Flash Update: UK Corporate Access Shake-up

Corporate Access, a service usually offered by investment banks / brokers that brings investors and corporate management teams together, is going through a radical shake-up in the UK. These developments could potentially impact not just UK-based companies but any listed company with an investor base in the UK.

Update:

After a period of lengthy consultation, last Thursday the UK’s financial regulator, the FCA, has issued its final say on the use of dealing commissions, previously used by investors to pay for research, corporate access and  trade execution. As of the 2nd of June, UK investment managers should only use client dealing commission to pay for ‘substantive research’ and costs related to executing trades. Using dealing commission to pay for access to senior management at companies they invest in will now be explicitly banned.

The FCA estimates that up to £500 million pounds of dealing commissions were spent in 2012 to arrange such meetings. The new rules emphasize that costs for research can only be passed on to clients if they lead to a “meaningful conclusion”. Naturally, nothing is stopping investors from paying brokers for corporate access themselves from their own management fees (rather than passing it on to their clients), or organizing their meetings themselves without a broker.

Impact:

These current developments have been widely expected by the market and its participants. It is too early to assess the precise impact on the industry however we can anticipate a few emerging trends.

  • Institutional Investors will place a greater scrutiny on how they organize their roadshows and most importantly, the business model behind it. We would not be surprised to see investors setting up their own Corporate Access departments to facilitate dialogue between companies they are interested in.
  • Brokers will most likely continue to offer corporate access service to investors, however the nature of the services is likely to change. Focus will be on access to new, unique, and valuable investment ideas priced at a point which investment managers are prepared to pay for themselves. As a consequence of this, and looking on the other side of the coin,  brokers will likely be more selective of which companies they offer this service to.
  • From a company’s IR perspective,  the magnitude of the impact will certainly depend on both macro and company specific factors, as well as the size of company’s investor base in the UK. Broadly speaking, we expect companies assuming more responsibility for investor targeting and engagement, and over the longer term expanding the resources of their IR teams, to accommodate new requirements.
  • We expect the regulation to present opportunities for independent providers of corporate access. The challenge those companies will face is access to investors, comparatively weak relationships, and perhaps access to resources to provide ‘seamless logistics’ which play an important role in any meeting.

Further reading: New FCA rules on use of dealing commissions 

 

Home bias persist amongst global investors

Despite the benefits of diversification, institutional investors in most countries have a strong home bias, buying shares in companies that they know and ones that trade in their local markets, according to the latest report by Goldman Sach’s José Ursúa.

“We estimate that over the last decade, domestic holdings of broadly-defined domestic equity in developed markets (DM) have gone from around 81% to 76%, and from 90% to 88% in emerging markets (EM). This ‘home bias’ is visible not only in equities, but also in debt securities and other assets.”

Trade barriers are no longer a likely obstacle. Goldman notes that the behaviour continues despite decades of financial liberalisation, which have “removed obstacles to capital mobility around the world” while technology has enabled more efficient trading, and information flows have become “considerably more fluid.” Perhaps asset managers feel considerably less connected and engaged with companies outside their home market, an area which we are working hard to improve. Couple of charts below from the research caught our eye. Those may be useful in IR Strategy and institutional investor outreach planning.

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Sources: Goldman Sachs, Financial Times, CityAM