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Moderator Note (Andy): Best of WSO - this post originally went up January 2008 and we thought it deserved to go back on the homepage for those who may have never seen it.

I was just talking with an II-ranked independent research analyst. She was really surprised when I told her that I was interviewing with a BB ER firm; she thought that equity research at BB firms is diminishing in importance because of how brokerage is handled these days. And she spoke about how junior most analysts are these days, and increasingly analysts are putting out sophomoric research and not receiving enough training and inadvertently shooting themselves in the foot. I took the stance that research also provides added value to the investment banking arm; she disagreed and said she felt that most bankers thought analysts did not add value.

Well all this got me worried. No one wants to join a dying industry. She was of the opinion that research is increasingly shifting to boutique firms that institutions will pre-pay for research & services. But even if she's right, and someone does take a job with ER at a BB firm where the business is on the wane, you still end up with all the intangibles that an alignment with a BB firm brings; whereas when you work for an independent you start at a disadvantage in terms of exit opportunities.

So can you guys talk about what you think the future for equity research is and how strong the exit opportunities will be for a research associate that looks to get out of the business after 2-3 years?

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Comments (20)

  • dosk17's picture

    Most would say it's going down, primarily because of the brokerage changes and everything Spitzer did to institute the Chinese Wall and separate IBD and ER.

    That said, when pitching an IPO, the equity research analyst is still very important.  Many times companies going public will base their decision on the strength of the ER analyst.  Most bankers will value ER analysts to the extent that they can help bring in new capital markets business.

    Depending on your goals, ER could be ok to pursue, but most would rather do IBD these days.

  • ersearch's picture

    One of the BB analysts I spoke to said, after I asked him how one part of ER can be more profitable than another, that it's linked to the amount of activity in the IBD for that particular industry; and so while a chinese wall may exist, this does seem to imply a recognition of the value added by a strong ER dept.

    I'm just worried about exit ops. I don't want to be stuck in a dying industry after 3-5 years and I want to make sure I'm a strong candidate for b-school if I so choose. Do you think ER analysts have good mobility into ibd/pe/hf/vc?

  • AllYourBase's picture

    Out of the four (IBD/PE/HF/VC), I think the most realistic exit opp is HFs.  IBD and PE are going to look for people with deal execution experience which ER will not provide.  I have heard of people from ER getting hired into IBD but it was at a very junior level (after one or two years of work experience) and is pretty rare.
     
    My impression is that sell side reseach continues to decrease in prestige and that will make exit opps more limited in the future. 

  • nathanielpowers's picture

    It depends on the individual. I personally know some ER analysts who really worked hard to understand their industries and went on to become successful hedge fund managers. You also get good skills in ER. It depends where you want to end up. HF, ER is great. PE, possible, but not as likely.

  • ersearch's picture

    I'm mostly concerned with how easily I'll be able to get into a top business school and how easily I'll be able migrate out of ER if I want to (not necessarily to where). I just don't want to get trapped on a sinking ship. In the end I'd rather be in somewhere transction-driven, but at this stage in the game it's all about skill building.

    How easy is it to move laterally in BB, not just within ER but within other areas of the bank?

  • ersearch's picture

    Granted, but I was talking about after things normalize.

  • numi's picture

    having worked in ER at two bulge bracket banks, i can certainly tell you that the ER business model continues to change these days, and the cash distribution model at most firms seems to have become more and more tenuous, as commissions continue to shrink and hedge funds find more and more esoteric ways to get information that can potentially give them an edge. thus, if you are considering building a career in equity research, you should seriously consider whether or not you're the type of person that can live with a business model that is ever-evolving, and one where revenue generation can be difficult to track given that it's not a business unit that generates direct revenues.

    that being said, working at a BB in equity research, either full-time or as a summer intern, will look great on your resume. you have the prestige factor of working at BB, and you also have the training and client exposure that i'd say is often superior to what you'd find at a boutique bank. analysts at big banks generally have much greater visibility than their small bank counterparts, which means that the demands and expectations from associates are higher. that being said, it is a great way to start one's career in finance. secondly, you also have to remember that even if the sell-side business model continues to change, people will ALWAYS need investment advice in some form or another...so even if the ER business changes, all the things you acquire through a stint in ER such as finance skills, accounting skills, buy-side contacts, and relationships you build with industry consultants and CEO's/CFO's will be things that you can carry on to your next job. i myself speak to 1-2 buy-side clients a day, and am on the phone with someone from company management at least once a week. the relationships i've built have been very valuable from a career perspective, and i also feel that having the poise, acumen, and perceptiveness to interview senior management teams is also a very worthwhile skill, especially from the perspective of a buy-sider (i point this out because most people on the sell-side eventually want to move to the buy-side).

    on a more senior level, equity research divisions still play an important role at investment banks for the reasons dosk17 mentioned. the research analysts are responsible for vetting potential investment banking transactions, and company management teams often decide to work with banks who have good research analysts. why? it's because once a company goes public, in order to attract new investors in shares of their stock, it's infinitely more helpful to have good analysts providing research coverage on you. research analysts are also important to banks with significant deal flow - in my case, my bank's IBD sees no shortage of deals in our sector, and it's simply impossible to do all of those deals since there's not enough time or resources. as such, my team is responsible for assessing a company to determine its future potential in the capital markets and to gauge a sense of how interested investors will be in the stock issue - obviously we want to dedicate resources to the companies that we believe will be most intriguing to the public markets, and will prioritize those firms over other companies that we don't think will be as interesting.

    most people in research end up moving to asset management/hedge funds after 2-3 years, and every so often someone makes the transition to private equity or goes into industry. in general, your exit opportunities from a BB will be much better than those from an independent firm simply because of the perception that you will have better training, client exposure, networks, and "prestige." the person you spoke with probably spoke highly of their experience at an independent firm, but that's because (1) that's where they work, and (2) they already built their reputation at a bigger firm before moving to a smaller shop. in your case, and in the case of anyone else trying to break into finance, i highly recommend building your careerr at the most recognizable shop possible, all else equal. you need the networking opportunities, training, and street cred that comes with a bulge bracket, so if you have opportunities at a BB vs. an independent shop, i'd advise you to most likely go with the BB unless there was something really unusual that compelled you to go for the smaller firm.
     
    also, just put yourself in the shoes of a potential employer - if someone hires with a candidate from a smaller shop and things don't work out, it'll be easy to blame that person for making a "risky hire." in contrast, if an employer hires someone from GS/MS/ML/LEH equity research and things don't work out, they'll just assume that you were probably an outlier based on the perception (or reality) that it's harder to get a job at a top bank. personally, i feel like i've had pretty good opportunities to speak with the buy-side, both in terms of hedge funds and private equity firms...and i think a lot of this has to do with having some big banks on my resume and hopefully knowing a thing or two about the industry i cover.

    anyway, hopefully these observations are helpful. i realize that most people on here are aspiring IBers, a few people here actually work in banking, and even fewer people here work in research...but hopefully this sheds some perspective on the equity research biz. like the rest of wall street, we're going through pretty tough times right now, but if you're looking to build a pretty well-rounded financial skill set, learn an industry in-depth, and really understand what moves a stock, i think there's a lot you can gain from an experience in equity research.

  • ersearch's picture

    WOW! That post was fantastic, numi. Very illuminating. *bookmarks page*

  • searching's picture

    good info with a personal touch..

    Numi I am going through an ER interview... can you please advice what would be good questions to ask the MD in ER which will impress them and.. would be beneficial for me too?

    also, What skills of ER are tranferable to IB or PE? I just wanted to know skill are common between them could be tranferable. DOEd ER have some unique skill that IB dont have.. and would help me in long run..

  • ratul's picture

    I'm not sure I agree with Numi. Within ER, the prestige factor is not really as relevant as Independent research starts to become a major player. In fact, most buy-side funds loathe BB research because it's purely maintenance and generally bullshit in the first place.

    I also don't agree with the training impact, because independent research provides much more of what clients wants these days (rapid response, narrow and deep) as opposed to maintenance and cumbersome action. That's why you see rapid disinvestment at the Bulge in terms of ER, and management culling talent because it's not worth it to them anymore.

    The future of the industry derives from the independent model. Sure the bulge bracket will around and will be relevant, but there will be fewer around in number and drastically less resources available to those involved.

  • funkytommy's picture

    Is it better to start as a research analyst in the sell-side or in the buy-side (as in asset management) in terms of exit ops and compensation?

  • nathanielpowers's picture

    research seems to feed very well into HF's

  • In reply to searching
    numi's picture

    searching:
    good info with a personal touch..

    Numi I am going through an ER interview... can you please advice what would be good questions to ask the MD in ER which will impress them and.. would be beneficial for me too?

    also, What skills of ER are tranferable to IB or PE? I just wanted to know skill are common between them could be tranferable. DOEd ER have some unique skill that IB dont have.. and would help me in long run..

    searching -- glad i could help. as far as what you can ask the MD, i think you should focus on big picture stuff -- where he thinks the research department is heading, what the key objectives are for his team over the next 2-3 years, how he's tried to differentiate his coverage efforts as compared with other analysts on the streets, and what type of visibility you can expect to get with the sales force, clients, etc.

    as far as what translates well into PE, i'd say the ability to analyze companies from the perspective of a long-term investor is the most relevant, as well as your experience in looking at both the operational and financial elements of businesses. i can also say from personal experience that the industry knowledge is very useful; following a sector every day for a couple of years definitely gives you an advantage in understanding what the key drivers of a business are and whether or not they should matter to investors. i've found that my industry knowledge, research skills, contacts, and experience with interviewing company management teams are qualities that have definitely transferred well to PE.

    it should be noted that most research associates leave for asset management or hedge funds, sometimes because it's a better fit and other times because they don't have the necessary qualifications or are not as sought after in PE. i am definitely among a small minority of people in equity research that made the move to PE, but with enough perseverance i think it is possible for most people. i interviewed at both large and middle-market LBO's and recently made the transition to a $3-6M middle market buyout shop. please refer to the thread here for more details of how i think exit opportunities in banking and research compare, as well as what skills are most transferable; i wrote about it pretty extensively and i think it answers precisely the question you asked.
    http://wallstreetoasis.com/forums/curious-about-er

    hope this helps

  • In reply to ratul
    numi's picture

    ratul:
    I'm not sure I agree with Numi. Within ER, the prestige factor is not really as relevant as Independent research starts to become a major player. In fact, most buy-side funds loathe BB research because it's purely maintenance and generally bullshit in the first place.

    I also don't agree with the training impact, because independent research provides much more of what clients wants these days (rapid response, narrow and deep) as opposed to maintenance and cumbersome action. That's why you see rapid disinvestment at the Bulge in terms of ER, and management culling talent because it's not worth it to them anymore.

    The future of the industry derives from the independent model. Sure the bulge bracket will around and will be relevant, but there will be fewer around in number and drastically less resources available to those involved.

    as i mentioned in another post (http://wallstreetoasis.com/forums/curious-about-er), what buy-siders care most about that top research platforms can offer are (1) idea generation and (2) access to management. to me, based on my own experience as well as what i've heard from my buy-side contacts, this is the real benefit that the sell-side offers to the buy-side, as you are definitely correct in that most buy-siders build their own models in the first place. for specialized knowledge, i agree that independent research shops may have an advantage in certain pockets and niches, but they certainly have not become a "major player" yet and i don't know if they will in the foreseeable future, considering that many firms have been moving straight to independent consultancies rather than depending on any sell-side firm at all, regardless of whether it's BB or independent.

  • ratul's picture

    well, the reason the buy side says this is because all they get from the sell-side is maintenance and bureaucratic research. They have demanded less, but ultimately still want narrow and deep research on large cap stocks - all the time. There is no one out there providing that.

    Look at CSLA in Asia and Redburn and Exane in London. The independent model is fast thriving, and growing rapidly, which is why you see Hedge funds managers like the one the OP listed above talking down the value of BB research.

    At the Bulge, you see a clear culling of talent and resources, wherest you have growth in the independent model even during a bear market.

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