New York – Policy research, which specializes in analyzing the impact of regulation and legislation on stocks, is in much demand these days, as Washington drives financial markets. For this reason, we watched with interest the fate of the Washington Research Group (WRG), the venerable policy research subsidiary of the notorious and now defunct Stanford Group. Concept Capital, a prime brokerage subsidiary of Sanders Morris Harris Group, a Houston-based brokerage firm, has picked up the WRG franchise by hiring many of the analysts. The move highlights both the value of policy research and the resurgence of the regional broker/dealers.
Washington Research Group was founded in 1974, became part of Schwab and was merged with SoundView Technologies in 2004. It was acquired by the Stanford Group in 2005, the same year that Xinhua Financial bought Washington Analysis LLC (which was then sold to Glass Lewis in November of last year.) In February of last year, Stanford Group merged the 15 WRG analysts into its existing 20 person research staff, organizing the teams by sector. The Stanford Group de-emphasized WRG, marketing the research under the Stanford Group name.
Nevertheless, the WRG team maintained a separate identity, led by Ed Garlich, and was quick to explore other opportunities when the Stanford scandal emerged. The new home, Concept Capital, is a fast-growing prime broker with 25 hedge fund clients which accounts for 46% of Sanders Morris’s revenues. The core prime brokerage capabilities come from Blackford Securities which was acquired by Sanders Morris Harris in 2000. The new parent gives WRG a dedicated hedge fund distribution platform. Hedge funds, despite their often-reported demise in the media, remain the dominant purchasers of alternative research. For its part, Concept Capital is staffing up its sales and trading staff in addition to the WRG analysts.
Rise of the Regionals
The transaction is one more illustration of how the regional broker dealers are expanding their institutional brokerage capabilities in the current environment. As the head of Concept’s equity business put it, “Concept Capital has made growing its institutional sales and trading business a top priority in 2009 as we see tremendous opportunity to grow our business and fill the institutional service gap created by the collapse in a number of the bulge bracket firms.”
There is bravado in these remarks. While Concept Capital is growing quickly, expanding from revenues of $37 million in 2007 to $62 million in 2008, it is small. So is its parent, Sanders Morris, which is under $200 million in revenues, and booked a loss of $25 million in 2008. We also note that, unlike Barclay’s or Nomura’s purchase of Lehman assets, Concept Capital has simply extended offers to the WRG analysts.
Not all WRG analysts appear to have made the transition, at least as of yet. Concept Capital in its press release mentions 15 WRG analysts, but only lists 8 on its website. Some of the more high profile analysts are absent, including Greg Valliere, who was the co-founder of WRG in 1974, and Lyle Gramley, who was a prominent member of the Federal Reserve governing board before joining WRG. Concept Capital also appears to have failed to woo any of the energy policy analysts, leaving a gap in that sector.
Further, policy research is a very competitive sector of alternative research right now. We are currently working on an Integrity ResearchFocus℠ report on policy research, and we have identified 32 providers, other than WRG. Particularly popular are the new policy subsidiaries of lobbying firms, which give hedge funds access to timely insight on current lobbying trends. And it is not unprecedented for the 7 WRG analysts which have not joined Concept Capital to start their own shop. Contact us for more information on policy research.
We are pleased that Washington Research Group has survived yet another disposition, although it may have lost some key analysts in this latest move. Its persistence speaks to the strength of its reputation, as well as the broader interest in policy research. It also underlines the continued expansion of research capabilities of regional brokers, which are opportunistically using the current financial crisis to hire research talent.