By Sanford Bragg May 18, 2021
Melius Research, an independent research firm founded four years ago by three ranked industrials analysts, has allied with Guggenheim Securities to support investment banking transactions such as IPOs and syndications. Melius will provide research coverage and analytic support for Guggenheim’s bankers specializing in the industrials sector.
Melius and Guggenheim collaborated on the recent IPO of Hayward Holdings, a manufacturer of pool equipment. Guggenheim Securities acted as a joint bookrunning manager on the transaction. “We were feeling out whether it would work well for both parties,” said Melius Research CEO Scott Davis in an interview with Integrity Research. “From our perspective, being part of the due diligence process helps us provide more value to the buy-side subscribers to our research.”
Davis said the arrangement with Guggenheim is structured as a consulting retainer. Melius does not participate in the investment banking fees associated with a transaction.
Guggenheim Securities has been building its investment banking practice, recruiting both of the former co-heads of Barclays’ industrials banking group — John Welsh and Onur Eken — and the former US Head of Barclays’ Equity Capital Markets, David Levin. Melius Research’s co-founders also came from Barclays, so they have prior experience working with the Barclays alumni at Guggenheim. “Our relationship with Guggenheim is founded on mutual trust and respect,” said Davis. “We have the right to say no to working on a transaction if we choose.”
Guggenheim Securities employs 26 senior analysts covering 400 stocks in four sectors: consumer, energy, healthcare, and TMT. Guggenheim’s decision to outsource industrials coverage reflects fluctuating buy-side demand: the industrials sector is sensitive to business cycles causing investor interest to wax and wane. The industrials sector has been performing well over the last year but lagged the market over the last ten years.
Melius Research was founded in 2017 when three ranked Barclays analysts decided to set up their own boutique. Scott Davis had been the #1 ranked Multi-Industry analyst for the previous six years in the annual Institutional Investor All-America Research survey. Carter Copeland was a top-three ranked analyst in the aerospace and defense sector and Rob Wertheimer was a top-three analyst in the global machinery sector. The three analysts were joined by two senior Barclays salespeople in founding the firm.
Melius Research embraced subscription pricing for its research, offering three levels of service. The entry-level ‘Core’ service offers access to written research with analyst access limited to video and group conference calls for an annual fee of $60,000. ‘Core Plus’ service offers the full range of research offerings, including analyst access, financial models, conferences, events and corporate access for $120,000. ‘Priority’ level service offers full access to the founding partners, bespoke analysis and access to data analytics for $180,000. Pricing is consistent with other top-tier boutiques.
Over the past four years Melius has added services to its core fundamental research, including alternative data, consulting and macro strategy. Davis indicated that alternative data has not lived up to its hype: “Alt data does not have the broad appeal it had a few years ago,” he said. “Fewer than a fifth of our clients use alternative data as part of their process.”
The firm’s consulting practice includes strategic consulting to corporates and advice to private equity and venture firms considering transactions in the industrial sector. The three analysts have even co-authored a book published by McGraw-Hill.
The firm has fourteen staff comprised of 7 analysts, 3 salespeople and 4 operational staff including a general counsel, CCO, CFO/COO and a head of analytics.
The relationship between Melius Research and Guggenheim Securities represents the first US example of research outsourcing, a practice which has become relatively common in Europe after MiFID II. The poster child for the trend is Kepler Cheuvreux, which has partnered with six regional banks located in Italy, France, Netherlands, Belgium and Sweden. As is the case with Melius, Kepler provides the research to support the corporate finance functions within its partner banks.
Investment banking is a key source of funding for research units, growing in importance as commission volumes have declined and IPO volumes have risen. The arms-length arrangement that Melius engineered with Guggenheim differs from other US boutiques such as Wolfe Research, Telsey Advisory Group and Zelman & Associates, which have added their own corporate finance functions by hiring former bankers. ISI and Redburn chose to sell to investment banks, Evercore and Rothschild respectively. By comparison, Melius Research’s tie-up with Guggenheim is more carefully structured to maintain its independence.
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