| ‘Unbundling’ will be issue in industry going forward |
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| The rise of ‘unbundling’ of commission charges amongst brokerages, whereby stockbrokers charge different prices for different services, ie execution, proprietary research etc, will be a key challenge for the industry in Ireland going forward. Other challenges include the dearth of new issues of scale on the Irish Stock Exchange, despite the arrival of the Irish Enterprise Exchange. FINANCE speaks to Roy Barrett, Tony Garry, Adrian O’Carroll and Conor O’Kelly. |
Q. What are the key challenges facing the stock broking business going forward and what opportunities do you see for business growth?
Barrett: Some of the challenges are:
A paucity of new issues of scale in the Irish market. If stockbroking is to thrive it must have a greater flow of companies joining the market or existing companies using equity funding as a mechanism to advance their strategies. The departure of quoted companies such as Jury’s, and potentially eircom, is not easily balanced by new issues – there is a dearth of private Irish companies of similar scale with the potential to replace them on the Stock Exchange.
The continuing change in the ownership of the Irish market, with a growing percentage of companies owned by non-Irish investors. The size of the international market creates a challenge to the dealing rooms and research teams of Irish brokers. There is a requirement to broaden the marketing footprint, while increasingly we are asked to provide quasi-bespoke research for non-Irish clients. The fact that the majority of liquidity in Irish stocks has been retained in Ireland is a remarkable achievement for such a small market.
The continuing decline in commission rates is putting revenue pressure on brokers. To succeed, it is necessary to widen the client base and deepen existing relationships. Inevitably, international institutional investors are tending to shorten the list of Irish brokers with whom they have dealing relationships, leading to a concentration among those with full-scale research, sales and trading teams.
Opportunities lie in:
Providing an intensive and specialist service on a relatively small group of companies. Successive surveys show that investors are looking for true added-value sales and research service. By providing an in-depth and consistent research service on companies considered small by global investment banks, Irish brokers can carve a niche on the international market.
Developing wealth management capabilities for the fast growing high net worth market in Ireland. The extraordinary performance, predominance and ubiquity of property as an asset class in Ireland has led to undue exposure from a risk perspective. While we continue to see demand for high quality property projects, by providing a full range of services (encompassing equities, property and alternative investments) we can supply a suite of products that match the risk profile of individual investors. At the same time, we must as an industry acknowledge that demand for the one-product stockbroking service is now limited, and price-competitive.
Broadening our corporate finance and advisory offerings. Goodbody’s corporate finance offering has continually developed from its roots in providing transaction advice and equity funding to listed companies.
Exploiting the opportunities created by Dublin’s regulatory, physical and cultural proximity to London. London’s absolute scale as the world’s largest financial market can provide substantial opportunities for Irish-based brokers. We have skill sets in sales, research, corporate finance and administration that can be exploited in a larger market.
Garry: Our business environment is extremely competitive both in respect of our institutional and private client business. Apart from the local competition, the growth in the Irish economy is attracting overseas competition in increasing numbers.
As far as our customers are concerned the quality and level of service demanded is rising all the time and no doubt it will continue to do so. I am sure broking isn’t unique in this regard and the same applies to other parts of the financial service industry and indeed to the service industry in general.
O’Carroll: The Irish stock broking industry has operated in an excellent environment in recent years thanks to the strength of the Irish economy and the high quality of management of Irish quoted companies. Going forward the outlook for the economy remains positive. Clearly we cannot become complacent as more countries, especially the new EU entrants, examine the Irish model and try to replicate its success and present competitive threats to investment in Ireland. Irish companies must deal with management succession and the next 5 years will show if the next generation of Irish managers can continue to lead Irish companies to continued success.
The Irish stock market must remain vibrant and attractive to new entrants and fight off the threat of markets such as AIM in the UK. The issue of unbundling of commissions that is a hot topic internationally has yet to be properly felt in Ireland. This has major implications for how stockbrokers get paid for the various services offered to institutions.
O’Kelly: The key challenge today is the same as it was yesterday and will be tomorrow ……people. In a business where the assets go home in the lift every night, finding, keeping and motivating top quality people is the single biggest challenge and of course the single biggest driver of success in our business.
With our new found wealth and success come higher expectations and clients are rightfully more demanding and more sophisticated. The firms which have a continuous appetite to learn, innovate and remain at the cutting edge of new product development will end up in the winner’s enclosure. As Arnold Palmer said “The road to success is always under construction”.
Q. What is the outlook for your corporate finance/private client divisions?
Barrett: As the only full-service corporate finance offering within an Irish stockbroker, we have seen progress on all fronts in 2005, and anticipate continued development in 2006. The consolidation of many sectors of the economy, combined with an ever-increasing perception of Ireland as a growth market in which international companies seek to do business, has created many M&A opportunities, while strong stock markets have given quoted companies a currency they can use for expansion. We expect to see more of the same in 2006. Low interest rates have made debt an attractive source of finance for quoted companies in recent years. As stock markets strengthen, however, some companies may begin to look to the market to strengthen their balance sheets and support future expansion plans.
Private equity is available for projects of all sizes, with the venture capital market now fully open for business again, and private equity is also one of the forces behind the high level of acquisition activity in stock markets. There is also good availability of capital from private investors for unquoted investments. We expect to be increasingly active in regard to the sale of Irish technology companies over the next year, as the sector consolidates, and the traditional NASDAQ IPO route for US-oriented companies remains closed. Our recent role advising Cara on its sale to BT is an example of the many trade sales we expect over the next couple of years as VC-supported companies reach a level of maturity. Others may head for IEX.
The outlook for private client stockbroking services is also buoyant. The performance of markets in recent years has renewed confidence in equities following the savage bear market in the early part of the decade. While the Irish investor’s love affair with property remains undimmed, there is an increasing realisation of the benefits of portfolio diversification, and those that have invested in equities over the last few years have in the main profited from that decision. The vast increase in wealth that has been generated in Ireland over the last decade provides an extremely positive environment for wealth management services, and the challenge for our industry is to provide the range of options that our increasingly sophisticated clients demand.
Garry: Public company corporate finance is driven by market demands and fashion. The wave of take-privates over the last number of years has probably come to an end although M&A continues to be an important part of the business. We remain active in fundraising for Irish companies both public and private and expect to see more new companies coming to market, in particular to junior markets such as AIM and IEX.
The outlook for our private client business remains positive against a background of continued strong growth in the economy. The relatively low level of euro interest rate has been a particular boon for this business and notwithstanding some possible rate rises from the ECB, investors are likely to continue to seek investment outlets other than cash deposits.
O’Carroll: Corporate activity has picked up considerably over the past 12 months. Corporate take-privates, divestitures and restructurings, which dominated the market in previous years have largely been completed. Domestically and internationally, companies are increasingly looking at non-organic growth opportunities through M&A. This is evident locally in Ireland through recent transactions such as the /eircom/ acquisition of Meteor and the Johnston Press acquisition of the Local Press and Leinster Leader Group.
Activity in terms of fundraising is also improving on both the debt side and equity side. There is still significant funding available from VC’s and private equity firms. They are currently closing and pursuing opportunities aggressively at present. Activity levels among lending institutions has also been high. Low interest rates make leveraged deals, such as MBO’s, attractive.
Public offerings for small and medium caps continue to grow. Activity on the AIM Market has been significant. The newly introduced IEX may lead to an increase in dual listings for small to medium cap Irish companies.
The Irish private client market is going from strength to strength. Rapid growth is being underpinned by a number of factors, notably,
• Rising levels of income and wealth, with more and more people choosing to diversify some of their property holdings into equities;
• The continuing low level of Euro zone interest rates- despite the relatively strong market conditions of the past year, much of the Irish equity market (notably the Irish bank shares) still offers attractive yields relative to deposit rates. Many of these stocks also offer good dividend growth prospects; and
• Growth in the numbers of personal pension funds, as investors become increasingly aware that they can take control of this aspect of their personal finances, make their own investment decisions and also enjoy greater transparency with regard to their holdings.
Looking out at 2006, we do not anticipate any major changes for the worse from any of these key drivers. Indeed, we continue to see good scope for further expansion in the private client market, with interest rates likely to remain low and Irish people continuing to take profits on part of their property holdings, recycling some of these funds into equities. For investors of a more cautious inclination, we recently launched the Merrion High Yield Fund, which invests in attractively yielding stocks with good defensive characteristics.
O’Kelly: Ireland still has plenty of problems but for the first time in our history money is not one of them. In the last ten years wealth has been created beyond ever our wildest expectations and regardless of market volatility or interest rate moves the vast bulk of that wealth is here to stay. It’s true to say that the ingredients for a thriving long term wealth management sector are now firmly in place. Creating wealth, retaining wealth and passing on wealth to the next generation now form the basis of many of our problems, and of course in solving these problems, individuals need and want good advice.
Corporate Finance also operates currently from a strong fundamental platform. Low interest rates (where would they be if we were not part of the Euro?) strong economic growth, growing appetite for risk from corporates post the indigestion of the tech bubble period and high levels of liquidity from private equity and private individuals provide the perfect backdrop for a corporate financier to play his or her trade.
No deal is too big for the insatiable appetite of the private equity players at the moment and we could see some very large deals in Ireland in the next twelve months.
Q. Has the launch of the Irish Enterprise Exchange been a positive development for the industry? How would you see this new exchange developing?
Barrett: Following a slow start, the IEX has seen substantial interest this year, and more companies are set to list in the coming months. IEX provides an opportunity for fledging companies to establish a market quotation without resorting to the London market or meeting the onerous regulatory requirements of a full listing. As an incubator unit within the stock market, it provides an environment for higher risk investments and an avenue to a full listing.
Continued strength in stock markets should lead to more companies coming to market in 2006. A number of IEX candidates are in the traps, and while investors recognise the greater risk that attaches to these early stage offerings, we expect that high levels of institutional and personal liquidity will provide the opportunity for growth oriented companies to play on a larger stage.
Garry: Yes the launch of IEX has been a positive development. Over time we would expect to see many more companies joining the market.
O’Kelly: The IEX has listed twelve companies since opening, eleven of which are also listed on AIM. AIM has been enormously successful but the lower standards of regulatory oversight and the switch of responsibility from the exchange to the nominated advisor make it a market where the buyer must beware. The ISE has responded quickly and adroitly to the challenge from AIM through the welcome development of IEX. |
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