Since its founding in New York in 1967, AllianceBernstein has built an enviable reputation for its equity research. Now, more than half a century later, French bank Société Générale is trying to cash in on the US asset manager’s renown.
The companies last month agreed to create a joint venture that will combine AllianceBernstein’s research division and SocGen’s cash equities business, a move that underlines the deepening challenge facing both.
Slawomir Krupa, head of SocGen’s corporate and investment bank who will take over as chief executive in May, is betting that AllianceBernstein’s research will help wrestle market share in European cash equities from domestic rival BNP Paribas and heavyweight Wall Street competitors.
A low-margin business, cash equities trading involves buying and selling shares for clients and is typically seen by banks as a nice-to-have offering for customers already writing large cheques for more lucrative services.
“This will significantly enhance our ability to play a bigger role in the investment banking business with our corporate clients,” Krupa said of the joint venture that SocGen will have the option of owning outright in five years.
But the deal also exposes the fragile economics behind equity research, a picture that many believe has been made worse by the EU’s introduction in 2018 of sweeping rules known as Mifid II.
Under Mifid II asset managers must split the cost of buying research from that of trading securities, a requirement designed to stop investment banks and brokers offering research as an inducement to trade with them. Until the shake-up the cost of research was typically bundled up with other investment banking and broking services and passed on to clients.
In the run-up to Mifid there were plenty of warnings that the overhaul would undermine independent research companies and force them into the arms of investment banks with deeper pockets. Although Mifid II is a piece of European legislation, it has led to more scrutiny worldwide of the cost of research.
Krupa was in talks over the shape of a deal for more than a year with Seth Bernstein, who runs AllianceBernstein.
For the US group, which has $627bn of assets under management, the joint venture holds out the prospect of generating more value from a well-respected research arm that it does not have the financial firepower to grow by itself.
Bernstein said last month that the US asset manager “didn’t have the resources” to help grow the research business in Asia, the US and Europe.
“AllianceBernstein reached the limit of where they could sell their research, but they needed equities capital markets to turbo charge it,” said a senior SocGen banker familiar with the deal.
Headquartered in Nashville, Tennessee, AllianceBernstein bought UK research group Autonomous, which will be part of the joint venture, four years ago.
The tie-up with SocGen has echoes of several deals that investment banks have struck in recent years with research firms — some of which have been spurred by the changes wrought by Mifid II.
In 2019, Rothschild & Co took a minority stake in UK equity research house Redburn, while last year Japanese bank Nomura agreed a tie-up with New York’s Wolfe Research.
BNP Paribas also bought the remaining 50 per cent stake in research company Exane it did not already own last year. While BNP’s move helped the bank cement its equities services in Europe, SocGen’s deal gives it the option of expanding in the US.
Flora Bocahut, an analyst at Jefferies, said the deal made strategic sense for SocGen, especially in light of Mifid II.
“Bernstein’s research and SocGen’s equity capital markets, derivatives and prime capabilities offer good complementarity,” she noted. It would allow “for more scale, a wider range of services and some more synergies, increasing the profitability of this business.”
The deal should allow SocGen to pitch a wider range of products and services to clients. Existing buyers of Bernstein’s research, for example, may look to SocGen’s cash equities team to execute their trades.
Under Krupa, SocGen’s investment bank has tried to shift away from a reliance on equity derivatives — often complex financial products that left the bank with heavy losses when markets tumbled at the outbreak of the coronavirus pandemic in 2020.
And there is optimism within the bank that the joint venture with AllianceBernstein will prove an allure to its clients.
“Our research isn’t groundbreaking . . . so this gives us more of a global profile,” said the senior SocGen banker. “It solidifies us in Europe and gives us more salespeople globally.”
Nevertheless, turning a prosaic cash equities business into something more valuable will not be straightforward.
Coalition Greenwich, a research company, said that in the first nine months of the year, the largest investment banks generated $44.2bn of revenues from equities-related businesses. Just $7.8bn came from cash equities, with equity derivatives and prime services pulling in more than twice as much.
The US cash equities market dwarfs that of Europe and Asia. Revenues for US banks have grown steadily over the past few years thanks to the country’s larger equity market, while those in Europe have stagnated.
“It’s not very profitable for European banks,” said Youssef Intabli, research director at Coalition Greenwich. “American banks with scale will do much better.”
The volatility in equity markets unleashed by the pandemic helped sustain the cash equities businesses for European banks, said Intabli, but that is now fading as markets sour and the global economy slows.
“European banks are realising they can’t maintain a cash equities business without a significant American presence,” he added.
While the tie-ups with investment banks give independent research providers greater resources to expand, it also raises questions of whether they can preserve their reputation for impartial analysis.
Some of the world’s biggest investment banks were sanctioned by US regulators following the dotcom bubble for issuing overly optimistic equity research in order to win business from tech companies.
“From the independent research providers’ perspective, these deals are an avenue to extend distribution. For banks, they see them as being able to offer highly valued research to differentiate themselves from competitors,” said Joshua Maxey, co-founder of Third Bridge, an independent research company.
SocGen’s Krupa is banking the tie up with AllianceBernstein can do just that without putting off the US asset manager’s clients.
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