Goldman Ventures Into Independent Research


New York, NY – Goldman Sachs’ long awaited venture in the independent research industry was officially made public through a Dow Jones news article published last week.  The new venture, called Hudson Street Services, has been established to make minority investments and help market promising and unique research services to their over 600 institutional customers that currently used soft dollars to purchase third party research through Goldman Sachs.

Not New But It Is Unique

Whereas a number of firms have developed “platforms” in the past to try and capitalize on the growth in the independent research space (e.g. Instinet, Capis, JayWalk, and Soleil Securities, to name a few), the Goldman effort is unique as the well heeled investment bank has decided to commit a significant amount of capital to actually invest in their research partners versus merely promising their partners to help them market their products and services to clients.

Many independent research firms we have spoken to have expressed extreme disappointment with the performance of many of the existing platforms as they have not been terribly successful at driving new business to the research provider.  Instead, some research providers have complained that existing platform providers have merely wanted to get a research firm to push clients to trade with that broker in order to pay for their services rather than actually help them grow their business.  As a result, Goldman’s willingness to actually invest in their partners shows a willingness to “put their money where their mouth is”.

Minority Stakes In Partners

According to the Dow Jones article, Goldman has already taken minority stakes (10% to 25%) in three such firms, including Asset4 (an SRI research provider), Connotate (a web scraping tool), and Investars (a research performance measurement provider).  Goldman is also expected to make similar types of investments in up to a dozen firms by year’s end.

The article also suggests that the distribution relationship between Hudson Street Services and these partners seems to be for a limited time – one to three years – and that the research providers have some flexibility of opting out if the relationship is not working out.

It is also interesting that the article indicates that Hudson Street Services has focused its initial investment and marketing efforts on non-traditional firms that produce research and tools that do not compete with the firm’s proprietary fundamental company research product.  This makes imminent sense as Goldman Sachs has invested considerable time and capital to develop and market its internal research capabilities to buy-side customers.

Goldman Gets Good News For Its Venture

Last week, Goldman received good news from regulators in the form of a “no action” letter where the SEC decided not to recommend enforcement action if a participant in its new Research XPRESS platform (part of Hudson Street Services) receives payments from a Client Commission Arrangement — a “pool of client commissions” set aside by a broker to pay for research, even if the research provider in question is not a broker dealer.

Implications For The Industry

One of the major reasons for the formation of Hudson Street Services is the growing proliferation of Commission Sharing Agreements, Client Commission Arrangements, and the move to unbundling research from execution services.  In this environment, Goldman has decided that it makes considerable sense in trying to increase its share of trading volume AND increase its share of clients’ research commissions by offering both its proprietary research and unique third party research products and tools.

As a result of these developments, we would not be surprised if other large investment banks tried to develop similar platforms to market unique independent research in an effort to build up their commission management businesses.

The complete text of the Dow Jones article is included below


Goldman Buys Independent Research Co. Stakes For New Venture

February 01, 2007: 01:42 PM EST

NEW YORK -(Dow Jones)- Goldman Sachs Group Inc. (GS) is starting a new business to cash in on the proliferating number of independent research firms hawking their services to hedge funds, mutual funds and other institutional investors.

Goldman has been buying minority stakes in firms such as, which ranks stock analysts by the performance of their picks, and will promote the companies to its clients in return for distribution fees. The biggest investment bank by market value has purchased stakes of 10% to 25% in three firms, and hopes to have about a dozen by year’s end, said Tom Conigliaro, a managing director in Goldman’s equities division.

Goldman is packaging the research offerings into a unit called Hudson Street Services, an offshoot of its soft-dollar business that lets clients pay indirectly for research through trade commissions. If money managers who work with the world’s biggest independent investment bank prefer to pay directly for the research services, the firms will rebate some of the fees to Goldman.

“Hudson Street Services is a wonderful revenue model even if clients don’t trade through Goldman,” Conigliaro said, but added the program will initially be pitched to the company’s 600 or so soft-dollar clients who are allocating a growing amount of their commission dollars toward third-party sources of research. “The fragmentation of the marketplace and the myriad of choices makes this difficult for them.”

Goldman got a green light last month from the Securities and Exchange Commission to offer soft-dollar services from firms that aren’t broker-dealers. Hudson Street responds to clients’ needs and could produce substantial profits if the businesses it backs take off, Conigliaro said. The firm’s distribution deals run from one to three years, giving the securities firm and its partners flexibility if the fee streams or business models change.

The development comes as large investors seek more efficient ways to choose and pay independent research providers, and as research firms, many of which are thinly capitalized, look to expand their customer base.

“As a high-tech growth company, we had a plan to take on additional capital and looked at various investment partners in the venture capital community,” said Bruce Molloy, chief executive of Connotate, a 6-year-old “Web-scraping” firm that filters the Internet to source client-customized news and data. “We thought Goldman would be best because of their knowledge of financial services, their willingness to help through joint marketing and their credibility.”

Goldman began explaining the business to its sales force this week, a spokesman said.

In addition to Investars and Connotate, Goldman has bought a stake in ASSET4, which sells a database correlating stock performance to companies’ environmental, social and governance practices. Investars, which offers its analyst ratings free on its Web site, makes a profit by selling its models and licensing data to more than 40 Wall Street firms and institutional investors, said Kei Kianpoor, chief executive of the 7-year-old company.

Goldman has no immediate plans to add companies producing fundamental stock research such as that produced by its own research department, Conigliaro said. Other categories it is exploring include firms that do primary research, such as industry-specific surveys, and macro-policy analysis and that offer outsourcing services.

“We are looking for firms that provide something interesting and unique, that need strategic capital and that need our distribution,” the executive said.

Goldman is not the first financial firm to centralize research access as it seeks to offset plummeting stock trading commissions with other revenue models. Bank of New York Co. (BK) recently spun off its research aggregator BNY Jaywalk into a joint venture that includes many of its stock execution and soft-dollar services, although Jaywalk focuses on access to fundamental stock research.

Goldman has a history of making investment bets on emerging players. It was an early backer of Archipelago, an electronic stock-trading platform that returned a hefty profit after its sale last year to the New York Stock Exchange. Goldman also booked a solid gain from its sale of electronic communications network RediPlus – formerly part of its Spear, Leeds & Kellogg group – several years ago.

The small research firms being incorporated into Hudson Street have lower potential for big returns and risk losing their value to investors if distribution gets too wide, said the head of an independent research firm who declined to be identified. Conigliaro said the short-term contracts should serve a foil to static growth by allowing Goldman to release participants and add new players. At the same time, the research firms can opt out of the program if they prefer independence or other partners, he said.

In branding the venture Hudson Street, Goldman carries on its tradition of using New York City street names. (Its multibillion-dollar Whitehall real estate funds are named for a street near its downtown Manhattan headquarters.) Hudson Street is meant to convey the “edgy” character of the street’s location in Manhattan’s trendy Tribeca area, where Goldman has an office, said company spokesman Ed Canaday. Marketing material for the new business plans to promote Hudson as an “intersection of research, services and technology,” he said.

-By Jed Horowitz, Dow Jones Newswires; 201-938-4047

Comment by Bill George:

Dear Independent Research Provider:

We have recently noticed that there is considerable cache attached to the term independent research provider. Many investors seem to feel an extra level of comfort when they can review independent and unbiased analysis of various investment strategies and stock ideas. Perhaps this emerging popularity of independent research has been influenced by media discussions of conflicts of interest in full service (and Investment banking) brokers’ research, or maybe the Global Analyst Research Settlement has made people aware of the value of Independent Research. Who knows? Our motive is not to analyze human behavior, our goal is to capitalize on human behavior.

The Firm would like to capitalize on this emerging demand for Independent Research by proposing that we invest in your independent research company. Furthermore, we understand the difficulty, and expense, of marketing research, so we propose that, if we come to terms, our firm’s resources (institutional salesmen, sales traders. and etc.) will be deeply involved in the marketing of your independent research services to our list of nearly 600 large institutional research users. We also want to mention we have recently been blessed with a “No Action” letter which we believe will put us in a very advantageous position to control the soft dollars available for independent research.

Do not worry your pretty little head that we will try to influence your independence through our investment in your firm, or that because we are capable of introducing you to so many valuable clients we will try to influnce.

We really want you to continue providing independent research. And whenever necessary you should feel comfortable criticizing our investment banking deals and our proprietary analysis and research work. We provide a clause in our agreement stipulating that you can rescind if you can’t adjust to the compromise and the new found affluence.

If you are interested in this proposal, please contact me at your earliest convenience. Independent Research providers are eager for our investment and marketingand our “stable” is filling fast, so this opportunity may not be available if you delay your decision.

My Best Regards,

The Mad Hatter


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