Over the past few months, I have been informing you about the trend we are starting to see in the independent investment research marketplace. My past posts have called for the independent investment research marketplace to consolidate for a few reasons:
1. Discretionary spending on independent investment research is down due to the awful effects of the recent crisis. – causing revenue sustainability and growth challenges for the smaller research providers.
2. The number of hedge and mutual fund professionals is down from the height of the market in 2007 – further challenging revenue sustainability and revenue growth.
3. Independent investment researchers will continue to be threatened by issuer generated lawsuits – to offset these challenges, firms will merge to create a stronger balance sheet.
4. The recent challenges of the credit rating agencies will provide an opportunity for independent investment research providers to enter this marketplace. Considering these propositions, this memo is to once again reinforce our original hypothesis and to provide a glimpse into the past few weeks’ events. _________________________________________________________________________________
This week much coverage has been given to the impending indictments of insider trading across the financial services industry. As one may expect, the typical cadre of hedge funds and analysts are being mentioned among those possibly indicted. However, recognized names in the independent investment research and expert network business have been rumored upon, as well. This presents a unique difficulty for these businesses. Institutional and retail trading, brokerage firms, understandably sensitive to any controversy, will most likely sever ties to any research or expert network providers embroiled in the impending investigation, despite the very strong possibility that many of these firms will be cleared of all charges – in the long run. Unfortunately the long run is just too far in the distance for many of the smaller independent investment research firms.
Impacted by the drop in discretionary investment research spending, the drop in fund professionals and the elimination of federal funding, many of these firms will have a severe challenge of making it through to next year, despite the fact that their research may be industry or market leading.
In addition to the most recent downbeat press, there are signs of vitality in the investment research marketplace as well. Most recently Meredith Whitney, the previous ¬Oppenheimer & Co. banking analyst who predicted the credit crisis, announced that she plans to alter her independent firm into a nationally recognized statistical rating organization that will rate debt and will compete with Standard & Poor’s, Moody’s and Fitch.
With the yet unknown regulations that will impact the credit research marketplace, it is still too early to tell if the move to become a NRSRO agency is a potential avenue for many of the smaller investment research firms. What can be taken away from this is that the investment research market will change, some firms will go away no doubt, some will merge and some will be acquired – the open question is who will win and who will lose