Investment Research: Continued Shift

Ongoing market turmoil and the intensifying financial crunch have accelerated ongoing shift within the investment research industry. This morning Credit Suisse and the Gerson Lehrman Group announced a strategic partnership that will 1) give Credit Suisse analysts access to GLG consultants; 2) give GLG clients access to Credit Suisse analysts; 3) give GLG access to Credit Suisse distribution channels.

Credit Suisse access to GLG consultants: Tom Hutchinson at Integrity Research points out that the partnership is a shift from GLG’s longstanding policy of not providing sell-side analysts with access to their network. Sell-side research has been slowly dying over the last several years as experienced analysts have departed for hedge funds. Hutchinson theorizes that the deal could improve the quality of CS analysis and piss off existing GLG customers. I agree that CS idea generation will likely improve but it will still be produced within the broken commission based model. This aspect of the arrangement an interesting way for GLG to utilize members of their network to non-subscription paying customers with CS analysts as conduits in the middle, shouldering the risk of getting paid via commission.

GLG client access to Credit Suisse analysts: The addition of Credit Suisse analysts to the GLG roster is not terribly significant since the bulk of GLG customers are hedge funds that would be able to get the ear of a Credit Suisse analyst simply by picking up the phone. That said, CS will be able to lease out their analysts through GLG to consulting firms, PE shops and corporate clients that don’t typically deal with prime brokers or consume sell-side research. However all of these types of researchers are extremely savvy and use services like GLG to drill into specific investment theses so it’s unclear how much macroindustry input they are really looking for. It would be helpful for a PE shop to have access to a sell-side analysts for specific merger analysis, but that may fall into the prohibited “investment advice” part of the deal.

GLG access to Credit Suisse clients and distribution: The potential for broader distribution has significant potential for GLG and likely the primary reason why they were interested in the deal. The sell-side has very little to sell right now. Selling GLG services and getting direct commissions on those sales would be an effective way for CS to monetize their sales force separate from the trade commission game. That said, structuring the cost, discount, fees, and commissions for something like this will likely be a bit of a shot in the dark and will be hard to execute without angering existing GLG customers. However these factors are minimized in the instances where CS sales keeps pushing CS analysts’ ideas which utilize GLG consulting hours. This aspect of the deal is similar to the GLG/Morgan Stanley AlphaWise partnership announced in March.

Congrats to both companies in completing what I’m sure was a very sticky deal. At the end of the day this is massive validation of expert networks. Over the last several years the sell-side has lost inside access to companies and as a result has been forced to do deep primary research alongside everyone else…and they’re using expert networks to do it.

Edit: Great post from Mike Mayhew at Integrity put up last night.