New York, NY – Last week in Washington DC, First Street and Women in Government Relations, Inc. co-sponsored a breakfast and panel discussion called Defining Political Intelligence. This event was meant to start a discussion among industry participants about the current state of the political intelligence industry. The following is the first part of a multi-part article addressing a variety of the topics discussed by the panel.
The Definition of the Political Intelligence Industry
The obvious starting point for this discussion was to come up with a definition of the “political intelligence” industry.
Political intelligence is an industry which provides information or analysis about fiscal or monetary policy decisions, legislative developments, or regulatory actions to clients including hedge funds, mutual funds, pension funds, or corporate executives — all whose businesses are affected by what happens in Washington DC.
It is important to note that political intelligence firms are not defined by the type of content or analysis they deliver to their clients, but rather by the process by which they collect the information that they deliver to clients, or which they base their analysis on. Political intelligence firms primarily collect this information from political insiders, including members of Congress, their staffers, employees of regulatory agencies, and other federal employees.
Some political intelligence firms set up meetings with current or former political insiders to enable clients to directly ask sources the questions they have; other political intelligence firms answer specific customer questions based on their research either verbally or in short written notes; while still other political intelligence firms use the information they collect as an input into detailed analytical reports on various sectors, political topics, or issues.
Political intelligence firms run the gamut from boutique providers of policy research, to lobbyists or law firms that also provide advisory services to investors, to regional or large sell-side investment banks that set up meetings in Washington DC for clients or produce detailed research reports on government policy or legislative developments. The three major types of firms that produce political intelligence services today includes:
- Independent Policy Research providers,
- Lobbyists, Law Firms and Accounting firms with Investment Advisory Practices,
- Sell-Side Firms with Policy Research Offerings.
History the Industry
Most agree that the political intelligence industry has been in existence for many years – perhaps as long as government actions have impacted investors. For decades, a large number of research boutiques, broker-dealers, and investment banks have produced research on central bank policy and the impact of this on macroeconomic developments.
The focus on producing research on legislative and regulatory developments has been a more recent phenomenon as the number of major bills and regulatory initiatives that could have an extremely large impact on business has exploded. Certainly, a number of firms started producing this type of research as early as the 1970s.
However, the use of lobbyists and law firms to provide investors with insight about Washington developments started becoming known in the 1980s. It was then that investor Ivan Boesky hired lobbyists to gather intelligence on whether Congress intended to block Standard Oil’s proposed takeover of Gulf Corp. Boesky learned that the merger would be approved, and used that information to make some profitable trades.
From 2004 to 2006, the US congress debated revising the asbestos-litigation system by creating a $140 billion trust fund to pay health-care and other costs incurred by people injured by asbestos. The fund was expected to be paid for primarily by companies with asbestos liabilities and their insurance companies. However, the bill was finally defeated in February 2006 after Senate Majority Leader Bill Frist changed his vote from Yes to No.
A number of hedge funds hired Washington lobbyists to keep them informed of the progress of the bill, profiting from these developments by trading stocks like USG Corp., W.R. Grace & Co., and Crown Holdings – all companies that would have benefited from the establishment of the trust.
Size and Growth of the Industry
Based on Integrity Research’s analysis, the global market for policy research and political intelligence services generated an estimated $402 mln in revenue in 2009. This is comprised of the following:
Between 40 to 50 independent research firms generated approximately $120 million in sales of monetary and legislative policy research in 2009.
Between 30 to 50 law firms, lobbyists, strategic consulting firms, and accounting firms also supported ancillary advisory practices for buy-side investors. We estimate that this segment generated slightly more than $36 million in revenue in 2009.
In addition, hundreds of broker-dealers or investment banks produce central bank and legislative policy research for their clients. Integrity estimates that approximately 1.5% of the total research revenues generated by investment banks should be allocated to this type of research. This would represent $246 million in equity commissions globally from institutional customers for policy research and political intelligence services.
While the number of independent firms that produce this type of research grew moderately from the 1970’s, growth in this segment has accelerated by almost 160% since 2000. We suspect this is due, in large part, to the growth in the hedge fund industry and their interest in understanding how the significant expansion in government and regulatory developments might impact potential investments.