Over the past several months, investment banks all across Europe have scrambled to put a price tag on their equity research after years of giving it way as a ‘freebie’ in return for trading commissions.
Of course, for wall street’s titans of finance, you know, the same guys who will look you straight in the eyes and tell you that they know with relative certainty the precise value of the synthetic CDO squared they’re selling you, we figured this would be a relatively simplistic task. Therefore, you can imagine our surprise now that the market has established a fairly wide bid-ask spread with JP Morgan on the low end at $10,000 and Barclays on the rich side at $455,000.
Luckily, since wall street’s finest don’t seem to have a clue, Bloomberg Gladfly has decided to take a look at some comps to help shed some light on the true value of equity research.
First, of course, it’s important to define what institutional clients are actually buying when they sign a research contract. As Bloomberg points out with the chart below, and contrary to popular belief, equity research demand actually has very little to do with analyst forecasts and trade ideas but rather is dependent upon which banks provide the greatest access to those highly coveted management 1x1s.
The dirty little secret on Wall Street — and why it’s so difficult to price research — is that star analysts aren’t really valued for their research at all. Ask any money manager, hedge fund or research shop, and they’ll tell you it’s all about the contacts.
Many senior analysts spend only 10 percent of their time conducting research and writing reports. Teams of junior associates (or sometimes robots) maintain financial models and blast out notes. Some use pre-recorded voice mails to alert clients to new research.
Gadfly estimates that between 50 and 70 percent of a senior analyst’s time is spent on corporate access. Things like arranging lunch with a CFO or connecting a client with a lawyer, supplier or other industry expert to delve into what the data doesn’t. For this reason, analysts are often required to log the number of phone calls, meetings and events arranged each month.
The final 20 percent of an analyst’s time is spent on pre-IPO research, conferences and bespoke projects, such as flying a drone over a retailer’s parking lot to track how full it is; scoping the laundry outside apartment blocks; or conducting so-called channel checks to see how much oil’s being pumped through a particular pipeline.
So, what does that mean for the ‘value’ of equity research? Well, Bloomberg figures those actual ‘research’ reports that flood your inbox all day long are worth basically nothing while the corporate access component of ‘research’ (i.e. those annual trips to Miami Beach where 24-year-old hedge fund analysts get to interview CEO’s between binge drinking sessions at Story) should be valued at roughly the same price as an expert network service.
Access to independent research network Smartkarma starts at $7,500 a year per user for a Spotify-like subscription that opens the door to reports from more than 400 analysts. Customers can also buy additional packages of analysts’ time, similar to the way lawyers or consultants get paid.
We reckon the closest approximation to corporate access is so-called expert networks, companies that maintain a stable of industry experts to match with fund managers and other financiers when they need quick access to esoteric information.
Industry leader Gerson Lehrman Group Inc. charges $100,000 a year, with the heaviest users paying millions of dollars, according to the Financial Times.
As for bespoke research projects, Morgan Stanley said it plans to charge $2,500 an hour for private meetings with its stock analysts, almost twice the rate of some of the best corporate lawyers. Partners at big management consulting firms such as Deloitte LLP or McKinsey & Co. charge clients anywhere from $800 to $1,300 an hour, according to career consulting guide Rocketblocks.
Then again, maybe those hedge fund managers could just ask young Trevor Worthington IV to stay home from Miami Beach and read a 10-K for free…just a thought.