Last week, Instinet introduced a whiz-bang electronic service that connects money managers to corporations looking for institutional investors.
Midway through last year, Liquidnet launched its own technology-driven corporate access service. Around the same time, JonesTrading rolled out a product that leverages its deep client relationships. Detect a pattern here?
If so, you’re not alone, because agency brokerages of many stripes have started corporate access businesses, long the domain of the large investment banks.
For these firms, corporate access is an inexpensive way to get into the research game. Maybe more important, providing access to company management gives money managers more reasons to trade with them–at a time when firms find it harder to transact with execution-only shops in a tight commission environment.
Corporate access is a breadwinner. It represents an estimated $2.2 billion–or 17.5 percent–of the $12.5 billion in equities commissions, according to Greenwich Associates.
This niche has been open to newcomers with an innovative approach, strong relationships on the buyside and good knowledge of where stocks–particularly of the small- and mid-cap varieties–trade.
"Everybody’s jumping into this business because all of their clients are telling them it’s a priority to them," said John Adam, who heads the Insight Group, a research offering at Liquidnet. "That’s why you’re seeing a lot of interest in the space. The nuance of it is finding a way to differentiate the offering, because if it’s just another research product, or if it’s just another non-deal road show, it’s tough to differentiate yourself."
Due to demand, there’s opportunity for firms looking to provide this nontraditional form of research. But many suspect that when the deal calendar returns–initial public, secondary and bond offerings–corporate access will once again become the domain of the largest investment banks. The thinking goes that the buyside will have to pay the bulge bracket for these services. That could eat away at any inroads the independent firms make in their corporate access businesses. Consequently, all eyes are on the deal calendar.
Anecdotally, one trading executive whose firm provides corporate access says he’s heard that investment banks are already pressuring clients for more business for their research. Clients, he said, have told him that the bulge bracket has been applying the "soft strong-arm." The bulge expects institutions to come running back to them for deal-based road shows, as stock and bond offerings rev up.
"They’re saying, ‘We’re not doing this for free,’" the exec said. "And agency brokers like us have suffered to some extent, based on that. We haven’t done anything wrong. It’s just with commission pools shrinking, they’ve got product offering that we don’t, and there’s been pressure applied."
In the traditional corporate management access model, sellside research sales organize investor meetings for the management of companies that their analysts follow. Corporate access is a valued part of the overall research offering because the best information on a company often comes from the company itself, according to one brokerage exec. Therefore, institutions want to sit down with a company’s president, chief executive officer or chief operating officer to gain perspective on the company, its sector and the economy at large.
Firms with corporate access offerings continue to grow, while the research coverage of small and midsize companies continues to shrink. Wall Street has seen an 84 percent head-count reduction in the sellside analyst ranks over the last decade, said Dan Dykens, co-president of Meet the Street, a subsidiary of Instinet, as well as its corporate access service. The culling has led to a severe shortage of coverage of small- and mid-cap companies, he added.
"We’re in a declining commission environment," Dykens said. "And the way [sellside analysts] get paid today is to cover companies that trade much more volume. So, the analysts who are lucky enough to have jobs on Wall Street on the sellside have pretty much dropped coverage in unison on small- and mid-cap companies and migrated over to large-cap companies."
With fewer analysts today, a growing number of companies lack sellside analyst coverage and, as a result, struggle to find interested institutional investors. Agency brokers such as Instinet and JonesTrading have taken note. And returning calendar or not, this is one area where agency firms say they can distinguish themselves.
"We think we’ll get a large share of the small- and mid-cap market, because there’s really nothing for them out there," Dykens said. "They’re being ignored, really, by the sellside."
"We’re definitely focusing more on our sweet spot, which is small-and mid-caps," said Brian Pears, a managing director at JonesTrading, speaking of its corporate access strategy. "But you really never know who this idea will appeal to. We’ve had some surprising results."
In addition, agency brokerages without research have another advantage over those firms with analysts. If there isn’t an analyst on staff covering the company, there’s no risk that the agency brokerage will downgrade that company’s stock, said the exec.
Still, at a time when large investment banks are ramping up their underwriting businesses, agency brokerages will need to have specialties, or something to offer other than just another "me too" corporate access service. Although the market for the services has expanded, commissions remain ever-limited.
"There are markets where the rising tide lifts all boats," Pears said. "This is certainly not one of them."
Agency brokers, therefore, are banking on their services making an impact with corporations and institutions.
Instinet’s electronic Meet the Street service takes a different approach. It has investors register online by building a profile. It includes a "watch list" that shows Instinet which companies they follow in real time. Companies, meanwhile, register with information about executives who are likely to be traveling to meet investors, as well as whom their competitors are.
The executive group would log into the application and input the city they plan to visit, as well as how long they’d be there. Meet the Street would generate an agenda. The company could then filter which institution they wanted to visit by assets under management or investment style.
Once the company is comfortable with the list, appropriate investors are contacted via instant message and emails. The investors and companies can then determine if, when and where to meet with a couple of mouse clicks.
Jones, for its part, wanted to enter the business quietly–the agency brokerage forwent any sort of high-profile announcement. In addition, its people excuse themselves from the actual institution-corporation meetings they arrange, Pears said. The brokerage doesn’t offer investment advice based on these meetings. Clients speak to the corporations alone, Pears added, and must decide for themselves the relative merits of the company.
Corporate access is something Jones said it can leverage from its trading. It often ends up as one of the top three traders in a number of small- and mid-cap stocks, in terms of the volume. Armed with this selling point, Jones has something to attract companies to its program.
"It’s a natural fit for us to go to the companies and say, ‘We know who’s trading your stock, and know a lot of what’s going on behind it, and we’d like to work with you to make sure you tell your story the right way to investors,’" Pears said.
At Liquidnet, corporate access comes through InfraRed, a proprietary desktop application accessed through New York Stock Exchange’s NYSEnet system that aggregates near real-time institutional demand, news sentiment and block-trading data. Investment relations officers and CFOs at corporations can use the free service to be proactive and reach out to their targeted institutional investors.
"By providing that information, we’re better able to facilitate corporate access requests on behalf of our members," Adam said. "InfraRed is out there to do a better job of explaining to publicly traded companies how the investors are thinking of the stock at the moment. And that, in turn, drives the dialogue with the investors to help them get the corporate access they require."
The demand appears to be there, Adam said. Since its hard launch in late 2009, InfraRed has added about 185 users to the original 15 beta testers.
Agency brokerage WJB Capital has had a corporate access business for three years. In that time, WJB has seen its customer base more than double, according to Deena Sullivan, a director of business development and co-manager of the firm’s corporate access program. Key to its success is a commitment to grow the business with quality people. There’s no cheap way to do the business properly, she added.
"We see a lot of firms pop up without a lot of infrastructure," Sullivan said. "You need personnel, like a sales and marketing team, road show coordinators, administrators. To make it work, you really need to be committed to it; it’s not the cash cow everyone thinks it is."
The payoff for WJB has been votes from portfolio managers and analysts who attend its events and want to set up a trading relationship. And those votes have translated into trading volumes that have grown at a double-digit rate each year over the last three, she said.
