New York, NY – One of the fastest growing segments of the equity research industry over the past five years has been the expert network business, as a growing number of buy-side analysts have sought increased access to industry experts. In fact, our analysis shows that at the end of 2007 at least 26 firms generate between $325 and $375 million in sales by providing expert network services to the buy-side. In addition, most analysts and asset managers at buy-side firms note that primary information will remain a key input into their investment process in the coming years – a trend that should bode well for the expert network industry. However, increased compliance requirements, the internalization of these capabilities by some clients, and the growing competition from both traditional and nontraditional sources, will create significant challenges for many industry participants in the coming years.
Near Term Growth Expected
Based on a survey conducted by Integrity Research Associates in the 4th Quarter of last year, close to one third of the hedge fund and long only asset management firms interviewed expect to increase their use of expert networks over the coming twelve months. This follows increased usage of expert networks from close to one quarter of the buy-side participants in 2007.However, it is interesting to note that 16% of hedge funds surveyed by Integrity Research actually expect their usage of expert networks will decline modestly over the coming twelve months, while only 4% of long only asset managers expect to see a similar drop in expert network usage in the coming year.The increased usage of expert networks anticipated by many hedge fund and long only asset managers is consistent with Integrity’s findings that the buy-side continues to search for sources of deep industry expertise and unique investment ideas backed up by primary data and information.
Growing Overlap of Experts
A few years ago, most experts participated on only one network, depending on the domain knowledge of the expert. However, today that is no longer the case. In fact, some expert networks (depending on the sectors) have close to 30% of their experts participating in multiple networks. As a result, many customers are finding fewer and fewer new or exclusive experts. This is one reason that large firms like Gerson or Vista spend so much of their effort on recruiting new experts to their networks.
Internalization of Networks
While not widespread, some hedge fund and asset management firms have chosen to build their own “expert networks” rather than relying on third-party networks like those provided by Gerson Lehrman Group, Vista Research, or Leerink Swann. Many of the buy-side firms that have decided to build their own networks have felt that the quality of experts in many third-party networks has been inconsistent, that the experts provided by many of these networks are not unique, and that the overall cost of these networks has been too expensive. As a result, most of the firms that have decided to invest in proprietary networks have done so in order to control the quality of the experts their hire.
Greater Compliance Requirements
A few years ago, a firm could set up an expert network by sourcing and establishing commercial relationships with a database of a few thousand professional contacts that it would market to the buy-side as experts. This network would then be expanded based on client demand, eventually encompassing tens of thousands of experts.However, the expert networking business is undergoing significant changes as buy-side customers are becoming increasingly more concerned about legal and regulatory compliance issues. Consequently, expert network providers are being forced to implement more extensive compliance procedures and invest in the technology infrastructure required to keep up with rapidly changing client requirements. For example, a few of the more well-established expert network providers have invested millions of dollars developing their compliance infrastructures. This is raising the bar for individual expert network providers, making it much more costly to support their client base in the future than it was in the past.
Increased Competition
Another trend that has developed in recent years and is likely to continue in the future is the growing competition in the expert network business. A few years ago, the entire expert network industry was comprised of less than half a dozen firms. Today 36 firms are bona fide expert network providers, while another six to eight firms are currently developing new businesses or unique products offering access to specific experts.However, these traditional competitors are not the only ones who are offering investors with access to experts. Today, a growing number of job boards, social or professional networking sites, and industry specific web communities are providing members with access to an unlimited number of experts. Sites like Monster, LinkedIn, Techdirt, MediaBistro, Sermo, and Google’s recently announced Knol service all enable investors to identify and interact with current or former corporate executives, doctors, journalists, and consultants with deep domain expertise. This means the buy-side is likely to have more and more ways to find experts.
Continued Fragmentation of the Marketplace
So, what will the expert network industry look like in three to five years? We suspect that the various trends discussed above will create a fragmented marketplace with a few (2 to 3) large network providers that provide extensive networks covering a wide range of sectors and offering a broad set of services. Gerson Lehrman Group is one firm that is likely to maintain its market leading position, while Vista Research, Coleman Research, Reuters Insight, and Guidepoint Global Advisors (formerly called Clinical Advisors) are likely to battle for the next few spots. In addition to these few large providers, we expect that a large number of boutique “industry specific” or “geographically specialized” expert networks will thrive as they will be able to meet the buy-side’s need for experts with more unique insight. Based on this view, we are likely to see new expert networks spring up in Europe, Asia, and the Emerging Markets.
A Few Conditions for Success
Thus, to succeed, expert network providers will have to do much more than merely build huge networks and connect these experts with investors. In the future, successful expert networks will need to greatly increase their ability to correctly match clients with the “right experts”, elicit meaningful feedback from the client base to enhance the value of the client experience, provide additional value-added services other than a telephone consultation, and provide an increasingly more sophisticated compliance framework that will support clients, experts, and publicly traded companies. We also suspect that successful expert networks will need to transition from today’s model where they put clients in contact with experts in response to client questions, to a model where they develop a strategy to generate new use of the network. One way firms might accomplish this is to produce and distribute proprietary “idea generating” surveys, studies, and reports to a broad range of clients to create demand for network use. In addition, we believe that expert network providers will need to adopt more flexible pricing models, enabling clients to access and pay for use of their networks on an ad hoc basis, conduct custom projects, and leverage their networks to perform other consulting and research projects as needed.
You can read more about the Expert Network industry in our upcoming ResearchFocus report on this topic, slated for publication in the next few weeks.
