A chat with Q4’s Managing Director of Europe, Amit Sanghvi
As we bravely leap into 2019, it’s a good time to take stock of last year and look ahead to the critical macro-trends in investor relations. I recently sat down with Q4’s Managing Director of Europe, Amit Sanghvi, to hear his predictions and advice for the new year.
IROs Take Center Stage with MiFID II
It’s been just over a year since MiFID II took effect, and clearly, there’s no turning back. We’ve all felt the decline of the sell-side globally, along with the increasing loss of research coverage and increase in direct investor engagement.
Over the last year, the relationship between corporates and brokers has come under some serious scrutiny. Whether its their ability to draw crowds at an event or bring key institutional investors to roadshows, the sell-side has had a challenging year. Historically, sceptics have always raised concerns around a broker’s partiality towards their sales desk clients. But now many IROs feel frustrated at the lack of clarity around which institutions can be accessed via their broker, versus those they should directly contact themselves. Many corporates have also seen a real drop in conference attendance arranged by brokers.
Amit says that we’ll see this trend only heighten in the new year, and ultimately, reach a point that defines new rules of engagement with brokers. He explains, “while large caps didn’t anticipate a change in broker coverage and were promised an unhindered corporate access service, the reality is that several have already been left disappointed. It’s common to hear stories of brokers not approaching specific investors and corporates finding out about it too late to send direct invitations themselves. This is fuelling the growing distrust between corporates and the sell-side, and will ultimately force IROs to change the way they work with brokers.” Amit adds, “as the scrutiny of broker engagement continues, only those brokers who become more transparent with corporates and/ or operate on a different revenue model will survive.”
This means that IROs will have to directly engage investors where their brokers fall short. In fact, there’s been a dramatic increase in investor interest for direct communication with corporates. Amit points to a Q4 client whose direct inbound requests from investors, via their IR page, more than tripled over the course of 2018. And while you might expect this sort of stat only from small or mid caps, large caps are seeing the same phenomenon. It makes sense, since we’re also seeing the buy-side set-up their own corporate access and research teams. In fact, Rivel Research claims that with MiFID II taking its hold, institutional investors now actually prefer direct contact with corporates.
Amit describes 2019 as “the year corporate access outside of broker engagements becomes the focal point.” He predicts an overwhelming trend for corporates, of all shapes and sizes, to directly and proactively shoulder a large number of investor relationships. Several have already started to experiment, by taking the corporate access model in-house and organising ‘IR only’ roadshows put together and managed by the IR team alone. We’ve even seen a move from corporates to organize conferences independently.
There’s also a growing impetus for corporates to be braver about adopting new technologies (following in the footsteps of their substantially tech-savvier buy-side counterparts). Many see the potential of technology to help take the added workload off IR teams. For both sides of the business, technology will play a key role in alleviating and scaling the extra costs and time demands in handling the new responsibilities. IROs will look for cost-effective tech solutions and go-to services. Amit says that by 2020, we can expect to see IR programs integrate sophisticated IR operating systems into their daily workflow, along similar lines to today’s Microsoft Office.
Amit sees the new corporate access model becoming a global trend. While MiFID II is certainly Euro-centric, there’s a strong argument for the new operational landscape going global. He points to buy-side firms with global offices. There are the inherent complications of maintaining two different ways of operating. Not to mention that US clients of international buy-side institutions might start comparing themselves to their European counterparts who can now see how their money is spent, while they themselves still can’t. Amit sums up, “the need for core transparency across the board will drive MiFID II into becoming a global trend.”
MiFID II has undoubtedly made it more challenging than ever for the buy and sell sides to connect. Solving this challenge and finding alternative methods for corporate access will be integral to success in the new year. With the rapid growth of IR technology and the rise of boutique corporate access and research services, 2019 will be a year “to see who can amass the highest quality relationships across the corporate, sell and buy sides.”
The Holy Trinity: ESG, Passive Investing, and Corporate Access
ESG (Environmental, Social and Governance) and the rise of passive funds are undeniable IR trends that are profoundly changing the capital markets. ESG has become a key focus in the IRO’s mandate, especially for mid and large-cap companies. Amit emphasizes, “2019 will see the growing convergence of IR and ESG.”
Today’s consumers are highly aware of their overall footprint and making environmentally and socially conscious decisions. They’re more conscious than ever before about contributing to the success of a brand that meets their growing expectations. In this way, ESG is directly impacting a corporate’s perceived value, and in turn, an investor’s ROI. In addition, these same consumers are making their opinions known, as HNWs and large groups of retail investors, flexing their votes on governance matters at AGMs.
As the investor universe increasingly factors ESG into their investment decisions, corporates are striving to help drive share price through better governance. From board diversity, to environmental impact, and employee compensation, it’s clear that 2019 is about ensuring that you effectively position your company for ESG best practices.
We’ll also continue to witness the rise in passive investing, index funds and ETFS. Passive funds will keep growing as a total universe (and ultimately surpass active funds based on current IR trends). And corporates will have to engage these passive funds through governance channels, to drive shareholder value and prevent activist situations.
With this, we’re seeing another key trend for 2019: Quantamental investing, the coming together of quantitative and fundamental “stock picker” investment strategies. While passive strategies are set to reign, the active universe will evolve around using quantitative strategies to co-exist alongside passive funds.
Leveling-up with Alternative Data
While the IR market is still learning about the potential value of alternative data, Amit says that “leveraging sophisticated algorithms and alternative data sets is ready to become a formidable part of investor targeting. It’s already fundamental to the way many investors look for investment opportunities.” He underlines the importance of IROs catching-up with the buy-side who have been using alternative data for years. He cites the example of the buy-side using credit card data, combined with GPS coordinates, to analyse corporate sales.
He predicts that 2019 will bring a rude wake-up call for IROs everywhere to figure out how the buy-side is leveraging alternative data to value their business. This is especially true if you’re not already aware of the unintentional data your company is putting out, how investors are leveraging that data, and ultimately, its impact on public perception about your company and its valuation.
Amit concludes, “as the sheer volume of potential data points grows and algorithms get increasingly more sophisticated, IROs will need to become a lot more savvy about leveraging alternative data for their own targeting strategies.”
Embracing the ride for 2019
As we dive increasingly deeper into an IR universe heavily impacted by MiFID II and ESG, the mandate for robust and proactive IR programs has never been more apparent or intense. For the IRO, this year is all about the impact of direct engagement and strategically taking on more responsibilities. IROs will need to run their programs more efficiently to manage the load. At the heart of this will be finding an effective marriage between a variety of advisers and smart technologies. They will also have to become more creative about communicating to the right investors and driving fair share price value. And as 2019 brings a whole new level of transparency between corporates and investors, IROs will have to realize the importance of non-traditional channels like alternative data. The future is bright, but this “Wild West” period of transition brings a mix of hard work and bold experimentation.
Amit will be speaking about 2019 IR trends for setting up successful roadshows, in an upcoming webinar Thursday, January 24th. Register now to reserve your spot!