On Thursday, May 14th, New York City based start-up Visible Alpha announced that it had closed a major round of funding and was launching its data and analytics platform enabling buy-side investors to make better use of equity analyst forecasts and models. Five bulge bracket investment banks both invested in the start-up and provided the firm with access to all of its analyst models.
Value proposition for the new platform
The Visible Alpha platform was created to help buy-side analysts and portfolio managers extract the most value from sell-side and independent analysts’ financial forecasts and models. Using the platform, buy-side clients can access all of the detailed forecasts, assumptions, and actual models created by the research providers they have commercial relationships with, comparing this data, and generating their own estimates based on these inputs.
Due to the fact that Visible Alpha does considerable work normalizing this forecast and assumption data, adjusting for differences in analyst definitions, accounting treatment, etc. investors can focus on identifying the actual differences of opinion between analysts. Also, since Visible Alpha provides forecasts at such a granular level, investors can restate all the analyst and consensus data according to their own definitions – for example, cash flow as defined by the client to include or exclude certain items – rather than as defined by any one analyst.
Scott Rosen, CEO of Visible Alpha explains how the firm will change the way the buy-side uses sell-side research, “In the past, individual research providers or investment banks created their own proprietary portals to allow clients to access to their forecasts and financial models. However, this didn’t help buy-side clients easily compare their various providers’ assumptions or forecasts to generate their own projections. Visible Alpha accomplishes this.”
Research providers should also benefit from providing their models through the Visible Alpha platform. Doing so enables them to serve their buy-side clients better, leading to deeper discussions about investment opportunities between their analysts and their clients. Additionally, providing their models and forecasts over the Visible Alpha platform enables research firms to obtain usage data about what buy-side customers value most in their research. Research firms can also get back consensus forecasts in addition to their own data from Visible Alpha to help make their research process more efficient. Lastly, Visible Alpha has created an incentive structure to allow research firms to share in the economics of the Visible Alpha business.
Visible Alpha’s Commercial Model
Rosen explained that Visible Alpha DOES NOT charge buy-side clients for research providers’ forecasts or models. These commercial relationships are strictly between the investor and their sell-side or independent research suppliers.
Instead, Visible Alpha plans to charge buy-side clients for their data and analytics platform, as well as the consensus data and standard models they offer. While the firm has not finalized their pricing model, they anticipate charging a per user license for their platform. Ultimately, management’s hope is to make Visible Alpha as ubiquitous to the buy-side as their use of normalized fundamental data.
Participation of Key Investment Banks
One major advantage of Visible Alpha is the support they have already received from five of the largest investment banks in the world, including Bank of America Merrill Lynch, Citibank, Jefferies, Morgan Stanley, and UBS. These five firms provided seed funding of $30 million to Visible Alpha, enabling the firm to scale its operations.
In addition, these five banks helped provide design ideas in the development of the Visible Alpha platform. However, possibly more important than either of these two contributions is the fact that these five investment banks provided the firm complete access to their analysts’ forecasts, assumptions, models, etc.
Rosen, made it clear that while these founding investors are important to the success of the platform, he wanted to make sure that other investment banks or research providers would not feel that that they would be treated as second class citizens. Instead, Rosen explained that all research contributors would be treated equally.
While last week’s seed investment and launch of Visible Alpha signals that the firm has finally released a beta version of their platform, Rosen was careful to manage market expectations for the new service. He noted that he expects a staged roll-out starting in the second half of 2015, with a more broad-based offering to be launched next year.
One of the key aspects of delivering a more comprehensive service is adding to the number of investment banks and research providers whose models are available through the platform. Currently, only the five founding banks’ research is included. Consequently, Rosen plans to focus a great deal of effort this year on recruiting firms to provide their forecasts and models.
Related to this issue, Visible Alpha will also be hiring and training data and research staff to help the firm on-board new research and normalize the forecast and assumptions data provided by each investment bank.
The launch of Visible Alpha has been a long time in coming as the initiative has taken close to three years to move from conception stage to delivery of a beta service. Clearly the complexity of the problem that Visible Alpha has been trying to solve is one of the reasons for the delay. However, we would not be surprised if working with a consortium of five of the largest investment banks in the world has not also slowed the firm’s progress.
Now that Visible Alpha has launched publicly, the real question is what will it take to ensure the product’s success? In our mind there are really three factors that are likely to drive the success of the business. This includes recruiting a critical mass of investment banks and independent research providers; adding key user functionality; and solving the sales and marketing puzzle. Now that Visible Alpha has successfully gotten to first base with its new service, we will have to wait and see whether the management team can get the business across home plate.