There has been a lot of commentary this week on the proposed removal of the much maligned MIFID II rules, but sadly you can’t unscramble an egg. The elephant in the room is that by destroying the economics of research remuneration, MIFID II has led to a serious reduction in sell side coverage – which unfortunately heavily impacts those companies who were most dependent on that coverage to disseminate their message – the small cap sector. Companies which used to have 10 analysts writing research on them can now find themselves covered by a mere 2 houses. It’s no coincidence that European small cap indices have underperformed over this time period. In the Bloomberg Eurozone developed market indices the 402 small cap members account for 15% of total value, and trade at a significant discount to their mid and large cap peers…27% on 2024 EV/EBITDA! To put that in context, in 2017 prior to Mifid II, the small cap names traded at a 12% premium.
As the FT has rightly noted;
“Mifid II has ended up reducing the number of companies under research coverage, harming liquidity, and decimating the ranks of sellside analysts….Like a quality newspaper, research offers a fast-track way to get up to speed on a company or situation…. Broker coverage generates interest and engagement, potentially resulting in deeper trading liquidity, superior price discovery, and a lower cost of capital”. Unfortunately, reversing the process is unlikely to see a boom in coverage and now costs have been reduced for investors, there will be likely resistance to paying higher prices for sell side research.
The best investment that mid and small cap listed corporates can make now is in their own communication with the investment community, to ensure that they get their message across.
With our combined 60 years experience in equities and IR, Clearhart can help you to design and streamline your IR process, avoid regulatory pitfalls and help you to build a consistent, clear and confident dialogue with both existing and potential investors. Our approach combines expertise, regulatory acumen, and strategic communication to empower mid and small-cap corporates. Partnering with Clearhart, allows listed companies to navigate the complexities of the market, enhance IR, and confidently convey their value proposition to stakeholders.