For years, a mutually beneficial relationship existed between corporate management teams, investment banks and the buy-side regarding corporate access as represented by non-deal roadshows (NDRs) and conferences. Now, like many elements of this relationship, the process is undergoing a major revision with implications for all relevant parties. For corporate management teams, the bottom line is two-fold: a much more vigilant supervision of the sell-side must become standard practice, along with much more proactivity in terms of direct outreach to the buy-side. Recent news that a consortium of large institutions is banding together to further disintermediate the sell-side NDR/conference model for management access by setting up what have been called “sponsorless conferences” draws a brighter line under this point.
There are many reasons for this shifting relationship, but they can be summed up in two general themes: tighter regulation of commission payments and collapsing fee structures. Each of these developments have either forced or incentivized the buy-side to have a much stricter accounting of their overall payments to investment banks and the services for which they are willing to pay.
From a regulatory standpoint, MiFID II was designed to create much greater transparency around the payments made from the buy-side to the investment banks because those payments are the property of the fund shareholders, not the buy-side analyst or PMs. There has been a view amongst regulators and pension fund consultants that the buy-side was far too cavalier with their external research budgets, which are paid for with shareholder assets. And, from a financial standpoint, the advent of passive investing had greatly pressured the profitability of the buy-side, causing greater internal scrutiny on research payments as well. Recently, a major buy-side firm in Boston announced they would be “cutting off” six major investment banks and declining to receive any services from them.
Unsurprisingly, the investment banks have reacted by steering their services toward clients who are willing to pay the most. In most industries this would be the normal, if not applauded, course of business, but in the world of Wall St., issues of equitable dissemination of information, fair disclosure and advantaging the large over the small always loom largely. In the arena of corporate access, this is forcing the investment banks to make choices about their needs relative to the needs of their corporate clients, and the results do not always skew in the client’s favor.
Where does this leave an IRO trying to maximize the utility of his or her CEO’s time? How should a management team handle a situation where a major shareholder and a sponsoring bank don’t have a relationship? These are among the relevant questions that must be asked because turning over the responsibility of an NDR to a sponsoring broker and waiting for a completed schedule to come back will likely create substandard outcomes, particularly amongst small-cap life sciences where demand is more limited.
The answer is that the existing client-investment bank relationship is no longer sufficient. As the partnership evolves, a hybrid solution will likely emerge where sponsoring banks will play a role as a regional guide, but the IRO will be making a far greater number of outbound calls. This paradigm will require IROs to have a much more detailed map of the landscape and a much more nuanced appreciation of the dynamics. In terms of direct outreach, an IRO will likely need to be calling not just shareholders in a given region with whom he or she has likely formed a relationship, but also secondary and tertiary investors who were previously unknown. These investors may be valuable targets as potential shareholders, but they may not be clients of a given investment bank. The banks can and will be helpful in targeting these investors, but may not be willing or even able to contact them for financial or regulatory reasons. An additional complication will result from the fact that different banks may have relationships with different investors in a given region. While this has always been true to a degree, the range of the difference in these relationships is likely to widen markedly. Engaging with multiple banks to manage a given roadshow, as is common practice on IPOs, may become more common in the aftermarket. An additional practice that may become standard is direct follow-up from the IRO to the investor following the meeting. Currently, the bank is responsible for post meeting correspondence and feedback solicitation. This process is imperfect for many reasons, and taking this interaction “in house” may correct some of the current issues while offering the IRO a bridge to maintaining a dialogue with the investor.
These are just a few of the incremental wrinkles being creating by an evolution in standard practices in corporate access that has been in place for decades. While much is uncertain, what is certain is that the IRO will have to take a much more hands-on role to ensure a positive outcome. If you have questions about managing corporate access and what it means for your company, contact us today.
Matt Lane, Managing Director
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