New York, NY – One of the biggest stories of this week was yesterday’s announcement that Gerson Lehrman signed a multi-year agreement to provide Credit Suisse analysts with access to their network of close to 200,000 experts. We published an initial piece providing our initial views on the deal yesterday. However, we can’t help but add some additional thoughts on why this deal was done and what it means for the industry.
First, we need to clarify something. Some who read our article yesterday think we meant to encourage hedge funds to cancel Gerson as a result of their deal with Credit Suisse. This is the furthest thing from the truth.
We expect that the largest hedge funds and asset managers in the world will continue to use Gerson’s platform – for a variety of reasons. This includes the extensive compliance platform they offer, the size and global nature of the network, the suite of additional services they provide, and the quality and breadth of the experts in their network. In addition, any client should still want to know what the “consensus” is on any topic, and Gerson has become the primary place to discover what the market thinks.
However, we suspect that some of the more paranoid hedge funds may respond to the Gerson / Credit Suisse news with anger. In most cases, this is likely to be a knee jerk reaction. The sheer size of the Gerson network means that hedge fund clients should still be able to find “informational alpha” from experts in their network even if Credit Suisse analysts are also using the network. Despite this, some may reevaluate their use of Gerson as they feel that sell-side access of their experts will reduce their ability to “get an edge” from GLG.
After yesterday’s news we thought of various reasons for why Gerson would want to sign the deal with Credit Suisse. The one that made the most sense to us was that Gerson was doing the deal with Credit Suisse as the first step in opening up a new and potentially very lucrative market for themselves – the research departments of the world’s largest investment banks. We suspected this was part of a continuing strategy to diversify the firm’s business in preparation for going public at some point in the future.
However, we were mistaken. Gerson management felt the deal made sense for one reason – and that signing on a client like Credit Suisse (and potentially other investment banks in the future) will enable the firm to attract better and better experts. The research departments of most bulge bracket investment banks spend millions of dollars a year on hiring industry experts and consultants. By adding these firms as clients, Gerson feels it is making themselves an even more attractive platform for the world’s best industry experts. As a result of drawing better and better experts to the network, Gerson feels they will be able to keep and even attract new buy-side clients.
Based on the feedback we have received from Credit Suisse, we think we were primary correct about their rationale for doing the deal with Gerson. However, two other benefits of the deal come to mind that we forgot to mention yesterday. First, Credit Suisse hopes to be able to expand its CSA business outside of the US by marketing Gerson in Latin America and other emerging markets. Another intangible benefit of the deal for Credit Suisse is that having a tool like Gerson to offer their equity analysts could help them recruit and retain research talent.
Interestingly, Credit Suisse management felt that there was only one real choice to provide expert network services for them – and that was Gerson Lehrman. This was based on two factors. The first reason was the global nature of the network (and the firms support infrastructure). In addition, Credit Suisse believes that Gerson is the only firm that has a compliance infrastructure that is capable of meeting the rigorous demands of a global investment bank.
Other Expert Providers
So how might the rest of the expert network industry respond to the Gerson / Credit Suisse deal? We suspect there are two approaches these firms might take. This includes the approach we discussed yesterday, which is to use the Credit Suisse deal to sow fear and paranoia in the minds of the hedge fund community. As we mentioned earlier, some hedge funds might respond to this argument. However, we also think most clients will continue to choose Gerson for a range of reasons mentioned previously in this article.
Some expert network providers, however, will try to copy Gerson’s deal with Credit Suisse – particularly if they see that Gerson is able to navigate the tricky waters in convincing their hedge fund clients that the deal with Credit Suisse (and potentially other investment banks to come) will be good for them due to the “network effects” discussed earlier. And while we suspect that the smaller expert network providers are likely to find willing takers among second and third-tier investment banks, we wonder if the bulge bracket firms will really be attracted to anyone other than Gerson, or a few of their larger competitors (like Vista Research, Coleman, and Guidepoint Global).
Other Investment Banks
Of course, the more interesting response might be how the other investment banks respond to the fact that Credit Suisse has done a deal with Gerson. It is clear that with this deal, Credit Suisse is focusing on improving the quality of their core research product. As mentioned earlier, Credit Suisse might also reap the unintended benefit of being able to keep and attract better analytical talent as a result of this deal.
In our minds, we would expect that other investment banks will want to keep pace with Credit Suisse – either by signing deals with existing expert network providers like Gerson, acquiring expert network providers like Vista Research, or setting up captive networks like Bear Stearns / JP Morgan’s Primary Insight or Goldman’s Vantage networks.
Ultimately, we expect that such moves by other investment banks won’t be purely an act of playing “follow the leader” but rather meaningful attempts to improve the quality of their core proprietary research offerings.
It is clear to us that the Credit Suisse deal represents a watershed event for Gerson, one that will prompt some hedge funds to re-assess their use of expert networks in general and Gerson in particular. One of the key tenets of the expert network industry since Gerson first began offering its expert networks to hedge funds has been that the sell side did not have access to the network. This has now changed, and it represents an import milestone for Gerson and for the expert network industry in general.
Other alternative research firms have stumbled when they have tried to diversify their business beyond their core base of hedge funds. So far, Gerson has not. It has successfully built a strong and fast growing business offering experts to corporate clients. It has added channel checking services, and partnered with other services such as Morgan Stanley’s AlphaWise. There is no reason to think that this announcement will trigger a mass exodus of hedge funds, but Gerson is going deeper into uncharted waters.
The Credit Suisse deal is also significant for the investment banking industry as well as sell-side analysts will be able, for the first time, to benefit from the extensive networks built up by Gerson and their competitors – a development that should have a considerable positive impact on the quality of proprietary research.