The Rise of Company-Sponsored Research Benefits Neither Investors Nor Companies

By October 18, 2019 October 24th, 2019 Corporates
The Rise of Company-Sponsored Research Benefits Neither Investors Nor Companies

Of all the ills the market has blamed MiFID II for, the drop in research diversity and quality is up there in the rankings. But is company-sponsored research the answer?

Specifically, a large part of the consensus has focused on the drop in quality and quantity of research on small- and mid-cap firms. Such companies need the exposure and the attention of investors that analyst coverage brings them – if no analysts are writing about them, it’s harder for investors to find them and for the market to know about them. 

So several smaller issuers have tried to battle the dearth of coverage by paying analyst firms to produce research pieces about them that will help their Investor Relations (IR) personnel put them on the map.

Read our blog: Self-reflection and Change from Within for the Investment Research Industry: the Real Impact of MiFID II

The trend of company-sponsored research has been gaining ground ever since MiFID II came into force in January 2018. In that time, research houses that specialise in this segment have either seen their revenues rise or their number of customers grow, according to media reports. 

For example, Bloomberg reported that French brokerage Kepler Cheuvreux saw the firms covered by sponsored research rise from 60 to 100 in 2018, and planned to have double that in the next few years.

The FT, meanwhile, last May wrote that the bulk of the research brokers like UK-based FinnCap and WH Ireland produce for corporates is sponsored by those same corporates. For all of them, the percentage of that research has grown since the onset of MiFID II.

This raises all kinds of questions on conflicts of interest when it comes to company-sponsored research. Even though most research providers offer assurances of objectivity and adherence to standards, questions remain.

The value of more small- and mid-cap research out there in the face of the unbundling unravelling is a strong argument for company-sponsored research. It’s the reason why some segments of the market think it’s gaining more credibility, as an article in IR Magazine pointed out.

The problem is, necessity alone does not a compelling argument make. There needs to be more research on small- and mid-cap companies, that much is certain – it’s a glaring gap in the market that needs addressing. But how valuable can it really be for investors?

The Value of Independence

Asset managers from such firms as Amundi SA and RWC Partners have told Bloomberg they are concerned about conflicts of interest and would prefer more independent research providers. 

“Companies will have to get better at talking to investors directly. I think ultimately the longer-term implication of MiFID is going to be a disintermediation impact,” RWC’s Graham Clapp said.

It’s not just investors that need be sceptical about company-sponsored research. Companies also need to ask themselves, is this the best way for them to get their story out there?

Sure, they can make a generous investment in sponsoring research about themselves, but how valuable is this going to be in the long term? If investors find out about a company through a bunch of research it sponsored itself, and no independent analysts are covering it, will they be interested? Has the company successfully addressed the lack of research about its business, or has it just invested in an expensive marketing brochure?

IR departments must focus on cultivating direct relationships with analysts as well as investors. On the one hand, that lets analysts know about a smaller company and they can cover it if it seems relevant to them. Investors, who presumably know and trust certain independent analysts, will value such opinions more, and will also have already started building a relationship with IR that could evolve into a fruitful partnership. 

And the best part is, no one needs to depend on expensive and questionable tactics like sponsored research. What it takes is a unified network that can bring them together under one roof and allow them to interact and collaborate. Smartkarma’s network does exactly that; IR personnel can sign up their companies through Corporate Solutions, and immediately be able to connect with analysts who might take a genuine interest in their company.

Online platforms have solved communication, distribution, and monetisation problems for all kinds of industries – why not this one as well?

That’s why Clapp’s point about companies talking directly to investors resonates. Disintermediation is indeed one of the impacts of MiFID II in the industry – together with a much-needed reality check. But the missing piece to the puzzle is exactly this – a network that brings all stakeholders together.

Learn more about how Smartkarma’s network can connect you to analysts and investors. Sign up for a FREE account on Smartkarma’s Corporate Solutions, a brand-new range of services for C-Suite and Investor Relations personnel of listed companies that’s been designed to help IR professionals establish and maintain valuable connections to the investment and analyst communities.

Lead image by rawpixel on Pixabay

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