Top tips to ensure you are ready for MiFID II
To mitigate the impact on listed companies, David Lloyd-Seed offers IROs eight key tips to help ensure a smooth transition into a MiFID II world.
While there has been a lot written and talked about MiFID II already, there has been very little said about the impact all this new regulation will have on listed companies themselves. What is clear, though, is that no one really knows what the world will really look like post implementation of MiFID II, but there is consensus that there will be a period of, possibly significant, turmoil until the great machine that is the capital markets works out how to make it work best.
Research, corporate access and corporate broking are likely to feel the most significant effects from MiFID II, and these are the three key areas that companies have historically relied on to help shape and deliver their investment case to a targeted investor pool. The impact on these three will likely change the way information about the stocks and shares listed on the London Stock Exchange flows around the capital markets. The result will be that the cost of the information flow that is so vital to the efficient functioning of capital markets will partly shift from the buyers of stocks and shares to the issuers of stocks and shares – companies.
Different companies will be impacted in different ways, but we can all prepare and be as ready as we can be for the turmoil that will be unleashed on 3 January 2018. I’m sure you all have some plans in place, but here are my top tips to help make sure you don’t get left behind in the competition for capital.
1. Know your investors
This may sound fairly obvious to many of you, but make sure you properly understand who your shareholders are, or indeed should or could be. Not just the names of the fund management firms, but the funds that own your shares, why they own them and how your shares fit into their portfolios.
Make sure you know who the individuals are that make the decisions about owning your shares, and that you have a dialogue with them. There are some fantastic systems in the market today that, when fully utilised, can provide a richness of information only dreamed of a mere five years ago. Make sure you’ve got the one that best suits your needs and provides you with the information you need now, and start enriching your database.
2. Understand what you will get from your corporate brokers
Many brokers out there are saying little will change and I do hope that is the case, however, I fear much may change.
Find out if their research department is investing in your sector – are they aiming for top three coverage of your whole sector, or are they just being selective with ‘maintenance’ research. If the former, great, but if the latter how good will they be at supporting your equity story. You may need to think about a change in corporate broker.
Interrogate them and understand which institutions they will continue to have a relationship with. They won’t be much help if they can only talk to a small proportion of your share register. They may promise that they can speak to everyone through corporate broking/corporate access, but I would question how rich the information flow will continue to be where the house does not have a research/equity trading relationship.
Work with them to establish how they will continue to support you in corporate access, you may be able to continue to rely on them for some outreach, but you may well need to look elsewhere, or do more yourself. Understanding how that support might change now, will help make sure you don’t get left behind in the competition for capital.
3. Talk to the analysts covering your stock – find out what will change
Talk to the analysts who currently cover you and try and find out the following:
• how they will be covering you and your sector going forward;
• how, and to whom, they will be distributing their research;.
• how they will propose to approach coverage of your shares, eg, regular short update notes, or intermittent thought pieces; and
• what they will continue to send you – notes on the sector or just on you. If the latter, it will make it harder for you to put their position on your shares in context.
You may, of course, not get all the answers you wanted to hear from this exercise…if so, explore alternative ways of getting research written on your company. That may mean engaging new research houses, or may mean paid-for research. Investors don’t mind if research is paid for by companies, so long as it is informative and insightful – information is what fuels their interest, so make sure they have access to it in anyway you can.
4. Understand how you will be able to collect consensus
Building on the above, IROs need to understand whether the information that comes from individual analysts will change, and therefore how companies will collect consensus. Will they continue to share their models with you or do you need to find a new way for them feed data into your consensus tracker?
I’m a great advocate for collecting consensus directly as that ensures you can understand how an analyst builds and works their model on your company. I suspect little will change here as analysts will likely want to continue to be part of consensus and there is no threat to their economic model in sharing their forecasts with a company. However, if the landscape does radically shift, IROs may need to look into using third party aggregators – so have a look around and see how these work and whether they work for you. With that in mind take the opportunity to make sure you understand how current consensus aggregators such as Bloomberg collect their data and how their analysis of the numbers may differ from yours.
5. Update your calling card
Investors often start looking at a company through their website and/or report and accounts. So make sure the information you have on there is clear, succinct, relevant and useful.
Make sure it is easy to understand who you are, what you do, how you make money (business model and strategy), how you measure yourselves (KPIs), the key risks in your business and industry and how management is incentivised and rewarded. Make sure all relevant information, including any recent presentations you are using on roadshows, is easily available.
This exercise, combined with some of the other tips here may lead you to update your equity story. Ask yourself is it clear and punchy? Does it tell the story as we actually want to tell it? Does it appeal to the right investors? Does it cover all the bases? It’s always a good idea to do this exercise on a regular basis, but do it now, before everyone else beats you to it!
Having sat on the judging panel for our best practice awards, it struck me how hard some companies make it to understand the key reasons why an investor should buy your shares. So keep it clear and simple and make sure you stand out from the crowd.
6. Network – build your contacts with both sell and buy side
Investors are always happy to hear directly from companies, so get out there and network, don’t rely on others to do it for you. Build your CRM database so you always know who is, or isn’t, or should be interested in your shares.
Network with your peers and other IROs. I’ve often said that IR can be a lonely role in companies, so use the IR Society to network with other IROs. Build your own network of IROs who are facing similar challenges to you. You never know how useful a piece of advice might be, and of course how useful your advice might be to others. We’re a rich pool of talent in the IR Industry, together each of us can be even better.
7. Make sure your management team understand the implications
There are some very enlightened management teams out there about IR, but sadly there are many less so. As a service function management are often reluctant to spend on IR. However as the burden of cost of accessing the capital markets shifts more on to companies themselves, helping management teams understand the importance of good communication and of winning the competition for capital is vitally important. A good, well-communicated investment story can only lead to a full and fair valuation, which of course helps the value of share options!
8. Be prepared to do a lot more yourself
If there is one certainty of MiFID II it is that we will all likely be much busier, whether it be corporate access, feedback, research and consensus management or just updating our IR assets. Investors will undoubtedly rely more on IROs directly, which, while a good thing, will clearly take up more time. Think carefully about how you will prioritise and resource up – either internally or externally – to meet these challenges.
This is an exciting time for the IR industry and with a little bit of planning now, the transition into and through MiFID II should be relatively painless.
David Lloyd-Seed is director of IR at O2 (Telefónica UK) and chair of the IR Society.
Published 19 December, 2017