For the first time, expert networks — which provide managers access to specialists in everything from pharmaceuticals and clinical trials to clean energy and other technologies — are among the highest-paid research firms. And while hedge funds were once the primary clients of experts networks, traditional, long-only asset managers are now helping drive the growth in the sector, which many consider to be primary research.
Expert networks Gerson Lehrman Group, founded in 1998, and Third Bridge have made it into a list of the top-20 highest-paid research providers, Substantive Research told Institutional Investor. GLG is at number eight, with Third Bridge coming in at number 14. Substantive Research, which provides analytics on the investment research market for asset managers, is publishing its full report on Monday. The research firm examined the actual budgets of managers who oversee $6 trillion in assets to determine the rankings. The new study examines the rise of expert networks and how market share is changing in the investment research industry.
“Clients ask about expert networks all the time now, and they didn’t a year ago. They just didn’t,” said Mike Carrodus, CEO, in an interview. “All these expert networks are appearing in people’s budgets, and near the top.” While GLG and Third Bridge have now broken into the top 20, other expert networks are gaining market share as well, he said.
Some hedge funds have used expert networks for 20 years, but traditional managers have been slower to use outside specialists to help identify investments. In part, that’s due to early regulatory and compliance concerns over the nature of the insights gathered by experts, along with the question of whether they go too far and could be considered illegal insider information. But the field has been institutionalized and regulations tightened in the last decade.
In fact, the sector is hot, with a flurry of new expert network launches, new investments by venture capital and private equity firms, a number of mergers and acquisitions, and innovation, including the use of artificial intelligence. In August, VQ, the number-one expert network in Japan, said it would acquire Coleman Research Group. Expert network Atheneum Partners recently closed on a $150 million VC investment led by Guidepost Growth Equity, which included a long list of existing investors.
Substantive Research said that the pandemic has helped create the surge in interest in expert networks.
“This is a long-only story. The hedge funds didn’t change that much,” said Carrodus. Even after two years of substantial growth in 2018 and 2019, expert networks’ average payment per client (in Substantive Research’s universe) grew 38 percent. Eighty percent of Substantive Research’s universe is made up of long-only asset managers, with the remainder in hedge funds.
“I know from my clients that this is continuing to accelerate and will do so into next year,” he added.
The research analytics firm also said that the top three firms, Morgan Stanley, J.P. Morgan, and UBS, along with Jeffries in the number-seven spot, remain unchanged, but almost every other provider in the top ten moved around. Of particular note are Sanford Bernstein and Exane, both of which gained significant market share. Carrodus said the moves were particularly interesting given questions about whether the connection between quality of research and market share would grow stronger in a post-MiFID II (the sweeping overhaul of European financial markets regulation) world. Regulations now require managers to pay for research directly.
“You see Bernstein and Exane jumping up four places. That is a material gain in market share. And those are people who weren’t going to capitulate from a pricing perspective. They said, ‘Sorry, this is what we cost.’ ”
But Substantive Research, which tracks analyst moves “forensically,” has found that firms that have invested in research have been winners when it comes to market share. In addition to a study on the great analyst brain drain that II reported on earlier in the year, the firm now found that there is a correlation between research providers who are outliers compared to peers when it comes to committing resources to maintain their teams with senior, high-quality analysts.
“If they showed greater commitment to resourcing, is that correlated to this market share data? The answer is yes,” Carrodus said.
