior. ‘But maybe German fund managers have different preferences when it comes to the presentation. Fund managers in Frankfurt tend to take more time and are more interested in the relationship between themselves and company management. I’d say they take more of an interest in the social aspect of the presentations.’
That’s not to say that fund managers care more about chummy chemistry than hard facts and nitty-gritty. It’s merely a case of these investors looking beyond the numbers and taking in the bigger picture. As Scior points out, ‘They care as much about structure and the quality of management as they do about the financial details.’ Schroder agrees wholeheartedly: ‘Frankfurt’s fund managers are not just interested in the figures,’ she says. ‘They are looking for trust, reliability, performance and strong management.’
German fund managers’ concern with the ‘social aspect’ of meetings also comes across in their demeanor. As a result, you may find one-on-one’s in Frankfurt less of a clammy-palmed ordeal than elsewhere. Scior has certainly detected a difference in tone. ‘I’ve met with fund managers in the UK many times,’ he says. ‘In London, people are quite nice but they really do grill you. In Frankfurt, fund managers aren’t quite so… nasty. They’re a little more polite.’
That said, a one-on-one with a fund manager in Frankfurt is no walk in the park. In the current market climate, these meetings have taken on great significance and shouldn’t be taken lightly. ‘Companies coming to the city for a roadshow shouldn’t forget that after the performance of the Neuer Markt in November and December, German fund managers are slightly more conservative than they were last year,’ Scior points out. ‘They want to analyze the quality of the company – so they’re concerned with the EPS, profit and loss, the facts. They’ve become a little more teutonic.’
With that in mind, a glitzy Powerpoint presentation isn’t going to win any investors without the substance to flesh it out. ‘We find that we see excellent presentations but they really must contain solid fact,’ says Schroder. ‘We want to see the facts and figures. In fact, after the recent situation in the Neuer Markt, you really have to win over the audience.’
Breaking boundaries
So German investment professionals are looking for sound structures, quality management and a strong business model. It’s little wonder then that Frankfurt is waking up to traditionally Anglo-Saxon hot topics. ‘Interest in corporate governance has grown a great deal,’ says Scior, ‘so companies should be aware that investors are paying attention to European and global standards.’
As for the market itself, its much-publicized troubles have shaken investor’s confidence. ‘We still have to make some important changes if we want to catch up with the best Anglo-Saxon markets,’ concurs Scior. ‘I think we need some kind of European SEC – the recent developments in the Neuer Markt shows that some kind of regulator is needed – and I think German investor relations still needs to see a little improvement.’
To pedantically list every difference between Frankfurt and the rest of the world is to miss what Scior sees as the key development of recent times – namely, the blurring of national divides and cultural boundaries. ‘Germany doesn’t exist anymore,’ announces Wilhelm Scior, enigmatically. ‘There is no German market. Germany is now Europe. And Europe is now the world. It’s an international marketplace. These days, Frankfurt is more European and more global.’
