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Independent Investment Research — What’s To Come

28 Sep

My overall hypothesis is that the independent investment research marketplace is finding its way amidst the previous market turmoil, recent and unwarranted issuer retaliations, the end of the Global Settlement monies and the declining number of investment management professionals.

Independent investment research has a market size estimated at about $2 billion and growing, and represents approximately 250 companies in the United States. Yet I have been noticing a consolidation in the marketplace: companies between $8- $20 million in revenue have faced serious challenges achieving their next level of growth. The decrease in the number of traders and fund managers, coupled with the decrease in discretionary spend of retail investors seeking alpha, may have temporarily thwarted the upward momentum of both leading and average firms. Although the end of the Global Settlement has not impacted many of the research firms, it has created a hole for some of the larger providers.

To offset some of these challenges, investment research firms are looking to become multi-faceted by enlisting qualitative, quantitative, and expert network services, integrated within multi-asset class offerings. This is a direct attempt to increase competition with the larger research providers, such as Morningstar, S&P, MSCI, Risk Metrics, Moody’s, Thomson Reuters, IHS and Gerson Lehman.

In addition, I have noticed some firms are taking advantage of the recent challenges facing the credit rating agencies by entering this marketplace, albeit cautiously. Lastly, I have noticed that some firms have realized that a larger balance sheet can help sustain them in a down market and when dealing with adverse situations, such as “issuer retaliation” a common concern throughout most of the investment research marketplace.

It is my opinion that with the recent credit rating agency concerns, the recent sell-side research issues, and the conflicted activities of independent auditors that over the next few years, independence within the marketplace will return to prominence.

However, despite my bullishness on the industry, in the near term I see continued consolidation with companies seeking greater sales and distribution systems, larger balance sheets, and diversified offerings leading the way. Companies that are at the apex of the growth curve, those that are at the crossroads of raising more capital for infrastructure and hiring a larger sales force will be most favorable for an exit by a larger strategic provider.

Compared to the second half of 2009, the first half of 2010 has shown 40% and 20% increases in Price to Revenue and Price to EBITDA multiples, respectively. I believe these attractive movements in multiples will only accelerate consolidation in this industry.

The strategic acquirers that have been active in this marketplace are those you might expect, such as Morningstar and MSCI Barra but media conglomerates have also been expressing interest in this market. I have seen some of these firms purchasing their way into the investment research business. It is not far-fetched to see social media companies such as LinkedIn purchase Expert Network Providers and or dabble with equity and or fixed income research. For example, SourceMedia has recently entered the independent investment research business with the hiring of Jim Moore, former CEO of Highline Financial. The continued interest on behalf of media companies to diversify their portfolios into research will most likely gain traction as such businesses are not associated with ad revenues or steep correlations with marketing spending.

In addition to media companies, market data providers and analytics companies without news organizations also find great value in independent investment research providers. Most recently, FactSet’s acquisition of MarketMetrics, Thomson Reuters acquisition of Asset 4, and Point Carbon and Morningstar’s acquisitions of Old Broad Street, Aegis Equities Research and Realpoint LLC support this point. Other financial information providers, such as MSCI Barra, will continue to find interest in data analytics and quantitative research firms, as evidenced by their recent purchase of Risk Metrics.

Overall, I am bullish on the independent investment research marketplace long term, yet cautious over the next few years. Only time will tell, but it seems that with the consolidation in the industry, the higher quality independent investment research providers with deep domain knowledge, strong intellectual property, and strong margins will be acquired and those with less than stellar margins and limited access to sales distribution may find it challenging to compete.

Why MOBILE Matters

23 Jul

A few days ago, I posted a question to many friends asking if mobile applications mattered in offering best of class financial services.  The comments back from many of my colleagues was “sort of”, “not sure yet”, “we think so”, “not yet – but big future” and many similar comments.

To help answer this question, you only need to look at the KPMG report on mobile adoption.  According to the report which surveyed 5,627 respondents in 22 countries showed that 46% of consumers have used mobile applications to conduct banking transactions and 28% to buy consumer goods compared with 19% and 10% in 2009, respectively.

China is a leader in adoption with 77% of the population using mobile for banking services compared with the United States that only has about 19%. Across the board most countries increased adoption of mobile devices for banking substantially, with many countries increasing usage by more than 50%.

With the continued adoption of smart phones and the increased need to maintain ubiquity across platforms, it is only plausible that mobile capital investment will increase with many larger financial conglomerates buying their way into the market.

Financial Information and Technology Trends

21 Jul

Financial Information and Technology Trends

The Financial Information and Technology (FinTech) sector of the economy has shown signs of growth, despite the reluctance for a true recovery to emerge. Yet there remain signs of substantial economic improvement as revenue, operating profit, and M&A transactions have all increased within the sector.  For instance, in the first half of 2010, there has been a 31% increase in the number of transactions and a 248% increase in the value of transactions versus the last six months of 2009.  This growth has pushed multiples up, with the average revenue multiple challenging the 2007 highs of 2.3 and the EBITDA multiples approaching 2007 of about 16.0.

Strategic buyers have led this growth, completing approximately 83% of the total transactions, and in turn representing approximately 56% of the total transaction value within the sector.

While it is not perfectly understood why smaller companies are selling – two thirds of all deals were below $245 million -we have heard that the timing of such sales is heavily predicated upon entrepreneurs’ calculated avoidance of next years’ higher capital gains tax and the recent rise in multiples.

Payment processing companies have received a fair amount of attention from buyers, with online and mobile payment processing and automation have both seen several significant acquisitions: Visa, Inc.’s acquisition of CyberSource, TPG Capital’s acquisition of Vertafore, Inc. and Jack Henry’s purchase of iPay Technologies, Inc.  The payment automation and processing space may be consolidating due to the appearance of over-capacity and the need for more efficient end-to-end online and mobile processing systems.

On the capital markets side the trend appears to lie in the consolidation of research providers and push into social media.  Of the 44 deals in capital markets, roughly 20% of them were in research: Morningstar purchasing Old Broad Street, Aegis and Realpoint, followed by MSCI’s purchase of Risk Metrics and FactSet’s acquisition of MarketMetrics.  We expect to see continued consolidation in a market where small companies vie for rare discretionary funds and large companies refocus after their Global Settlement moratorium.

Alongside of the research trend, we see FiServ’s acquisition of Advice America, an online collaborative offering in wealth management, as a pivotal turn in wealth management industry.  Technology providers will continue to add social media and web 2.0 collaboration tools to round out their more traditional solutions to improve both customer relations and efficacy of programs.  MarkIt’s acquisition of Wall Street On Demand may also be a sign that collaboration tools (one of their offerings), rather than CRM providers, will continue to gain relevance within wealth management and retail brokerage.

Admittedly, it may fall short of a bona fide trend, but we nonetheless see continued demand for compliance information and tools.  It is our opinion that Complinet, a recent purchase of Thomson Legal and Regulatory, will be utilized to help strengthen ThomsonReuters already powerful position in the capital markets.

On the banking side, an overwhelming need of process automation will drive acquisitions.  Banks and technology service providers are seeing value in process automation systems as demonstrated by the recent acquisitions of Speranza, Equifax, NextStep Technologies and Inmatrix.   We believe banks will continue to seek operating efficiencies in the post – financial reform marketplace.

In addition to banking automation, new mortgage technologies will continue to be developed and attractive to buyers, including analytic programs helping both mortgagors and service providers manage defaults.

Although not reflected in recent activity, we see an increasing appetite for mobile applications in the Capital Markets.  Companies such as ThomsonReuters, Bloomberg, IDC, FactSet, Morningstar, CaptitalIQ, SunGard, Fidelity, TD, Scottrade, IPREO and Dealogic among others will need to establish a more ubiquitous platform, providing the user the ability to gain increased levels of information on Blackberry, Iphone and other smart phone devices.  With the recent rise in smart phone adoption, increased usage and greater levels of wireless connectivity it seems only sensible that mobility in financial services correlates with the broader trends.

At the core of our observations lie a few trends:

  1. We believe that research providers will continue to be consolidated at compelling values, with companies like Morningstar and FactSet leading the charge.
  2. We believe that the capital markets will continue to seek solutions that help professionals communicate with their clients.
  3. With relation to banks, we see a continued push toward technologies that streamline processes, eliminate paper and help remove redundant costs.
  4. Although not evident in recent activity, we feel as though strategic and private equity sponsors will continue to invest in multi-asset class, ultra-low latency platforms, with FX, futures and commodity trading platforms leading the way.
  5. We expect Asian FinTech companies to become highly competitive in the U.S. and EMEA with the continued diversification of assets from the U.S. to Asia.

If you would like to discuss the information in this article, receive a more detailed report or discuss market opportunities you can reach Christopher Young, Managing Director of M&A at Berkery Noyes at Christopher.young@berkerynoyes.com or phone 646-442-7998.

The End of the Market Data Desktop (Part 2)

1 Jul

Last week I wrote “The End of the Market Data Desktop”.  Since that posting I received more than a handful of emails from friends, colleagues and clients telling me that I am crazy and that there is no way that financial professionals can do without market data, analytical tools, dashboards, streaming quotes, etc…

I Feel the Need

Let me first say that I was referring mainly to retail broker dealers and wealth management professionals in my post and I was definitely not making reference to institutional brokers/ traders, algo / black box guys, or any other financial professional that takes security positions or makes markets at the smallest fraction of a percent.  The reason for my posting was mainly to say that wealth management professionals need new tools that help them build deeper relationships with their clients as they continue to offset the analytical work to their portfolio managers.

I think there is tremendous upside in building next generation relationship tools for the wealth management professional.  Rather than security dashboards and scrolling news, perhaps it makes sense to have a dashboard aggregating everything about a client.  Does it make sense in this social media world to aggregate items such as Facebook and or LinkedIn updates, changes in credit ratings, money in motion events, news about the client, their portfolio or their interests, twitter posts, blog updates, etc…? After all isn’t sales knowing about your client and understanding their needs?

The second part of my posting was related to communication tools.  How does a wealth manager communicate with their client regularly? Few do the obvious – talk.  In the age of social media perhaps wealth managers can do better by having a communication platform that allows instant communication in a one-to-many platform, all wrapped around a compliant rich framework.  How great would it be if wealth managers were able to Tweet, update LinkedIn, Facebook, their blog, their website all with a single platform?  What about knowing how many of their clients are reading their weekly or monthly newsletter or perhaps worse, those who do not.  Social media is opening a new world for sell-side financial professionals and financial technology firms need to address these needs if they want to maintain their market share of the wealth manager desktop.

– Need for Speed

I thought that while I am at it, perhaps it makes sense to address the trading needs of the wealth management professional, particularly those who service the Family Office and Ultra-High Net Worth individual.

Yesterday, Scott Patterson of the Wall Street Journal wrote an insightful article “Fast Traders Face Off with Big Investors Over ‘Gaming’”.  In this article Patterson recognized that high-frequency traders who tend to trade on algorithmic triggers are front running traditional traders, those who are not using algorithmic models and who are not dialed in directly with the exchanges.  So, this brings me to the second part of observation.

Today, low latency trading systems are typically used by the buyside investment management firms and or hedge funds and are not used by traditional traders or portfolio managers who tend to support wealth management practices — atleast not the smaller shops. So my speculation is that at some point low latency trading systems will have to be built and or purchased from technology firms who support retail brokerages and wealth managers.  I would imagine that at some point wealth management firms will be fed up with the idea of losing out to algo traders who are making a killing on very small movements in spreads and execution timing differences.  Are we getting closer to the time when LPL, RayJay, TD, RBC, Pershing and others offer ultra low latency execution?

Overall it seems as though the wealth management technology vendors will continue to go through major changes – with one change coming in the form of building relationship tools and other ensuring that their back end trading and execution systems are more closely competitive with those systems supported by ultra low latency execution.

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The Dark Comedy — The REORG

29 Jun

A few months back I was catching up with a colleague of mine and we got talking about corporate reorganizations (reorgs).  Now both of us have professional backgrounds with information and technology companies, living through the painful but sometimes fun Wild West like activities that went along with transitioning the information and media industry from a paper industry to existing online and interactive one.

After a few Boddington’s and a bucket of laughs later we got rolling and came up with our version of a Sitcom – The Reorg. The Reorg was a conceptual idea that would be a knock-off of the current hit show – The Office.  The Reorg would take place in a large corporation where every 3 months a new organizational structure would come out, with new senior leadership, new strategies and reallocated capital expenditures. The gist of the show would be that reorg’s do not work but rather negatively impact an organization, destroy morale and sometimes destroy lives.  I theoretically cast the show with Kelsey Grammer as CEO, Michael Richards (Kramer) as head of strategy and Penny Marshall as Head of Human Resources.  The show was a dark comedy satire, yet with real world issues that come from actual reorgs.  A scary – yet funny show.

Sure we had fun with this idea and I am sure someone can make millions of dollars casting the show but the reality of the situation is that reorg’s seldom work and more often than not hurt the organization performing the reorganization.  Do not take it from me but rather from Harvard Business Review.  In the June 2010 issue of HBR, “The Decision Driven Organization” Michael Mankins argues that reorg’s although are usually approached with the right intent seldom create the intended results.

At the core of Mankins argument is the idea that reorg’s are typically structured around an organizational chart, alignments moving up to the CEO.  They typically are structured by an incoming manager / CEO who tries to put his/her best employees in the important boxes.  Again the intent is right but the outcome is not.

Makins argues that rather than fixing problems with shuffling of the seats the company should first understand where the decision problems lie. This is where I found Mankins ideas genius.  At the core of Mankins hypothesis is that companies fail or lose competitiveness because they are not making decisions fast enough and because of this are losing to competition.  Mankins proposes that CEO’s of flailing companies should first figure out what decisions need to be made faster and design a structure around it.  Perhaps a reorg is not needed at all and just some policies, accountability and transparency are needed to push the company to the next level.

I think Mankins highlights some interesting ideas in his article and one’s that should be heeded by CEO’s before they embark upon a costly, timely and almost never successful reorganization.

Shareholder value is not created by moving around boxes, but rather by executing on predefined strategies and if this can be accomplished without reorganizations than by all means try it first.

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The Parable of the Two Beggars

17 Jun

Last evening while sitting at a traffic light in a rather unattractive neighborhood, I took note of two people, each with their cup, asking the passerby’s to donate them some money.  Now what interested me to write this post were not the people, although they were interesting unto themselves, but rather the perceived agreement between the two of them.

It seems as though both of these people agreed to the lane they were going to service.  The woman had the two left lanes and the man had the two right lanes.  Interestingly though, the left lanes navigated the drivers into a rather impoverished neighborhood.  The two right lanes navigated the drivers to a rather wealthy neighborhood that stood just beyond the bridge ahead.

What I noticed in this situation were that the two right lanes were providing substantially more income to the gentleman, opposed to the woman who was servicing the two left lanes.  Now I am sure there are substantial sociological and psychological reasons for this – but I will spare you the intellectual banter.

In a very pedantic sense, it seemed as though the gentleman knew his market and where it was going and positioned himself in a way to ensure that he benefited the most from it.  Based upon my very short observation, I would guess that he made 5 times more than the woman did.

In addition to the right positioning, it seems as though the gentleman servicing the two right lanes also knew his marketing pitch rather well.  He told the same story every time and he did it in a less than 10 seconds.  “Hello sir/madam, my name is….can you help….it will greatly….thank you and God Bless”.

Same story every time….in the same location…with the best chance of success.

So how does this relate to financial technology companies or technology companies more broadly speaking?

It is probably not news to you, but technology companies tend to speak a different language, filled with words and jargon unknown to people outside of the industry and sometimes not known by people in the industry.  This type of jargon tends to permeate the entire marketing function within some of these technology companies.  The website, mailers, online communications, sales pitches all include this type of jargon.

Like the man servicing the two right lanes, marketing professionals within technology companies need to pay more attention to ensure that their message is crystal clear and can be consumed by all.  If you want to sell your technology to the IT staff only, then you should not worry about this.  However, if you want to sell upstream to the non-tech staff and engage the CEO, COO and other non-tech decision makers, do yourself a favor and streamline your message.

The second point of this post relates to your choice of lanes.  Many technology companies, particularly the start-up entrepreneurial one’s tend to jump between lanes, rather than taking the time focusing on the lane that will bring the most revenue.  From what I have seen working with small startups and mid-market technology companies is that not enough time is spent analyzing the lane.  Understand your market, understand what your competitors are doing and really understand the trends and where the road is headed.

A technology company that seems to have picked the right lane and has mastered their message is Salesforce.com.  Now I remember Salesforce when they were a startup and I know of them today.  Sure, the company has changed; it has become a behemoth of a company but it has remained consistent to its core message and has ensured that it does not deviate from its path.  They have many solutions with complicated technology, yet their marketing message is rather clear, “We are the enterprise cloud computing company”.  Rather straightforward and simple.

Do yourself a favor – DO NOT GET STUCK IN THE LEFT LANE!

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There Is No Value In Yep

16 Jun

Most recently I have become overly sensitive to the manner in which customer service professionals communicate with their customers.  I am defining customer service professionals as those who interact with clients in any capacity, albeit over the phone, in person, the virtual world via email, blogs, social networking, webcasts, etc… This can be sales and marketing folks, technical support, training groups and the like.

I think my heightened sensitivity in this area started most recently when I entered and exited a new club that I joined.  I remember the first day the club opened and I said “Good Morning” to the nice girl working the front desk.  I looked at her name tag and noticed her name was Mary.  She took my card without acknowledging my presence and said “Sorry, the air conditioning is not working today”.  Not thinking about it at the time, I entered the club and did my thing.  As I was leaving the club that morning, I said “have a nice day Mary” and she responded, “Yep” – an awkward response.  The next day the same thing occurred, this time with Janice. She used the word Yep as well.

Then it happened, Wednesday morning Roberta was at the front desk. I did my usual. I looked at her name tag and said, “Good Morning Roberta”.  She pleasantly responded, “Good Morning Chris”. What did Roberta do differently? She simply looked at the computer screen in front of her and looked up my name, it took about 2 seconds.  As I exited the club that morning, Roberta said, “Chris how was the club today, everything working?” We exchanged some nice words and then she said, “Chris, have a wonderful day, hopefully I will see you tomorrow”.

Although this interaction was a minor part of my overall experience at the club and by itself would probably not make me cancel my membership, it did show me how the simple things related to customer service are very important.  I would not cancel because of this, but I can guarantee you, that if all of the workers were as nice as Roberta, I would become a big advocate recommending this club to all of my colleagues.

So how does this relate to financial information and technology companies and or the overall marketplace? Simply this, many (probably most) financial information and technology companies put all of their attention into their ‘hard values’, such as their technology but spend little time on the ‘soft values’, such as customer service.

Years ago, when I was working for a large financial information and technology company we did some really interesting competitive analysis and we recognized that one company above all of our competitors was exceptional at customer service. FactSet, the market data and analytics company was an industry leader in customer service and still are today.  FactSet provided the best of class training with experienced and kind staff.  This experience permeated the client relationship and because of this FactSet very rarely lost a customer.  Sure, their technology and information was fine and probably on par with some of the other providers, but because of their attention to the soft values, FactSet gained substantial market share.

Perhaps a good way to think about value is to bifurcate it into soft and hard values. Similar to the way Joseph Nye defines hard and soft power in international relations, conceivably hard and soft values are nothing more than assets of a company that provide it with the capabilities to entice buyers.  This translates into stronger cash flow, thus increasing shareholder value.

Financial Information and Technology companies, more so that many others sectors of market should consider enhancing its soft values.  When you compete with best of class customer service and great soft values, price competition becomes less of a factor.  Ensure that your staff are not “Yep” people, but rather those who engage with the kindest of words, such as “Please”, “Thank You”, “Your Welcome”. These simple words can permeate the entire organization and can be a substantial differentiator in your value proposition.  You may not lose customers because of average customer service and soft values but you can be certain you will not win any either.

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The End of the Market Data Desktop?

15 Jun

Coming out of the recent Credit Tsunami, and still recovering from the 2001 Internet Bubble, the Wealth Management marketplace in the United States is just starting to realize that market data, security analytics and research are secondary data needs in this ever so distrustful financial climate.

In the late 1990’s and into the very early 2000’s, wealth managers, financial advisors and retail brokers (herein defined as wealth management professionals) were trading stocks and bonds for their clients.  Unfortunately with the substantial drop in market values that came out of the 2001 bubble and the most recent financial crisis, substantial pressure has been put on these professionals to do more.  Rather than just trading stocks and bonds and losing 30-50% of a client’s value – which they can do by themselves – wealth management professionals have recognized that they need to spend more time with their client, understanding their needs and addressing their longer term plans.  Many of the more successful wealth managers have recognized that they should offload or outsource parts of their supply chain, such as portfolio analysis and financial planning.  By doing this, they have regained time, which they have put back into solidifying strong relationships with their existing clients and helping to win new clients.  Dow Jones recently published a paper titled, “Best Practices of Elite Advisors” and in this paper they clearly show that this business is all about relationship management and communication with clients.  When relationship management is central to a wealth managers tasks, they are substantially rewarded with incomes that far outshine those who are still picking stocks.

Although this change in the marketplace has happened over a 10+ year timeframe, it seems as though large, publicly traded financial information and technology providers have not adapted well to this changing marketplace.  Companies like ThomsonReuters, IDC, SunGard and others are still building out and spending substantial capital in developing desktops with all of the security information that a wealth management professional may have needed in the 1990’s.  Sure, wealth managers need to have this basic market data, basic news, some research, but for the most part Yahoo Finance, Google Finance and media solutions such as MarketWatch and WSJ.com offer enough of this.  Perhaps rather than trying to sell pricey market data solutions into this sector, these large financial technology firms will realize that building relationship tools are probably a better way to go.

Look at some of the companies that are offering relationship tools: RedTail CRM, GaleForce Solutions, Forefield, AdviceAmerica (recently acquired by FiServ), Smarsh, Lightport and others.  These companies have recognized quite competently that relationship tools, perhaps originating from CRM platforms are the next generation wealth management desktops.    I would imagine that we will see many more deals such as AdviceAmerica on the horizon shortly.  I would also imagine that companies that offer social media communication and compliance tools to also be a nice value for some of these large fintech companies.  It seems as though FiServ has recognized this most recently with its purchase of AdviceAmerica.

http://www.galeforcesolutions.com

http://www.forefield.com

http://www.adviceamerica.com

http://www.fiserv.com

http://www.redtailtechnology.com

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Wall Street On Demand – Sold Again!

11 Jun

Yesterday, New York based MarkIt announced that it would purchase all of the assets of Wall Street On Demand, a Colorado firm that provides best of class Industrial Design, Web Hosting and Product Management with its main audiences being brokerage and investment management.  Now why would MarkIt buy this firm and what does it plan to do with it?

Well, MarkIt from my knowledge focuses on securities content and analytics with its main buyers being investment managers, risk, compliance and regulatory.  Wall Street On Demand however has spent most of its life focusing on Brokerage and Wealth Management.  Hmmm.  I could only guess that MarkIt is taking a much broader look at Wealth Management and brokerage, particularly discount brokerage.  Will MarkIt build solutions to compete against ThomsonReuters, Bloomberg, FactSet, SunGard and IDC or will it use the great assets of Wall Street On Demand to enhance its already powerful company?

MarkIt has been on a rather aggressive growth campaign over the past few months and I really enjoy the direction the company appears to be moving.  Only time will tell, but the financial information and technology industry needs a player who will address the changing needs of their end users, keeping in mind the changing nature of the financial services business and the rapid adoption of  social media.

http://www.markit.com/en/media-centre/press-releases/detail.page?dcr=/markit/PressRelease/data/2010/06/09

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