Is an equity research analyst just a marketer?
ER kicked out of the front office
Happy Sunday. Let’s get started:
This year marks the 20th anniversary of the Eliot Spitzer settlement. Not related to his prostitution-induced departure from public office, this settlement was a $1.4 billion agreement with investment banks over allegations that they misled investors.
Wall Street didn’t like the gift Spitz brought them
The former New York Attorney General (and later Governor) had big beef with equity research conflicts of interest — analysts recommending garbage companies because their firm hauled in millions of dollars in fees for capital markets and advisory work.
Star Salomon Smith Barney telecom analyst Jack Grubman provides a classic anecdote to describe the dynamic:
Like Grubman, nearly all equity research analysts were intimately involved in securing new investment banking business for their firm. A practice so pervasive that banks often expanded research coverage to hundreds of obscure companies solely to get a chance at a lucrative mandate.
Spitzer wasn’t having it. Either deeply affronted by Wall Street’s sliminess or looking to set himself up for a future presidential run, he came down hard.
While potentially improving the quality and veracity of the research product, Spitzer’s regulations led to the awkward situation in which one half of a firm (the investment banking division) could implicitly sanction a business by underwriting its IPO, while the other half (the equity research analysts) could call the same company an uninvestable pile of refuse.
The bigger issue, though, was the transformation of the entire equity research business model.
These fundamental changes severed equity research’s link to firm revenue. The division no longer had a role in new business wins and became a cost center without directly attributable benefits.
Investment banks’ solution was to bundle payment for equity research with trade execution fees charged to brokerage clients.
This solution has since proved precarious for equity research teams:
1. Fee compression within the sell-side cash equities business has collapsed margins, with trade execution now largely commoditized. Bank market share has also declined as high-frequency trading firms expand their influence.
2. At the same time, the number of investment managers willing to pay for equity research services has fallen off a cliff. Most large hedge funds and asset managers now have their own internal research teams.
3. Research departments also contend with falling information costs. Buy-side clients now have easy access to management teams, expert networks, alternative data, and any number of increasingly sophisticated sources to squeeze out a little bit of alpha, eating away at any edge equity research may have provided.
4. And, as much as a research team would dispute this, they also increasingly compete with publications like the Financial Times or Wall Street Journal, as well as specialized blogs and Substacks (many of which are written by former sell-side analysts or ex-institutional investors).
The irony is that equity research is now more dependent on investment banking than ever. Commissions from cash equity sales cover a fraction of the expense, and the remainder is indirectly subsidized by the capital markets and M&A advisory businesses.
So, next time you see an equity research analyst, just let them know that they’re really just a content marketer for investment bankers.
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This week’s other big dog deals…
⁃ Blackstone, KKR, and CD&R reportedly each held discussions with Siemens over the possible acquisition of a majority of its 32% stake in its listed energy division. All three backed out from the deal in diligence, which looks like the right move following last week’s profit warning related to delays in its wind turbine turnaround efforts. Shares drilled 37% on Friday.
⁃ Blackstone led a second investment in clean energy developer Invenergy Renewables, putting an additional $1 billion to work after its earlier $3 billion contribution.
⁃ Covestro, a German plastics manufacturer, rejected a $12 billion buyout offer from Abu Dhabi National Oil Co. (Adnoc).
⁃ Apax Partners, BC Partners and Hearst Communications are reportedly in the final round of bidding for Ascential’s consumer trend analytics unit, which could be worth north of $1 billion.
⁃ Silver Lake looks like it might finally get it done with Software AG. Competitive bidder Bain Capital has stood down, leaving Silver Lake’s €32-per-share offer the likely outcome.
⁃ Ball Corp. is looking to offload its aerospace unit, seeking buyers for a business which could be worth more than $5 billion.
⁃ Civitas Resources is picking up a portfolio of Midland and Delaware Basin assets from NGP portfolio companies Hibernia Energy III and Tap Rock Resources for $4.7 billion.
⁃ Abcam, a supplier of biotech and life sciences tools with a $5.3 billion market cap, has retained Morgan Stanley and Lazard to explore strategic options, including a potential sale. The move follows involvement from activist Starboard Value.
⁃ Eni has agreed to buy a majority stake in Neptune Energy, owned by Carlyle, CVC, and CIC, for $4.9 billion.
⁃ Global Infrastructure Partners nearing a deal to sell Italian train operator Italo to MSC Mediterranean Shipping Co. for €4 billion.
⁃ Global New Material (fka Chesir) is in discussions with Merck KGaA on a potential acquisition of its pigments unit for roughly $1.1 billion.
⁃ Textron is looking to sell its auto fuel tank business, which could be worth more than $1 billion.
⁃ Aledade, a primary care network, raised $260 million in Series F funding led by Lightspeed, with participation from Venrock, OMERS, Fidelity, and Avidity.
⁃ Bain Capital Special Situations reached an agreement with Intel to purchase a 20% stake in its IMS nanofabrication business at a $4.3 billion valuation.
⁃ IBM is exploring a possible $5 billion acquisition of automation software business Apptio, owned by Vista Equity.
⁃ Eli Lilly reached an agreement to acquire Dice Therapeutics for $2.4 billion, a 42% premium.
⁃ Saudi Arabia's PIF is reportedly in pole position to acquire Vale’s nickel and copper mining unit for roughly $2.5 billion. Competing bidders include Mitsui & Co. and Qatar Investment Authority.
⁃ Vodafone handed Morgan Stanley the mandate to evaluate a potential sale of its Spanish unit.
⁃ Wellington Management raised $2.6 billion for a fourth late-stage venture fund.
⁃ Oaktree raised $2.3 billion for an inaugural private credit fund focused on life sciences companies.
⁃ BV Investment Partners locked up $1.5 billion for an 11th fund and is on course to hit a $1.8 billion hard cap.
⁃ Aldine Capital Partners raised $276 million for a fourth lower middle market hybrid fund.
⁃ Illuminate Financial raised $235 million for a third venture fund focused on financial startups.
⁃ Stone-Goff Partners raised a $175 million fourth buyout fund.
Thanks for reading, catch you guys next week. Drop a line with any feedback or scoops (just reply here; kept anonymous).