City broker blames Aston Martin crash on EU rules

Post Mifid II, the City is feeling the loss of analytical talent, says Vinjeru Mkandawire

A “COLLAPSE” in the quality of City analysis is partly to blame for the failure of blockbuster floats such as Aston Martin and Funding Circle, according to the boss of broker Peel Hunt.

Steven Fine, chief executive, said the disastrous stock market performance of both companies since their debuts was linked to a cull of sell-side equity research teams by big banks in the wake of the introduction of the EU financial services rule book Mifid II.

“The quality of research is collapsing because banks are putting too much work on too few people,” Mr Fine told The Daily Telegraph.

He claimed it means new companies are less able to “navigate their way through the regulatory minefield of being a public company, in order to tell your story, put them into proper context and set the scene in a competitive landscape”.

“Take Aston Martin and Funding Circle. The fact that some of these deals have gone wayward reflects the big banks’ inability to support the secondary market,” he said.

“There are few specialists left at the banks, just undertrained and less market-savvy juniors covering too many companies.”

Aston Martin and Funding Circle have each lost about three quarters their value since their floats, resulting in investor losses worth billions and claims that investment banks overvalued them before their floats.

Mifid II, which started up in 2018, effectively banned banks from giving away research to clients for free, bundled with other services.

The change ended the long-standing use of analysis as a “loss leader” to encourage trading and cement client relationships.

Meanwhile, big fund managers have cut their budgets for paid equity research after Mifid II prompted them to account for it separately.

When Mifid II was rolled out in the aftermath of the financial crisis, transparency sat at the heart of Europe’s biggest market reform in over a decade. Nearly two years on, however, flaws within the sprawling set of financial rules are becoming ever more apparent.

With costly research operations being slashed, the phrase “content is king” has never rung more hollow. City insiders claim the depletion of analyst coverage – sparked by Mifid’s call for more transparent fees – has given rise to price wars, disastrous deals and an exodus of star analysts.

Those who have resisted the brain drain are increasingly being swapped for inexperienced, junior staff.

“You see it happening in all of the

big investment banks. Younger, cheaper analyst teams and aggressive pricing of research have raised concerns among investors and corporates about poorer coverage,” says Naresh Chouhan, an equity analyst who launched his own practice three years ago.

A growing focus on box-ticking exercises at the expense of research has also made life insufferable for bank analysts. “They are monitored on the amount of emails and voicemails they send to clients,” one former sell-side professional says. “Instead of focusing on research, analysts are preoccupied with feeding lies about how many interactions they have had.”

The giant “bulge-bracket” investment banks aren’t the only ones feeling the strain. Lower commissions paid to brokers as a result of the new rules have heaped further pressure on

the industry, crippling the smaller firms’ ability to retain talent.

As predicted, brokers are fighting for survival in the shake-out and consolidation is seemingly inevitable.

Equity research house Redburn recently sold a stake to Rothschild; finncap and Cavendish joined forces last year; and Shore Capital bought Stockdale this year.

City executives say that the flight of analytical talent from the financial district, coupled with lower-quality research and the downsizing of cost-conscious investment banks, has created a toxic environment for some of London’s blockbuster deals.

“The quality of research is collapsing because banks are putting too much work on too few people. Take Aston Martin and Funding Circle,” says Peel Hunt chief executive Steven Finn.

Aston Martin and Funding Circle have each shed around 75pc of their value in the past 12 months, resulting in investor losses worth billions. Their high-profile but poorly performing initial public offerings add to the handful of underperforming stocks in London amid weak demand.

The two listings have also exposed the limitations of the major banks, who are increasingly reliant on undertrained junior employees, according to Finn. “If anything, the illusion of what the big banks are capable of is really what’s keeping them going,” he says. “They might flex their muscle and balance sheets but they get unmasked all the time.”

Kier’s calamitous emergency rights issue further illustrates this, he says. “HSBC, Citi and Santander did not have a clue. Their lack of knowledge of the shareholders meant that they were completely reliant on Peel Hunt and Numis.”

Muddy Waters’ recent attack on Burford Capital, and its subsequent share price collapse, is seen as another example of investors being left out in the dark in the post-mifid environment. The litigation funder came under fire last week when a report by US short seller Muddy Waters alleged that it had been “egregiously misrepresenting” its returns, sending its stock price plunging to nearly half of its value. Burford has hit back at the claims, calling the “false and misleading.”

Figures from data provider Hardman & Co show that research across the market has struggled to grow in the wake of Mifid. Although stock analysis of AIM companies has improved, coverage of large-cap FTSE 100 stocks has fallen 8pc since Mifid’s introduction, while coverage of FTSE 250 stocks is down by 2.4pc.

This is boosting demand for boutiques and niche providers of research, according to Mark Pumfrey, the EMEA head of stock trading network Liquidnet. “Historically, the bulge bracket firms dominated the research market. But it has since become harder to add value if you are one of 40 brokers covering a single company,” he says.

Industry insiders also fear that mispricing stocks is becoming more common, particularly among small-tomid cap companies. Without sufficient coverage, those with a market cap of less than £200m are questioning whether it is worth remaining publicly quoted, one City source said.

“The fact so many businesses are undervalued and underappreciated reflects the dearth of research,” says Ross Mitchinson, CO-CEO at Numis. “A handful of companies have already been taken off the market by privateequity investors and you’re going to see a lot more of that.”

London’s stock market has in recent months provided fertile hunting ground for buy-out funds, who have raised a record $2.5 trillion of dry powder, according to data provider Preqin. Satellite operator Inmarsat, theme park giant Merlin Entertainments and defence supplier Cobham are among the companies that have fallen into the hands of private equity investors this year.

‘The fact so many businesses are undervalued and underappreciated reflects the dearth of research’