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FT Alphaville is fascinated by the travails of sellside research, possibly because of parallels to our own industry. Figuring out a viable business model in an era of unlimited content is hard. For indies, it’s even trickier.
Europe’s elaborate finreg torture-fest Mifid 2 has ironically made it even worse. At the time, some thought it would boost independent research firms, who would be competing more freely for all those sweet unbundled asset management dollars.
Instead, it has sped up the investment industry’s shrinking research spend, entrenched a few big broad banks as the dominant research houses and triggered a fairly big shakeout among the independent ones.
A press release from SocGen this AM therefore caught our eye.
We are excited to announce our intent to form a joint venture between Société Générale’s cash equities business and Bernstein Research Services to offer clients a comprehensive global suite of world-class services across cash equities and research, combined with Société Générale’s integrated equity capital markets, equity derivatives, and prime services.
Both entities bring highly complementary strengths and a shared vision of a leading full-service, truly global equity brokerage business, supporting the evolving needs of institutional investors and corporate clients.
You can read the FT story here, but here are the main details: SocGen will take a 51 per cent stake in the business, with an option to increase that to full ownership after five years. However, the JV will be run under the Bernstein name, and Bernstein CEO Robert van Brugge will lead the combined business (SocGen’s cash equity head Stéphane Loiseau will become deputy CEO).
The basic idea is to combine equity research and execution. The analyst comes up with a fancy idea, and SocGen’s traders will implement it for you — the basic model of all big sellside operations, even in the Mifid era. But it speaks volumes about the increasingly tricky economics of independent research.
Bernstein is currently owned by US asset manager AllianceBernstein, but is one of the biggest and most pedigreed of the standalone(ish) investment research outfits, having been founded by Sanford C. Bernstein back in 1967. That even Bernstein needed a new owner is telling.
Bernstein Research’s revenues fell 19 per cent annually to $92mn in the third quarter, according to AB’s latest results. AB said separately that the deconsolidation of Bernstein Research from its results will have a “modestly positive” impact on its operating margins, underscoring how difficult it is to monetise standalone sellside research.
This is the latest example of a broader trend of standalone research outfits falling into the arms of bigger and broader financial institutions. In 2014 Evercore acquired Ed Hyman’s ISI, Bernstein itself bought Autonomous in 2018, and last year Cornerstone Macro sold itself to Piper Sandler, while BNP Paribas acquired the other half of its Exane research outfit.
Others sellside indies are looking at other ways to make money. For example, Wolfe Research remains independent but in 2020 entered into a “strategic alliance” with Nomura, with a similar model to the SocGen-Bernstein tie-up (ie Wolfe comes up with the ideas, and Nomura’s Instinet executes them). BCA Research is part of an unwieldy conglomerate of interests inside Euromoney.
Basically, if you’re a brand-name analyst with a dedicated asset management following you can probably hawk yourself out by the hour or on a subscription basis and still make a good living. But anything more ambitious than that and you’ll find yourself squeezed by investment banks like JPMorgan and Goldman.
To be honest, even the big integrated shops are under pressure. Many big asset managers and even some major hedge funds now have hefty internal research teams staffed with sellside émigrés, and are questioning the value of the research they get from investment banks like never before.
The lack of strong and broad research function at non-US banks these days is stark. But even the Morgan Stanleys, Bank of Americas and Goldman Sachses of the world are having to reinvent themselves, explore new distribution models, and look for new clients outside of the investment world.
However, worries about the value and future of sellside research are hardly new. Here is an old piece we found in Institutional Investor’s May 1969 edition.
The reality is that despite investment managers loving to bash the sellside, it wouldn’t have survived (and occasionally thrived) for this long if it didn’t somehow provide a valuable service. Surely?
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