Sell side: regionals on the rise

Institutional investors are relying a bit more for equity research on mid-sized firms, regional brokers and industry-sector specialists as the bulge-bracket investment banks continue to reel from the effects of the financial crisis, Greenwich Associates reports in its 2010 U.S. Equity Analysts Study. Investor relations people reaching out to analysts might consider the changing sell side mix in targeting sell side firms.

In its survey of 1,007 buy side professionals, Greenwich tabulated “research votes” based on the sources of equity research used, weighted by commission dollars paid out by the institutional investors. So this is more than a popularity contest – it’s a look at who the buy side is paying for equity research.

To be sure, large investment banks still speak with the loudest voice, winning 64.1% of the buy side “research votes” in early 2010. But that’s down from 73.1% in 2008. Regional and more specialized i-banks gained share, from 23.9% two years ago to 32.4%. Independent research firms also gained, from 2.7% to 3.4%, but they remain a drop in the overall research bucket.

Integrity Research Associates notes that the financial crisis has contributed to an exodus of analysts from Wall Street, as some research stars have left troubled big brokerage houses to join regional or boutique firms or set up their own shops.

Greenwich says the bulge-bracket firms saw a pronounced drop in their share of research dollars in 2008, when giants like Lehman Brothers and Bear Stearns disappeared. But the shift continues into 2010.

What shape Wall Street research will take in the future is an open question, but the big i-banks may regain share of voice (and commissions) as the financial crisis continues to ease. “I think the worst is over from the bulge-bracket perspective,” Greenwich MD Jay Bennett tells Pensions & Investments.

IROs tend to seek out analyst coverage where they can get it. Large cap companies or hot stocks almost fight an excess of sell side interest, while small cap IROs work hard to cultivate regional brokers, industry boutiques and independent researchers.

But watching the changing landscape of the sell side – and particularly the shifts in institutional investors’ use of that research – may help IROs allocate their time.

© 2010 Johnson Strategic Communications Inc.


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