New York, NY – In addition to the recent flurry of activity in the expert network space, Gerson Lehrman Group (GLG)announced this morning that it had inked a deal with Merlin Securities to provide their service to the firms in Merlin’s hedge fund hotel. Merlin’s prime (and multi-prime) brokerage services cover the sub-$150 million hedge fund market, where they provide incubator services, including technology, back office, clearing, risk management and compliance services, etc. – and now access to Gerson experts. They have a model which allows them to serve the smaller end of the hedge fund market. Sources at Gerson indicate that the deal will allow these smaller managers to have access to GLG, through the Merlin relationship.
The Economics of the GLG / Merlin Deal
Gerson’s traditional client base is large and mid-sized asset managers, which tend to have a heavy usage of experts as they consider new investments or stress test existing positions in the market. In part, because Gerson has a deep penetration into this market and also because of the current economic environment, GLG is open to ways to extend its customer base. This has led GLG to grow current products for corporations, offer new services and look to other market segments in the investment industry. It is clear that the buffet style, all you can eat, pricing model, popular with the high AUM managers, will not work for either the corporate market or the sub-$150 million hedge fund market.
Obviously to penetrate the small AUM manager market, the economics of the pricing equation need to be distinct from the existing model. In fact, the pricing of the services through Merlin is be on an a la carte basis (per transaction) and will be more expensive than the implied per-call pricing offered to larger clients. Because of the cooperative nature of Merlin’s hedge fund environment, the group can together gear enough business to make it work for Gerson. Clients will also be able to do more significant projects if they wish. Merlin will act as the cash register and the interface with the hedge funds, but Gerson will have individual relationships with each of the firms that consume their expert network services.
Changes in the Industry
This development follows two prior deals in the expert network space; the acquisition of Vista Research by Guidepoint Global, and the deal between LinkedIn and DeMatteo Monness. The Vista deal is clearly a reach to increase the capability and client base of Guidepoint Global, bringing them into the top echelon of the expert network industry. The LinkedIn deal was interesting, because it provided DeMatteo access to the full LinkedIn network, including access to survey tools to execute market research, provide experts and establish panels from contacts in the LinkedIn network. While these moves certainly help DeMatteo and Guidepoint , Gerson continues to control about 2/3rds of the market, meaning that the real battle is for second place at best.
The expert network research industry has grown at an incredible pace over the past 5 years, but we expect that it will exhibit flat growth this year at best. In part because of Gerson’s dominant size, it needs to generate large amounts of revenue to continue to grow at historic rates. Clearly, the Merlin deal has two sides to it. First, it provides services to the small hedge fund community and modestly enhances revenue growth for Gerson. Second, and more importantly, it indoctrinates the smaller hedge funds into depending on Gerson for investment research. If and when these hedge funds become large hedge funds, they will want to establish direct commercial arrangements with Gerson to account for the higher usage rates. This should help Gerson grow the business in the future.