New York, NY – A few weeks ago, Reuters published an article about Goldman Sachs shutting down its independent research marketing unit citing a lack of interest from the firm’s big money manager clients. However, we think the assertion made in the article – that the buy-side doesn’t find this research useful – is off target. Read below to find out why.
In the wake of the Global Research Analyst Settlement in 2003 – 2005, numerous Wall Street analysts saw that there was an alternative to working for investment banks or broker-dealers – and that was in working for, or starting their own, independent research firms.
Consequently, a number of analysts left the comfort of investment banks to start up their own boutique research firms serving the buy-side. And for a time, many of these research firms thrived as the buy-side could not get enough of this unique, differentiated research that was distributed on a limited basis to investors.
This led a few of the major investment banks to try and benefit from this trend that supported the independent research industry. Consequently, in February, 2007 Goldman Sachs announced the development of Hudson Street Services, a unit that took minority stakes in a set of independent research providers, and which actively marketed these firm’s products to their 600 institutional buy-side clients.
The Hudson Street business strove to make money for Goldman Sachs either by collecting sales commissions from the research firms for all new Goldman clients that purchased these services as a result of their marketing efforts. In addition, Hudson Street expected to generate venture capital profits from the sale of their equity stakes in these businesses.
Eventually, Goldman Sachs made investments in and tried to market eleven different providers, including Investars, Asset4, Medley Global Advisors, TrimTabs, Connotate, Epocrates, Lusight, iSupply, Quantitative Services Group, JL McGregor, and Wall Street on Demand.
As a result of the various trends favoring independent research firms at the time, Merrill Lynch and UBS joined Goldman Sachs in launching their own initiatives to market independent research to their institutional customers.
For more details regarding Goldman Sach’s reasons for launching its Hudson Street unit, refer to the blog Integrity Research wrote in February 2007 on this development. http://www.integrity-research.com/cms/2007/02/04/goldman-ventures-into-independent-research/
Goldman Shuts Down Hudson Street
As the recent Reuters article points out, Goldman Sachs eventually decided to close down its Hudson Street unit, laying off or reassigning the dozen or so employees that worked in this business.
It is interesting to note that the article admits that Goldman Sachs actually made money from Hudson Street – though not from the sale of independent research and data to its buy-side clients. Instead, Goldman profited from the sale of its various investments in these firms.
The journalist who wrote the Reuters article argued that Goldman Sachs closed its Hudson Street group because their “customers did not want to buy what Goldman was selling.” Most of the research partners concurred saying that they did not get very much new business from the arrangement. Goldman management explained, “Hudson Street no longer exists for the simple reason that weak demand from our clients did not warrant continuing the effort.”
And while it is clear that Hudson Street could not drum up enough business to continue the initiative, it is not clear that the reason for the unit’s failure was because Goldman’s clients do not value independent research. Instead, we think the real reason Hudson Street failed was due to a number of other factors, including how the business was structured in the first place.
The Real Reason for Hudson Street’s Failure
We believe that one of the reasons Hudson Street failed was because Goldman Sachs did not employ a dedicated sales team to sell its third-party research. Instead, they relied on their existing institutional sales force to market the new research products alongside their own proprietary research. This obviously created a channel conflict for their partners as Goldman’s sales staff knew their own research better, and were paid more when their own internal research was sold versus the research provided by one of their independent research partners.
A second reason we believe the Hudson Street platform failed was because the Goldman research sales team actually did not sell the Hudson Street providers’ research, nor did they have the skill set to do so. Goldman Sachs sales force was asked merely to set up appointments with clients, and the independent research firms were expected to convince these clients to purchase their research or data services. Unfortunately, Goldman’s buy-side clients are used to getting their research for “free” in exchange for trading with the bank. The research providers with Hudson Street, on the other hand, required clients to sign contracts and pay them either with hard dollars or commission sharing agreements (CSAs) – a much higher hurdle for Goldman’s clients.
However, we think the most important reason Hudson Street failed was because institutional equity commissions plunged between 30% to 50% over the past four years. This has meant that buy-side clients have had less and less “currency” to purchase research with. This has also meant that the “channel conflict” that originally existed selling independent research alongside sell-side research has become even more acute as the commission pie has gotten smaller.
It’s not that buy-side clients didn’t want the independent research that Hudson Street offered. Instead, Goldman’s buy-side clients were being forced to make decisions about whose research they wanted to keep paying for as their commission budgets continued to shrink. Ultimately, no one was interested in promoting that these clients pay more for independent research and less for Goldman Sachs’ proprietary research. Consequently, the model failed.