Don't Write Off the Research Boutique Yet

(Bloomberg Opinion) -- If some of the most august independent analysts in the business feel their future lies inside a large U.S. broker, does any research boutique have a future? There is still hope.

Autonomous Research, the London-based firm set up in 2009 by Stuart Graham, the former head of Merrill Lynch & Co.’s European bank-stocks team, agreed this week to be taken over by AllianceBernstein Holding LP, owner of Sanford C. Bernstein & Co.

A decade is a natural point at which to seek an exit, and there aren't many potential buyers that can guarantee a continued culture of independence. Throw in a regulatory catalyst in the form of MiFID II, and a sale to AllianceBernstein, which targets institutional rather than corporate clients, makes sense.

But the deal isn’t a clean exit. It’s light on upfront payments. The lucre will come from an earn-out, and so likely depends on Autonomous's ability to generate extra revenue by cross-selling its analysis to Bernstein clients.

That answers the key problem facing boutiques like Autonomous. How do you gain clients when asset managers are actively trying to deal with fewer research providers? Over the past 15 years, regulators have been pushing investors to pay for analyst reports directly instead of through broking commissions. Europe's MiFID II regulations, which came into force at the beginning of the year, further reinforced the trend.

Research providers have had to put a price on their product and introduce subscription models. Asset managers have trimmed the number of research firms they deal with. Autonomous's U.K. business saw revenue decline 14 percent in the year through March 31. This process of price discovery and winnowing the number of providers is unlikely to be complete. The battle for market share in analysis may just be beginning.

The global equity research business was worth about $5 billion last year, according to Oliver Wyman. That's likely to drop to between $3.5 billion and $4 billion in 2018. Assume financials account for 20 percent, and that’s $800 million of potential revenue – still tempting for a small firm.

But if an outfit of Autonomous's stature doesn't appear confident it can win more clients on its own in a hurry, what about less well-known peers?

There aren't many AllianceBernstein lookalikes out there queuing to buy them. Bulge-bracket buyers probably aren’t interested – they want to hoover up market share in trading, a business that's many times bigger than equity research. And buying any boutique would kill its key selling point of independence.

Crunching two boutiques together might generate some cross-selling opportunity, if their clients don’t overlap, but the gains are likely to be pretty paltry.

Analysts wanting to keep their independence will need to make the standalone model work. It's too soon to write it off. As asset managers get used to paying for analysis, they should learn what it's worth to them. Boutiques should benefit from greater visibility of revenue and, in turn, budgets. Their client roster may yet shrink further – but the customers that remain will genuinely value the product. Who knows, raising prices for existing clients may prove easier than winning new ones.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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