Corporate access: death of the go-between?
Corporate access: death of the go-between?
Investors and portfolio companies increasingly prefer to arrange meetings directly
In the months just before the introduction of Mifid II — the wide-ranging markets regime put in place in Europe in January — much of the discussion among asset managers was about the treatment of research payments. Another change received a lot less coverage but it has already led to significant behavioural shifts in the investment industry and beyond. The Mifid II rules put a price on the brokers’ role in facilitating discussions between fund managers and the companies in which they invest — known as corporate access. The cost, and the fear among asset managers of breaking rules, has led to an increased appetite from investors and their portfolio companies to build stronger connections — and to cut out intermediaries. “There has been a breakdown in interaction between the buyside and sellside,” says Fraser Thorne, chief executive of Edison, an investment research adviser discussing the relationship between fund managers and brokers. “We are seeing a lot of changes in the market more quickly than we had anticipated.” Fund managers must now pay for brokerage services, such as facilitating access to investee companies, that they used to treat as a benefit of dealing with certain intermediaries. By accepting such services without an explicit cost, fund companies run the risk of being seen to have been induced, which is now outlawed. “Corporates are seeing lots of direct inquiries from fund managers,” says Mr Thorne. “If these continue, the companies will have to staff up.” BlackRock, Fidelity International and Schroders, three of the biggest fund houses, and Norges Bank Investment Management, the world’s largest sovereign wealth fund, have all recruited staff for their corporate access teams in response to the new rules. Several smaller investors, including Revera Asset Management and Saracen Fund Managers in Edinburgh, have decided they will no longer pay brokers for corporate access and will deal with companies themselves. In December, Norges, which manages $1tn globally, sent a letter to all its portfolio companies encouraging them to contact it directly as it would not pay brokers to set up meetings. Other managers have made similar announcements. At about the same time, the UK’s Investor Relations Society and QuantiFire, an investor relations service provider, contacted 302 institutional investors, including half the 20 largest global financial institutions, asking about their plans for corporate access. The survey showed that 92 per cent of respondents said they viewed corporate access as important or critical to their investment process, while more than half said they did not intend to pay for it in 2018. David Lloyd-Seed, chairman of the IRS, says that for a long time fund managers saw the role of brokers in facilitating meetings and phone calls as a “free admin service”. “Fund managers now question why they should pay for access to a company in which they own shares,” he says. “There is going to be a period of disruption and then it will settle down.” In the run-up to Mifid II’s introduction, several fund managers bulked up their corporate access teams and they have continued to hire. Fidelity International, the Bermuda-headquartered company with $256bn under management, hired Patricia LeFranc as head of corporate access from JPMorgan in November. It has since made other additions to the team and says the move is less to do with avoiding broker fees and more about having better quality access and clearer dialogue. BlackRock, the $6.3tn US manager, brought in Ellie Tinto as head of corporate access for Emea this month, having made several hires to its European and global teams this year. The company says it will continue to work with brokers to arrange the most important company meetings and attend conferences, but it has hired more staff to be available for increased direct interaction with portfolio companies. Elsewhere, Janus Henderson, the US-Australian fund house, is in the process of hiring half a dozen corporate access staff globally. “We do not think we should pay for corporate access,” says Andrew Formica, the company’s co-chief executive. One area in which corporate brokers had traditionally been able to show their value was by hosting conferences and roadshows, bringing together fund managers and company executives. These events have been one of the first areas to suffer under Mifid II. Mr Thorne of Edison says he has heard of many examples of conferences being cancelled due to lack of interest, or going ahead but being “shockingly attended”. Investors are steering clear of such events: they are overly cautious about running foul of inducement rules. Under Mifid II, investors cannot accept meetings organised by brokers unless they have a paid agreement with them. “We are hearing more stories about these conferences being a waste of time,” Mr Thorne adds. KBW, the US investment bank, recently invited investors to its European financials conference in May. In the email it stated that unless attendees were research clients of the bank they would have to pay $500 per person to attend. Fund managers report that brokers have quoted high fees for conferences — sometimes $500 or more. If the organiser can’t fill space, they will often call and offer free attendance. In other instances, fund managers and corporates arrange meetings around conferences, with “interaction” days added to roadshows. This happens more where the fund manager has no commercial relationship with the broker putting on the event. Several services now facilitate interaction. Various technology platforms cater for investor-relations professionals and fund managers. These are more popular in the wake of Mifid II, though observers expect consolidation among providers. “In two or three years’ time there is going to be consensus, but it is slightly uncharted territory,” says Neil Scarth, principal at Frost Consulting, which advises fund managers. Michael Chojnacki runs Closir, a company that advises groups in emerging markets how to build relationships with asset managers. He says about 5 per cent of meetings are organised directly by companies and investors — but he expects this to rise to more than half in five years. “Research is very simple to price — corporate access is trickier. It depends on the company, not the broker,” he says. “There is a bit of experimentation going on and maybe by the end of the year we will have a better idea of how to price it.”