Darrell Heaps & Simon Rose Interview “Your best shareholders are Wall Street’s worst clients.”
16 April 2020
By Darrell Heaps
It’s been a while since I’ve posted. We’ve been busy at Q4, expanding our solutions and growing the company. Most recently, we, like all of you, have been dealing with the Coronavirus and its impact on our lives, our clients, the economy, and the markets. I hope everyone who is reading this is staying healthy.
Having said that, today, I’m quite excited about a new partnership with Rose & Company (Rose & Co) and a new investor access solution. The value proposition of this offering is simple; to help your company identify and build lasting relationships with the right investors. The demand for this solution came from many of our clients, who were looking for help marketing their equity stories to investors they don’t currently have access to. This is something they used to rely on the sell-side to do, but are no longer getting the help they used to there. So, we partnered with Rose & Co and are combining their proven approach and sell-side experience with our suite of solutions. Yesterday, I had a chance to sit down with Simon Rose, the CEO of Rose & Co, to chat about his view of the world and how this new investor access solution fits in.
Darrell: Simon, we are excited to now have this partnership launched and look forward to great things. Before we jump into the solution, could you provide some comments on the macro issues that are driving the changing dynamic of the sell-side and specifically corporate access?
Simon: Thanks, Darrell. We are very excited to be collaborating as well. In terms of the dynamics, corporate access departments at investment banks came into being 20 or so years ago and grew into a major business for investment banks. According to Greenwich Associates, about 60% of trading commissions paid by investors is directed to pay the banks for facilitating direct interaction with company management teams. These commissions were historically bundled into their client’s trade execution costs, but now due to MIFID and other commercial reasons, money managers are paying for corporate access directly from their management fees, and this is driving a major behavior change.
Banks today auction access to management teams to the highest bidder, who is more often than not a hedge fund, which is not surprising given that hedge funds account for 80% of all commissions. This creates a divergence of interest between companies and banks as long-term shareholders are not usually high-volume traders, which means they don’t generate much commission revenue for the banks. Ironically, the best shareholders are generally Wall Street’s worst clients!
Darrell: That is very interesting and something that we have been hearing from our clients. Specifically, banks are able to arrange an NDR for example, but the investors they secure for meetings are not high-quality names, but fast money hedge funds. Can you expand on this but more from the impact this is having on corporates?
Simon: Sure, the reality is that meeting the management teams of public companies is critical for investors, but in order to control costs, long only investors need to disintermediate the banks as much as possible and meet directly with companies. Public companies rely heavily on investment banks to provide introductions to investors, but increasingly the banks are unable to deliver meetings that fit the profile of optimum shareholders. Banks are likewise in a challenging position, as an accelerating decrease in commission revenue over the last few years has led to large headcount reductions in research and equity sales departments. While there is growing awareness that the model is broken, there have been no clear solutions. In response, public companies have become more proactive, using targeting software to understand which investors they want to see, but the role of facilitator, long held by the banks, was the missing link.
Darrell: This makes complete sense. We’ve seen that, although we could provide clients with the targets and plans, what was lacking was the ability to truly help our clients be proactive and “outbound’ in their sales and marketing efforts. The missing link here is really the team of experienced ex-sell-siders that you bring to the solution. Can you dig in a bit deeper into the solution and the benefits it brings?
Simon: Our approach to investor access is very unique. First, we work exclusively for our corporate clients to help them define which investors would make the best shareholders. Then, we provide introductions to senior decision-makers at these institutions, and continuously advocate for our client’s investment proposition throughout the year. Investors meet with relevant companies and companies meet relevant investors – efficiency is driven for both parties.
The difference between the “corporate access” the banks offer and the “investor access” we provide is alignment of interest. While a bank’s decisions are often driven by the economic reality of which of their clients will pay the most for a meeting, Rose & Co is not burdened by this conflict. Our sole criteria is whether an investor would make for a good shareholder for our client. We deliver senior level buy-side access by deploying salespeople with decades of experience drawn from global investment banks. Our team has been an integral part of the investment process of the buy-side, and we enjoy deep relationships and understanding of investment criteria of over 600 global institutional investment firms in 18 of the top 20 global money centers.
Senior management teams devote at a minimum twenty days per year to marketing and countless hours to preparation. The return on this investment of time cannot be realized without presenting to bona fide investors. We are extremely unique in having the ability to drive efficiency by curating relevant meetings and shepherding our clients through the portfolio manager’s investment process.
Darrell: Very compelling, Simon. Personally what I like about the service is that it provides the same “white glove” service that our clients were used to in the past. Both in terms of the focus and value, and in terms of being in their corner and really looking to add value. I know for a fact that many clients will appreciate having this kind of partner again in attracting the right investors and improving their shareholder base.
Stay safe and healthy everyone.