New York, NY – Last week, San Francisco-based investment bank, Thomas Weisel Partners (TWP), disclosed that it was discontinuing the US coverage of its Discovery Research small cap research business.
Discovery Research was an effort started by Thomas Weisel in 2005 to develop a custom and subscription research business for global small cap companies. While the business had offices around the world, many of the unit’s analysts were located in the firm’s Mumbai office.
The primary reason Weisel decided to discontinue Discovery’s US coverage was the recruitment of key Discovery Research personnel to BNP Paribas Securities. Thomas Weisel Partners intends to maintain its Mumbai office — conducting other business and operations from this center.
With offices in San Francisco, Portland, New York, Chicago, Boston and Mumbai, Discovery Research was a division created to analyze global small cap stocks. While the firm covered over 140 names in the Media and Telecom, Consumer, Technology, Industrial growth and Healthcare sectors, it expected to increase its coverage universe to over 200 names in the next few months. Discovery Research also covered 14 Indian names.
Besides producing traditional fundamental research coverage on global small cap companies, Discovery Research also offered customized research — providing channel checks, market research surveys, industry white papers, and arranged for industry expert consultations.
As of a few months ago, Discovery Research employed 13 senior analysts and had over 50 total analysts. One interesting feature of Discovery’s research product was their client site, which provided clients with the ability to download working spreadsheet models and change assumptions etc.
While the team at Integrity Research Associates has not been able to contact management at TWP or Discovery Research directly, we suspect that the decision to discontinue the firm’s US coverage is a sign that the business prospects of the unit were not particularly encouraging.
This is not a surprise given the recent difficulties facing many smaller investment banks and broker-dealers who produce investment research. This has resulted as buy-side firms have consolidated their execution business with a smaller and smaller number of trading partners — forcing many brokers to seek strategic alternatives, or even shutter their research businesses altogether.
These challenges have been particularly difficult for investment banks and broker-dealers covering US small cap companies as falling commission rates and weak IPO volume have exacerbated the problems created by unbundling and broker consolidation.
Consequently, the move by TWP to scale back Discovery Research could merely by a reflection of the difficulties facing the small cap research business. Certainly, we would not be surprised if other boutique investment banks and broker dealers also choose to rationalize their research businesses in the coming years to meet these challenging times.