MiFID II will shrink already shrunk sell-side budgets; InFocus Capital Partners can help

InFocus Capital Partners, LLC is well positioned to help high quality private and public companies Be Understood, Be Seen, and Stay in Focus.  In an environment of shrinking sell-side budgets and high quality companies falling between the recognition cracks, we can help.

Sell-side research budgets are shrinking

Thanks to bad actors in the investment arena, regulatory changes, and changing business models, resources devoted to sell-side equity research have been shrinking.  According to a study by Frost Consulting and Bloomberg (cited by The Wall Street Journal), annual spending on sell-side research dropped from about $8 bln in 2008 to about $4 bln in 2014 and was projected to drop to under $4 bln in 2017.

35-40% of all public companies with no sell-side research coverage at all

It’s not surprising that the number of sell-side analysts have subsequently decreased and that many public companies are now without any sell-side coverage.

Indeed, The Advisory Committee on Smaller Public Companies to the United States Securities and Exchange Commission in its report dated April 23, 2006 noted that, “testimony provided to the Committee indicated that approximately 1,200 of the 3,200 NASDAQ-listed companies, and 35% of all public companies, receive no analyst coverage at all.”

And, Frost Consulting, Bloomberg, and Edison Investment Research, in a report dated October 2016, noted that according to the World Federation of Exchanges, (a trade association of 63 publicly regulated stock, futures, and options exchanges) 35-40% of all publicly traded equities have no research coverage.

MiFID II in the EU will likely further shrink sell-side budgets, leaving more companies abandoned

In our opinion, the trends of lower sell-side budgets, a shrinking sell-side analyst pool, and an increase in the number of companies without sell-side coverage will continue, if not accelerate.

Readers are reminded that MiFID – The Markets in Financial Instruments Directive – is the EU legislation that regulates firms who provide services to clients linked to financial instruments (shares, bonds, units in collective investment schemes and derivatives), and the venues where those instruments are traded.  Changes relative to MiFID are currently set to take effect beginning January 3, 2018, with the new legislation being known as MiFID II – this includes a revised MiFID and a new Markets in Financial Instruments Regulation (MiFIR).

In a report (Skadden’s 2016 Insights) dated January 2016, the law firm Skadden, Arps, Slate, Meagher, & Flom LLP and Affiliates suggested, “… If ESMA’s [European Securities and Markets Authority] original proposals are adopted, discretionary portfolio managers may no longer be able to receive generic or (even) tailored investment research from brokers unless they pay for that research themselves, raise management charges to absorb the extra costs or, with client agreement, use research payment accounts that are funded in advance… “

And, the aforementioned October 2016 report from Bloomberg, Frost Consulting, and Edison Investment Research suggested that “asset managers’ margins would halve if they absorbed the cost of investment bank research.”  We believe shrinking asset manager margins will lead to a further reduction in fees allocated to sell-side research.

InFocus Capital Partners, LLC can help

InFocus Capital Partners, LLC is well positioned to help high quality private and public companies Be Understood, Be Seen, and Stay in Focus.  In an environment of shrinking sell-side budgets and high quality companies falling between the recognition cracks, we can help.

Please contact us to learn more.