Bundling may be back, but this time, the buy side is wiser and more powerful, explains Joshua Maxey, co-founder of Third Bridge.
MiFID’s promise and unintended consequences
Before MiFID, access to high-quality public equity research depended on your broker. Brokers offered research as part of a bundle of services, including corporate access. This stymied the growth of independent research, keeping the market fragmented and sub-scale.
MiFID was meant to usher in a brave new world of independent research that would stimulate the markets by highlighting a wider range of companies with greater objectivity.
I welcomed MiFID, as did many fellow research leaders. We dreamt of a more level playing field and expected transparent costs to help bring about a healthy and flourishing market. Sadly, this didn’t materialise. Instead, investment banks increased their market share by offering waterfront research coverage at peppercorn rates.
The European Association of Independent Research Providers says the revenue of most stand-alone research boutiques fell after MiFID, and they now account for less than 10% of research output.
With investment banks offering research as a loss leader, many sell-side analysts decamped to the buy-side, where their expertise was used to build capacity and sophisticated modelling techniques. I’ve read estimates that state sell-side research has lost as much as a quarter of its talent pool over the last decade, with a galaxy of star analysts among them.
Looking forward: The future of independent research
Today, public equity research remains a broken market, and often sell-side content is maintenance research. All too frequently, it covers the same group of companies and falls into a consensus view. A symptom of this is the rise of company-sponsored research, which, although fraught with difficulties, is becoming an essential way for small businesses to attract investor interest.
The UK and EU are rolling back MiFID’s research provisions to revitalise the region’s capital markets. They want to increase the funding of homegrown companies after a lack of public listings and some companies choosing to list elsewhere. Jeremy Hunt says his changes will encourage brokers to generate more research on small and medium-sized UK companies, and one of Kent’s main proposals is to establish an independent platform that commissions research to fill gaps in the market.
These measures do not convince me. I fear they will be overwhelmed by other factors, such as the rise of private markets. An EQT study earlier this year calculated that the number of US public companies has fallen from 7,000 to 5,000 over the last 20 years, while the number of PE-backed companies has grown from 2,000 to 8,000 during the same period. These numbers clearly show the direction of travel. Perhaps a better solution would be to support the creation of a UK exchange for private companies or open up more access to retail investors.
The structural shifts that MiFID brought about will be very difficult to undo, and the future of independent research is now in the hands of asset managers.
Bundling may be back, but thankfully, the buy side is far wiser and more powerful this time. MiFID didn’t work out as planned, but it did change investment research dynamics forever. Today the buy-side is considerably more sophisticated in valuing research and cutting through the noise. They are no longer beholden to brokers and instead, leverage large in-house teams to formulate their analysis. They use primary research every day, and with this, they are at last exposed to the value of independent research.
Investment banks can’t turn back the clock.
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