Nearly 60% of independent research firms responding to a survey conducted by Integrity Research in December 2014 and January 2015 reported improved market conditions in 2014. Median 2014 revenue growth for IRPs was 5% and respondents expected median growth of 10% for 2015. While IRPS see improving conditions, few were singing from the rooftops. The most common adjective used to describe the market was ‘challenging’ in large part because revenue gains are coming from market share increases rather than from overall growth in research spending.
Integrity Research conducted a survey of sixty independent research providers in December 2014 and January 2015 through an anonymous online survey. Respondents reflected the diversity of independent research providers with over a third providing fundamental research and one fifth mainly providing macro research. Similarly, respondents mirrored the distribution of independents by size, with over two-thirds of respondents employing 25 or fewer full time staff. The majority (72%) were based in North America.
57% of respondents viewed research market conditions as better in 2014 than the previous year, with 26% reporting worse conditions. 17% felt conditions to be similar to the previous year. However, even those who believed that conditions in 2014 had improved were not glowing in their descriptions of market conditions. Many described progress as grudging and even the optimists expressed caution.
Median 2014 growth reported by respondents was 5% and the mean growth was 14%. One quarter of reported 2014 numbers were negative.
Projections for 2015 were more optimistic, with projected median growth of 10% and mean growth of 17%. 15% of respondents expect no growth in 2015.
The positive outlook was not without concerns. The most commonly expressed concern related to the future of the asset management industry and how that might impact spending on investment research. Respondents were particularly concerned about the fate of hedge funds and other active managers. The #2 worry was the state of financial markets heading into 2015, particularly equity market declines and dislocations. Regulatory developments were also cited by respondents, particularly reforms contemplated in Europe to the payment mechanisms for research.
Product enhancements were the most commonly perceived opportunity for 2015, representing 40% of the opportunities cited by respondents. The most commonly cited enhancement was increased coverage, whether by sector or by geography. 31% of respondents perceived opportunities revolving around sales activities, including geographic expansion and penetrating new client segments. Nearly a third of respondents saw improvements in external conditions which could present opportunities.
The overall survey results are positive, suggesting that market conditions have improved. IRPs express cautious optimism that improvements will continue. Nevertheless, the environment is not an easy one. As one respondent put it: “Business is there but you have to go get it, it’s not coming to us without strong efforts.”
Bulge bracket cash equities revenues reportedly declined 11% in 2014. Growth in independent revenues suggests that IRPs are regaining market share lost in 2010-12 because of commission declines and insider trading concerns. Anecdotally we are hearing buy side firms more committed to using boutiques because of the insights and value they provide. Although survey respondents see a number of challenges to future growth, we believe that the medium term outlook is favorable to further market share gains for independents. But as survey respondents attest, the journey will not be a cake walk.
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