We have been getting a lot of questions around the consolidation that is occurring within the UK broking industry.
Late last year, Northland Capital Partners announced a merger with SP Angel. Shortly thereafter, (this year) we have seen the tie up of privately owned Stockdale Securities with publicly listed Shore Capital (AIM: SGR) to create arguably the UK’s 4th largest mid cap broker. The very next week we saw an announcement from Cannacord that they would be implimenting a program of redundancies costing £9mln this quarter; primarily within their Capital Markets division (aka. broking).
Where consolidation has not occurred, some brokers have seen their profits decline markedly. Cenkos Securities (AIM: CNKS) for example saw profits fall by 90% in October 2018 resulting in the CEO stepping down.
We’ve already seen margins being squeezed in the UK small and mid cap brokers since January of 2018 when the MiFiD II regulations came into force. This is further evidence that the World is getting tougher for the brokers. Secondary trading is already a marginal activity for many with commissions having been reduced from circa 30 basis points down to between 10 and 15 for the smaller stocks. Larger companies are traded for a lot less meaning that the incentive to continue to facilitate this trade is diminished. Publicly listed companies are therefore seeing an increasing share of their traded share capital done by a declining broker pool. This begs the question, is this a blessing or a curse?
There is undoubtedly going to be more change within the global small cap broking landscape in the coming months so things could look very different once all the changes have been implemented. Clearly, this is also going to affect the companies that rely on these brokers for trading, research and advice.
Where does this leave companies looking to gain exposure to the European market?
MiFiD II has also made it more difficult for smaller companies to get noticed by the investors that they need to grow. The “inducement” provision with respect to non deal marketing and awareness campaigns is a hurdle.
Using an outsourced specialist investor relations consultant is one way to get in front of the right people on both the buy side as well as the relevant analysts, sales teams and corporate financiers active in the relevant sector on the sell side. This often works well for the companies as they are not incurring the cost of a full time IR employee whilst getting the benefit of highly experienced individuals to assist them with their activities. The right consultant will often have a network of strong relationships that is potentially far broader and geographically diverse than a single group.
At Stellium we are also able to assist with social media engagement as well as auditing how well a business is doing in reaching a wide audience online. Online engagement is increasingly important in disseminating relevant news to as wide a audience as possible.
For private companies who, in some cases may be short on cash, the outsourced IR model makes a lot of sense. Consultants are often pragmatic about how they are remunerated and so are not averse to being paid in a combination of cash and/or stock (thereby increasing alignment of their motivation and incentives with those of company management and the owners of the business). Companies should speak to consultants they are looking to engage to find out whether such an arrangement would be beneficial