IR Monitor – 30th November 2022

This week’s news

No improvement in sight for primary equity markets, and spin-offs remain the only ray of hope – Craig Coben

The Financial Times does not have an optimistic outlook for IPOs. The number of companies going public has drastically dropped off in 2022, whilst newly listed stocks are generally trading well below initial offer prices. Despite one or two notable exceptions, such as Porsche, the FT pinpoints investor attitude to valuation as the major reason behind the dour outlook. Due to inopportune market conditions, economies slowing down and earnings decreasing, investors and analysts end up using 2023 trough earnings figures as the starting point in their valuation models, in turn resulting in lower valuations. In that context, it is advised to avoid the first half of 2023 at all cost to launch an IPO and to prefer the second half of 2023, as the first forecast year would then be 2024 – i.e. a year of expected economic recovery. As such, a large huddle of technology and life science companies will have to remain in the waiting room for at least another six months. The primary market’s only ray of hope comes from carve-outs.

Value of sell side research questioned (again)

Alphaville commented on the recent deal between SocGen and Bernstein where cash equities and research resources will be grouped into a joint venture, 51 per cent owned by the French bank but run under the Bernstein name. Such deals illustrate the dynamics at play in the post MIFID II era, where independent sell sides research houses try and find alternative, viable business models in an era of unlimited content.  This is also reminiscent of a number of other recent transactions, including the strategic alliance formed in 2020 by Wolfe Research and Nomura under which research and execution capabilities joined forces. Independent sell-side research has struggled to remain competitive, and large banks have increased their dominance of the wider investment research industry since MIFID II’s introduction in 2018. However, it is worth noting that the concerns over the quality and longevity of sell-side research have always been there and, despite this, sell-side research remains continues to be produced.

Britain begins regulating ESG credential providers

As an initial step towards regulating the ESG industry, Britain’s Financial Conduct Authority has announced that ESG rating providers will be asked to apply voluntary best practice codes, Reuters reports. The industry regulators and the wider business world have been extremely concerned about greenwashing and, with increasingly significant funds flowing into sustainable investment vehicles globally, the British government is contemplating granting the FCA powers to directly regulate ESG ratings providers. And whilst this proposed code will follow recommendations from IOSCO and recent developments in the EU and Japan, the FCA hopes it will encourage transparency and good governance within the industry.

Superhero CEOs… a myth busted?

Harvard Business Review has examined our expectations surrounding impressive business leaders this week. With worrying stories coming out of FTX and the recent Twitter takeover by Elon Musk, the article debates the conventional expectation that extraordinary leadership trumps boring management and posits that the mythology of ‘good management’ is overly simplistic. Instead, the article offers three alternative dimensions that leadership should be examined under: “vertical differentiation”, meaning the degree to which CEOs are competent, strategically and technically; “horizontal differentiation”, the degree to which executives possess a variety of different competencies and skills to fit particular industries; and “influence”, the extent to which individuals can affect the way others within their companies conduct themselves. Whilst this approach may prove to be more complex, ignoring it could end up being quite costly for investors and indeed management teams.

Helping facilitate the new shareholder democracy movement

Bloomberg pinpoints two UK start-ups, Tulipshare and Tumelo, at the forefront of a movement to bridge the gap between the ultimate shareholders and the companies they collectively own. This follows the meme-stock frenzy and the increase in the number of retail investors exercising their rights and pushing for changes in some of the world’s most notable companies. Now that there is some momentum behind this movement, the question is whether these recent changes are permanent or whether they will disappear. Tumelo CEO and co-founder Georgia Stewart says ‘momentum is really increasing’ and therefore we can expect a continuation of stakeholder engagement and increased attention to ESG factors. Further questions are being raised surrounding how great the impact could be if ultimate owners were routinely voting their shares.

And finally… earnings season is too noisy

IR Magazine reports on a research poll conducted by the Australasian Investor Relations Associations (AIRA), that asked buy and sell side analysts to share their view on current reporting practices. Respondents shared the same frustration: schedule clashes, and more generally a ‘lack of time’ to analyse companies earnings and focus on key details, ultimately lead to poorly structured results days. One sell side participant writes ‘This reporting season was the most bunched in my memory. There is a clear need for a spread. If companies want to have due respect for their results, they need to ensure some clear air to consider the result.’ As a result, analysts are calling for results to be spread more evenly throughout the reporting season, for a better use of Mondays and Fridays and, as usual, for less time to be spent on prepared remarks in order to enable more time for Q&As.

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