The following is a guest article by Will Richards of the Research Alliance, a leading business development agency for independent research (www.theresearchalliance.com). This is the fifth and final article in a series examining challenges and opportunities facing independent research providers. The first article can be found here, the second article here, the third here and the fourth here.
Quite often when we initiate partnerships with new independent research partners, they tell us: “Our research firm has been around for a long time. We already know or have met everyone that could use our research.”
Is this true? Based on the databases we have purchased, there are close to 100,000 institutional buy-side firms world-wide. Just by sheer numbers involved, unless you have the brand recognition of a Goldman Sachs or Morgan Stanley, it is unlikely that even a small portion of your potential market has heard of you before.
For research firms with a sector specialty, what might be more true is that a sub-set of specialized investors may be familiar with you. For example, if you are an infrastructure analyst, there are about 15 specialized infrastructure funds globally, and they probably know you well – which means that subset of the market is indeed tapped out.
In any given sector, there are specialist investors. These would be buy-side PMs and analysts with a high-degree of knowledge in one particular sector. Because of this specialist knowledge they tend to invest heavily, if not exclusively, in this sector. They may be analysts covering a specific sector for a large mutual fund or PMs at a hedge fund that has a focus on only one or two sectors.
The generalist investor: an often-ignored target of independent research firms
However, most buy-side professionals – and most funds – are generalists. As such, they are looking for investment ideas across any number of sectors. In many ways, they are sector agnostic: they don’t care what sector they invest in. Rather, they just want clear, actionable, high-conviction investment ideas.
In our infrastructure example, while there may be only 15 specialist infrastructure funds globally, there are thousands of funds that can invest in infrastructure. These are generalist funds – funds that are able to move in and out of any sector depending the opportunities that are presented to them.
As such, the market for generalists is much larger than for sector specialists. However, this presents a unique problem for specialist research providers focusing on a particular sector or investment methodology. How do you sell a specialized product to a generalist, who may only want to use it for a limited period, or may not have the budget for such a niche service?
Who sells to generalists?
Based on our market surveys over the past 13 years, the majority of buy-side funds could be characterized as generalist funds with between $100m and $1B in AUM. There are tens of thousands of funds like this. So, the market is huge.
So where are generalist funds getting their research? The large sell-side investment banks own this market. They are able to offer research on a wide number of sectors, meaning that a generalist fund will always have a need for them. If basic materials goes out of fashion, the sell-side firm will provide you with industrials research. If the tech sector is having a meltdown, the sell-side will have utilities research for you to look at.
So how can specialist independent research firms sell to generalists?
One approach to selling to generalist investors would be to ally with other specialist boutiques that cover different sectors or use a different research methodology. Then, jointly, they could present themselves to the generalists as a “single research solution”. In the same way that the sell-side covers multiple sectors, so then would this group of IRPs.
At the same time, generalists require a slightly different research product than buy-side sector specialists. Industry experts on the buy-side tend to appreciate specialist boutique research because it speaks the same language as they do. Specialist investors want to get into the details and have in-depth conversations. Senior analysts at specialist research boutiques are ideal counterparts because of their high degree of expertise.
Generalists, on the other hand, need a clear, no-nonsense investment idea that directly lays out an investment thesis and a course of action to take. They want to know the basics of the investment idea and understand what warning signals there may be if things go wrong.
Unfortunately, by their nature, generalists do not want too many details, and they can easily get annoyed if they feel that an IRP is talking over their head. As such, IRPs that are interested in capturing market share from generalist funds would be wise to tailor their research product and analysis to make it more appealing to this group of institutional investors.
The broader generalist fund market
Over the past few years, as the opportunity with generalist funds has become more obvious, we have worked diligently with our research partners to help them covert clients in this segment. We help structure a research product more in line with the needs of generalist investors, and because we group together research providers across a wide range of sectors, we are appreciated by generalist funds looking for a research solution with broad coverage.
By our estimate, well over 60% of the $9.3B global market for financial research is consumed by generalist funds. And the sell-side has a dominant market share in this segment. So generalist investors present a huge growth opportunity for the independent research community.