According to the survey commissioned by broker Peel Hunt and The Quoted Companies Alliance, nearly twothirdsof investors (62%) said that since MiFID II was introduced, less research is being produced on mid andsmall-cap companies, with a third expecting further reductions in both the volume and quality of research inthe future.
Seven in ten fund managers (70%) said that their access to research providers has decreased as a
direct result of MiFID II, with over half (56%) confirming that they are worse off as a result.
Of the UK quoted companies surveyed in the report, 25% said that MiFID II has had a negative impact on
their business, with 41% of companies and 63% of investors saying the regulation has had a negative impact
on the liquidity of UK mid and small-cap stocks over the past 12 months.72% of UK fund managers confirmed that they currently spend at least 60% of their research budget on thetop 10 research providers. Meanwhile, more than half (58%) rely on fewer than five research providers tomeet their needs, indicating a widening gap between the best and worst-regarded research providers in themarket.
The vast majority of investors (86%) and companies (72%) expect MiFID II to lead to further consolidation or
closure of broking houses over the next 12 months, while one in five corporates said that they are considering
changing brokers as a direct consequence of how MiFID II has changed the relationship between brokers and
investors.
As a result, it appears that corporates are taking back more control of their investor engagement, by
improving their corporate websites, increasing their PR efforts, working with independent investor relations
advisors and increasing retail investor engagement, to improve their own visibility among investor audiences.
Steven Fine, CEO of Peel Hunt, said:
After MiFID IIs debut year, were already seeing a marked dispersion in the way the buy-side pays for sellsideservices, with virtually no conformity across the institutional franchise. The role of sales is changing,
technology is usurping traditional methods, internal procurement teams are ensuring fund managers clearly
define where they see value and ruthlessly enforcing the price they will pay. We are seeing a growing focus
by the buy-side on quality research with an increasing number of investors prioritising their research spend
on only the top providers with the most insightful analysis.The unintended consequences of MiFID II that we have seen so far are just the beginning. Specialists willbecome generalists. Generalists will cover too many stocks and their product knowledge will dilute. Qualitywill decline, gaps will appear in the market and many smaller companies will de-rate. Holding periods will getlonger, liquidity will dry up and take-privates will increase. Ultimately, it looks like the situation has to getworse before it can get better.
Tim Ward, Chief Executive of the Quoted Companies Alliance, said:
Both the broking community and investment houses are going through a period of substantial change. MiFID
II is accelerating that change. We are seeing a decline in the availability of research with a consequent
perceived impact on liquidity. Small-caps have always experienced a hard life in the secondary market, but
mid-caps are now learning to experience the same.However, there is potentially some good news too. The focus by the broking and investment community onMiFID II may be causing companies to take the initiative to work with their advisors to be more active in theirengagement with investors, both current and potential. This may, counterintuitively, lead to a betterunderstanding between companies and investors, leading to more information in the marketplace and betterliquidity in the medium-term.
