Commerzbank Corporates & Markets
‘We’re seeing a complete change in the relationship between research departments and the other areas of investment banks,’ explains Dominic Hughes, head of corporate broking at Commerzbank Corporates & Markets. ‘At the same time, the changing needs of asset managers mean that the quality and cost of research are really under the spotlight because banks can’t cross-subsidize research departments from transaction-based banking departments.
‘Also, broking margins have been viciously cut back, and the traditional business models just don’t work,’ Hughes adds. Because of this, the days of ‘free’ investment banking research are over. But while the quantity of research will decline, the quality should improve, according to Hughes. ‘We have already seen the development of a new type of sell-side boutique that is rewarded for its quality of intellect on a fixed-fee basis rather than through transactions.’
For IROs these changes mean it’s even more challenging, in some cases, to make sure a company’s story is heard by the right audience. Traditionally, companies have relied on sell-side brokers to a certain degree to sell their story to the buy side. But now Hughes says not enough IROs appreciate that research is written to generate trading flows. ‘The truth is that the sell-side analyst, no longer subsidized by investment banking fee income, is under constant pressure to generate ideas that will create short-term trading volume rather than long-term performance,’ he says.
So, how should IROs deal with this changing set of circumstances? Hughes sees the industry reaching back to its roots. ‘It’s a case of going back to the old style of relationship broking that made firms like Cazenove famous,’ he suggests. ‘In an environment where products and services are increasingly commoditized, that style is going to become much more relevant. The real value has to lie inside relationships. This is why corporate access has become such a buzzword in equity broking.’
Hughes refers to a 2005 study from Greenwich Associates that shows around 40 percent of commission paid to brokers by asset managers is now related to arranging meetings with corporate management. ‘If this is the case, why maintain expensive sales and research teams?’ he asks.
Asset managers are placing increasing importance on direct contact with company management when deciding to invest. ‘That means IROs have more market power than at any time previously and, as ever, with power comes responsibility,’ says Hughes.
‘IROs will have to work even harder to develop deeper relationships within the investment community and to become more immediately recognized within their own companies as core members of the corporate management team, rather than just in-house financial PR,’ he adds. ‘This is vital if they are going to take the weight of endless investor meetings off the shoulders of the CEO and CFO.’
Bear Stearns
Nicholas Bell, senior managing director at Bear Stearns, says demand from buy-side institutions to meet with companies has been steadily rising for a number of years.
‘Investors have always wanted access, but we are seeing companies increasing their own efforts to facilitate that demand,’ explains Bell, who covers the European media sector from London.
European companies in particular have become more investor-friendly. ‘What we are seeing is the buy side increasing its own research capacity, which will lead to greater demand for access to management,’ notes Bell. ‘This is particularly true when you have sector-based analysts working in a buy-side firm.’
Another change that is increasing investment banks’ corporate access role is the changing nature of European IR. Familycontrolled European companies have traditionally been less concerned with investor outreach, but that has changed over the last five years.
‘There’s much more awareness now about corporate governance and how companies are run,’ says Bell. ‘Things began to change, for example, with the hostile Vodafone bid back in 1999, so the old ideas of protectionism have been falling away.’ Vodafone’s bid for German telecommunications and engineering group Mannesmann initiated a debate on how German companies are managed.
Bell also notes that stronger support for the investor relations function is facilitating the corporate access role for investment banks. ‘Ten years ago, even in some of the bigger companies who had dominant shareholders, there might only be one IRO,’ says Bell. ‘Now they might have five. I think we are seeing IR emerge as a much more significant department in its own right.’
Banc of America Securities
‘The buy side is consistently telling the sell side that it wants direct corporate access,’ explains Brian Tobin, managing director of corporate access at New York-based Banc of America Securities. ‘Of course, research analysts tend to be in touch with them, but what they really want is management teams brought to their office on a regular basis.’ Tobin reckons 80 percent of Banc of America Securities’ corporate access projects originate from research relationships, as opposed to direct investment bank contact.
Despite disclosure restrictions, the buy side still has a hankering for looking management directly in the eye. ‘Everyone now is subject to Reg FD, but you can get a feel for the subliminal stuff,’ says Tobin.
From the corporate access point of view, targeting the buy side has become much more focused, Tobin claims. ‘You can’t just say to the sales desk, We’ve got this company, get investors in for a meeting,’ he says. ‘That could potentially be a nightmare, with possible inappropriate meetings. The most important thing for us is that meetings are effective. Sometimes, however, an investor will meet with a company but won’t be interested in investing in it. Instead they will use the meeting to compare other companies in a certain sector, which is not necessarily the best use of the IRO.’
Tobin thinks IROs really need to pay better attention and rethink their relationships with hedge funds. ‘Sometimes an IRO will say they want long-only investors, but sometimes those investors have embedded hedge fund departments,’ he notes. ‘And they may meet the person who operates the internal hedge fund. But the flip side is that some hedge funds do take long-term stable positions. In other words, your hedge fund aversion may be unfounded.’
Standard Bank
Hong Kong-based Peter Mack says Asian investment remains based on name recognition as much, if not more, than credit ratings. Investment banks are recognizing and pricing opportunities in Asia and taking positions in local companies, says Mack, who is Asia head of primary markets and debt capital markets at Standard Bank.
‘Investment banks are increasingly taking positions now as principal investors in mezzanine and subordinated tranches of transactions which would, in more mature markets, be normally filled out by the buy side,’ he says. ‘So the banks are trying to fill that structured debt financing side.’
Investment banks here are also developing the buy side market for structured transactions and lower-rated quality transactions, says Mack. ‘The creation of a syndicate function for Asian credits and Asian currencies for the asset-backed sector and high-yield credits creates an environment of liquidity and assists investor education,’ he explains.
That education is increasingly important given the lack of Asia-based asset-backed transactions, says Mack. ‘To the extent that you’re bringing out new asset classes and deals, you’ve got to look at the broader educational campaigns about the asset class, not just the specific issuer,’ he asserts.
This stage of the Asia-wide economic cycle is also shifting the opportunity set. ‘It’s all about where we are now, and we’re at a turning point with more opportunities for private equity and leveraged buyouts, compared with, for example, less of a focus on a non-performing loan sector,’ says Mack.
Citigroup
Has the impact of the global settlement and research unbundling affected the investment bank model significantly when it comes to more modestly sized companies? Diane Faulks thinks not. ‘We have a growing small-cap team of 16 analysts covering about 250 small European stocks, apart from covering over 2,800 stocks globally,’ she says.
However, Faulks says that IROs still have more work to do to understand why shareholders come into a stock, how long they’re likely to hang onto it, and what performance criteria they’re likely to use. ‘But it is getting more difficult for companies to track ownership; the market moves so quickly, and funds are not always transparent since shareholders don’t hold shares in their own name,’ she says. This is the challenge for many IROs, according to Faulks: to locate shareholders so that you can have an open dialogue.
Nevertheless, as some investment banks are finding, institutional clients increasingly want direct face-to-face contact with companies, well away from the roadshow visit. ‘If you look at the process of unbundling, it has meant more clarity for everyone on what investors actually value in terms of real service from banks. One growing area of appreciation is the opportunity to meet with company management directly,’ Faulks explains. ‘It’s of really growing importance for corporate access. It’s across all sectors – investors want access to companies of all sizes and sectors.’
