In the heady days of the dotcom boom, a company didn’t need to have a proven track record to get the attention of sell-side analysts – remember Priceline.com? Today, however, the combination of a recent bear market and a shakeup in the revenue model for investment banking research has led to some hidden gems remaining hidden.
‘What was once an over-abundance of mediocre research is becoming a scarcity [of sell-side research],’ points out Jeff Diermeier, former CIO at UBS Global Asset Management and current CEO of CFA Institute.
According to Reuters, sell-side coverage has been dropped on 666 out of a total of 4,075 companies in its database. Paid-for research is widely viewed as a possible solution to the dearth of banking coverage.
French regulator Autorité des marchés financiers (AMF) is proposing that this research could play a key role in stimulating coverage for small and mid-cap companies. In the US the Independent Research Network (IRN), the National Research Exchange (NRE) and the Shareholders Research Alliance (SRA) are advocating paid-for research as a way for lightly covered or completely uncovered companies to gain visibility. In October US state and federal authorities gave the green light to paid-for models such as IRN’s by giving these firms the go-ahead to sign-up research providers.
IRN is a partnership between Nasdaq and Reuters that will match companies with analysts using a ‘blind pool’ whereby the company doesn’t know who is writing the research. ‘The [firms] will go in with their eyes open because it’s objective,’ says Daniel Blank, CEO of IRN. To ensure the objectivity of the research and resolve any conflicts between issuers and providers, IRN has formed an independent council.
Providers will distribute this research through their existing networks, and it will also be circulated through Reuters’ platform and IRN’s web site. The price to companies is not finalized but could cost more than $100,000 a year with a minimum two-year contract. Blank says IRN has attracted a significant amount of interest from companies and is in talks with IROs, CEOs and CFOs, all eager to sign up. The organization is now in the process of signing up research providers.
Of course, the ultimate test for paid-for research is whether the buy side uses it. While at UBS, Diermeier says there was always a question mark over corporate-sponsored research. ‘We looked at a lot of independent research and we were looking for experts who could address hypotheses on companies we were looking at,’ he notes. But the motivation for the research was carefully scrutinized, Diermeier adds. ‘The job of our analysts was to seek people out to up their game,’ he explains. ‘Would that be company-sponsored research? Probably not.’
Still, Blank says IRN has received positive feedback from the buy side. ‘It understands the difference in what we are doing,’ he points out. ‘It understands that the lack of research comes from a lack of funding and you can see that it is being provided mostly to the larger companies because commissions are driving research. Our model tries to find a safe way to transfer some of the cost without sacrificing the research on the other end.
