It is time for us to squint into the crystal ball for 2015…
2014 provided a welcome respite from the inexorable decline of equity commissions. US shares traded were flat, with volumes up 2% from the previous year.
Does this portend a floor for commissions, with volumes increasing? Unfortunately, we think not. We fear that the underlying trend is negative, which will only be exacerbated if the six year equity bull market runs out of steam. Of course, we will be happy to be proven wrong.
2014 was a notable year for research-related M&A transactions. The bellwether was Evercore’s purchase of ISI for $440 million, but also notable were Sidoti’s S-1 filing, Capital Economics’ generously valued capital infusion and MSCI’s bargain purchase of GMI Ratings.
The bottom line is that investment research is saleable again, although the valuations are, with some exceptions, not that rich. We expect to see more transactions in 2015. Will this be the year Silverlake takes GLG public?
One of the major headlines for 2014 was the increasing aggressiveness of European regulators, led by the UK Financial Conduct Authority, in regulating equity research commissions. The UK now operates under a regime that bans commission payments for vanilla corporate access, requires valuation of bundled research and forbids payment for research not used. The new guidelines attempted to implement more rigorous budgeting and procurement processes for research.
If currently proposed MiFID II regulation holds up, budgeting will become a European regulatory requirement as of 2017. Asset managers will have to decide how much they want to pay each research provider, cap payments at that amount, and get client signoff on any increases. We expect that more rigorous research budgeting will become the norm before the European regulations take effect, and, like CSAs, will be adopted globally.
Insider trading convictions went into reverse in 2014, but we don’t expect that compliance processes will change. Greater compliance due diligence is a now a fact of life.
CSAs will continue to grow, both from new adoption and from increased commission volume being placed through CSAs as asset managers seek to stretch commission dollars. The pending European regulation practically makes CSAs mandatory because asset managers will be required to set up “research payment accounts” which are for all intents and purposes CSAs.
2015 will be a good year to be global, particularly for independent research providers. Demand for independent research has been growing in Europe and Asia, and the pending European rules on research budgeting will be favorable for independent research. We expect some M&A transactions in 2015 to reflect cross-border expansion.
Expert networks have made a remarkable comeback from the doldrums of 2011, setting new highs for revenues and hiring frenetically. We expect that primary research will continue to prosper in 2015 as insider trading concerns continue to wane. Primary research remains a major source of alpha. Given the financial pressures on investment banking research, most banks are cutting back on primary research, leaving the field increasingly open and attractive.
Technology is transforming investment research, and this trend will continue in 2015. Firms like Kensho are trying to automate the research process, similar to the way HFT has automated trading. Big data is an enticing and still relatively unmined source of alpha. Hedge funds and research providers are investing in new data sets and analytics. Much of the data is still ‘green’ but it is maturing quickly given the volumes. This will remain one of the most vibrant areas for innovation.
A quick look at our market conditions survey (which is still in progress) suggests that conditions in 2014 weren’t bad for many independent research providers. Based on responses so far, the median estimated growth in 2014 revenues was 10% and the mean was close to 17%. Respondents are a little more subdued when looking toward 2015 with mean expected revenues projected to be closer to 15%. Certainly the environment is better than it was three years ago. [It is not too late to participate in our market conditions survey; go to http://questionpro.com/t/AKpHKZR3oQ]
Although we are bearish on the core trend in equity commissions, we see bright spots going into 2015: a relatively quiescent regulatory environment (relative to previous years), improved M&A activity, positives for CSAs and global expansion, and a fast pace of technological innovation.