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MiFID II and The Rise of Corporate MiFID II and The Rise of Corporate MiFID II and The Rise of Corporate MiFID II and The Rise of Corporate

Sponsored ResearchSponsored ResearchSponsored ResearchSponsored Research

Joe Feldman

SMD & Assistant Director of Research, Telsey Advisory Group

Tabitha Zane

Vice President, Investor Relations, TopBuild (moderator)

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Overview of Telsey Advisory GroupOverview of Telsey Advisory GroupOverview of Telsey Advisory GroupOverview of Telsey Advisory Group

Telsey Advisory Group (“TAG”) is a leading equity research, sales and trading, consulting, and investment banking firm

• Founded in 2006 by Dana Telsey, retail industry expert with 30+ years of buy-side and sell-side experience focused on theconsumer sector

• Minority / Woman-owned Business Enterprise certification (“MWBE”)

• TAG affiliate Telsey Consumer Fund, a long/short hedge fund focused on the consumer sector, recently launched its capital raisingefforts

2006 Today

Coverage: 4 sub-sectors

Employees: 12 people

Business Units: Research

Coverage: 11 sub-sectors

Employees: 50 people

Business Units: Research, Banking,

Consulting, Sales & Trading

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What is MiFID II and How It All Began?What is MiFID II and How It All Began?What is MiFID II and How It All Began?What is MiFID II and How It All Began?

• MiFID (Markets in Financial Instruments Directive) is an EU law created in 2004 to replace ISD (Investments Services Directive)

• Primary Goals:

• Harmonize regulation for investment services across member states

• Increase competition in financial markets

• Strengthen investor protection

• The EU updated the law by introducing MiFID II in January 2018

• Primary Goals:

• Cover a larger group of companies and financial products

• Increase transparency

• Unbundle payment for investment research

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Adoption in the USAdoption in the USAdoption in the USAdoption in the US

• SEC has not implemented MiFID II• 2017 - issued three no-action letters, effective until July 2020.

• November 2019 - SEC issued 3-year extension to continue to monitor MiFID II impact

• Currently, the SEC is allowing US money managers to adhere to MiFID II if they choose

• Global asset managers quickly adopted MiFID II globally to have a consistent and frictionless strategy in their worldwide operations (aka, harmonization)

• Adoption of MiFID II has significantly changed the business relationship between buy-side and sell-side

• To maintain competitiveness, most large domestic asset managers have adopted MiFID II standards

• Many hedge funds also embraced a light version of MiFID II (aka, MiFID light), ratcheting down payments to sell-side equity firms

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Unbundling Research PaymentsUnbundling Research PaymentsUnbundling Research PaymentsUnbundling Research Payments

Asset managers used to

compensate sell-side firms

with client commissions in

bundled payments

(research, NDRs, conferences, special

projects)

THE OLD WAY: BUNDLED

Research services can

only be paid through

hard dollars (and/or soft

dollars for those US firms not

adopting MiFID II)

THE NEW WAY: UNBUNDLED

Under MiFID II, research

needs to be explicitly priced

and separated from

execution Unintended

Consequences

Trading execution

remains a stand-alone

business

For Companies Subject to MiFID II Regulations

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Unintended ConsequencesUnintended ConsequencesUnintended ConsequencesUnintended Consequences

57% of buy-side firms are sourcing less research1

Sell-side firms are downsizing and hiring more junior vs.

senior analysts

62% of buy-side firms note a decline in sell-side coverage of

small- and mid-cap stocks2

Growth of ETFs and a decline of active managers

Buy-side firms are offering little or no fees to be more

competitive

Lower market volatility and trading volume

Buy-side firms are insourcing research by hiring research

analysts

Research budgets down ~11% for firms with over €250B in

assets1

44% of sell-side firms report a decline in research quality1

RESPONSES CONSEQUENCES

Public market companies have less visibility

(1) CFA Institute.

(2) Peel Hunt LLC and Quoted Companies Alliance, December 2018.

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Unintended ConsequencesUnintended ConsequencesUnintended ConsequencesUnintended Consequences

• Looking ahead, we see additional issues arising, some of them structural in nature

• Underrepresented companies tend to have a discounted valuation

• Potential industry concentration of power (e.g., large-cap companies acquiring underfollowed companies not represented by Wall Street)

• Harder to raise equity capital (e.g., fewer companies going public or accessing the public markets for equity)

• The number of underfollowed or non-followed companies may increase, as more buy-side companies cut their research budgets or hire their own internal research analysts

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SellSellSellSell----Side Reaction: The Rise of CSRSide Reaction: The Rise of CSRSide Reaction: The Rise of CSRSide Reaction: The Rise of CSR

• CSR (Corporate Sponsored Research) is a type of research product in which a subject company directly compensates a sell-side firm for research coverage

• Win-win: CSR-covered company achieves enhanced recognition, while sell-side firm adds alternative revenue stream

• The CSR model in EU is already widely accepted and adopted• The number of Nordic companies paying for research increased to ~450 after MiFID II from

~300 before MiFID II1

• Select large cap companies pay for CSR when they seek to be covered by high-quality research analysts to increase visibility

• TAG expects CSR to gain momentum in the US, given the combined impact of MiFID II and the market structure changes

(1) Source: Bloomberg (https://www.bloomberg.com/news/articles/2019-11-18/nasdaq-reveals-50-spike-in-paid-research-triggered-by-mifid-ii)

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Telsey Advisory Group’s CoverageTelsey Advisory Group’s CoverageTelsey Advisory Group’s CoverageTelsey Advisory Group’s Coverage

• At Telsey Advisory Group, we added the CSR product to our coverage in 2019, in addition to our traditional research product

VNCE (CSR) VFC (Traditional Research)

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Telsey Advisory Group’s CSR ApproachTelsey Advisory Group’s CSR ApproachTelsey Advisory Group’s CSR ApproachTelsey Advisory Group’s CSR Approach

• The goal of TAG’s CSR product is to maintain the same quality as traditional research

• Full working model, with an income statement, balance sheet, and cash flow statement

• Analysts have the final say on the coverage and determination of rating

• Independent and fair view of the company

• Three risk rating categories: less risk, moderate risk, and high risk

• Reports following news events and off-cycle analysis

• Transparent disclosures that inform the reader of the fee, risks, and conflicts related to payment for CSR

• Annual flat fee from companies, much like a credit rating agency

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CSR VisibilityCSR VisibilityCSR VisibilityCSR Visibility

• Companies that choose to pay for research have the same visibility on financial research platforms (e.g., Bloomberg, FactSet, Thomson Reuters Eikon, Capital IQ) as other large companies

VNCE (1 ANALYST) VFC (21 ANALYSTS)

Source: FactSet.

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Why Should IROs and Investors Care?Why Should IROs and Investors Care?Why Should IROs and Investors Care?Why Should IROs and Investors Care?

• The effects of MiFID II are forcing sell-side research firms to drop coverage of some companies or avoid initiating coverage of them altogether.

• Bottom Line

• Less coverage

• Less visibility

• Less liquidity

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DisclosuresDisclosuresDisclosuresDisclosures

• Telsey Advisory Group LLC (TAG) is a registered broker dealer (Member FINRA/SIPC) offering equity research, trading, investment banking and consulting services. It prepares and distributes research and engages in trade execution and investment banking services.

• This material is not an offer to sell or the solicitation of an offer to buy any security. This publication is being furnished to you for informational purposes only and on the condition that it will not form the basis for any investment decision. Therefore, any opinion contained herein should not be used to make an investment decision.

• TAG provides investment banking and other non-investment banking securities related services, and non-securities services and may seek such relationships from companies about whom it provides research.

• TAG publications may not be reproduced, distributed, or published without the prior consent of TAG.

• © 2019. All rights reserved by Telsey Advisory Group. Telsey Advisory Group and its logo are registered trademarks of Telsey Advisory Group LLC.

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Q&AQ&AQ&AQ&A

Joe FeldmanJoe FeldmanJoe FeldmanJoe Feldman

SMD & Assistant Director of Research

Telsey Advisory Group

T +212 584 4605

jfeldman@telseygroup.com