They Built it, But Nobody Came

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New York – In what seemed like an excellent business model a few years ago, the Independent Research Network (IRN) is about to be shuttered by joint venture partners, Reuters and NASDAQ. In a press release (Story) Finextra newswire detailed the story.

The motivation for the IRN was a belief that there was a huge number of small cap uncovered and under-covered (less than three analysts) companies that wished to have research coverage in order to have greater access to equity capital. Because of this seemingly solid business proposition, several companies were set up to tackle the market, including the IRN, The National Research Exchange and Bright Meridian. The traditional companies that had been in this space–the paid-for research firms– were seen to be potentially compromised by the fact that were rating companies from which they were getting paid.

The IRN (and the other firms) were established to intermediate the inherent conflicts that arise from the paid-for business model. The IRN would stand in the middle of the transaction between the research provider and the company, providing the payment mechanism, the communication channel and any dispute resolution services that might be required. Companies would be assigned three research firms to review and monitor that company for a set fee per year.

By all accounts, the small cap intermediation business has had difficulty gaining traction, even while more companies continued to lose research coverage. There are three primary reasons why the model has not worked. First, paying for research coverage has a very high opportunity cost, compared to plowing back the capital into the growth of the company.  IRNs costs over three times what it cost a company to use a paid for provider.  Apparently, the cost/benefit favored the paid for suppliers, which have been proliferating. Second, the boutique regional investment banks and alternative research providers have done a good job of research coverage of the small cap companies, as our recent ResearchFocus report on small cap research shows.  This may change as regional brokerage firms suffer from lost execution revenues as CCAs take hold, but the IRN won’t be around to capitalize on that.  Finally, small cap investors have built up their own internal resources, reducing their need for external research.

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