What is Equity Research?
Equity Research is a division within either a buy-side or sell-side firm which is responsible for the research used by the firm and its clients. The purpose of an equity researcher is to provide insight and detailed analysis into a company, entity or sector and this information is then used by investors to decide how to allocate their funds and by Private Equity firms and investment banks to value companies for mergers, LBOs, IPOs etc. Buy-side firms will then pay theteam for access to their information, and this is why equity research is a revenue-producing group for an investment bank. Equity Research can be thought of as a liaison between investors and corporations. Typically an equity research department is split into different coverage groups, and these coverage groups will be small teams that focus on a specific sector (i.e. mining, energy & resources, healthcare, consumer etc.). Each team will usually cover 5-20 companies.
The Importance of Equity Research
In the financial markets, information is by far the most valuable asset. Investors rely on information to know what to put their money into, traders need information to know whether they should enter or exit a position, and corporate financiers (including bankers, private equity firms, etc.) need information to value companies and participate in transactions. This information has to come from somewhere and as a result, there are entire divisions within financial institutions dedicated to researching the key issues for their firm and this division is called Equity Research.
What Do You Do In Equity Research?
often arrive to the office as early as 7:00am in order to digest the new information related to the companies or industries that they follow. The work within equity research is split into research / reporting and projections. The research work is fairly self explanatory; the associate or analyst will spend time investigating both the company in question, competitors and the industry in general and take note of all the relevant issues. This information can either come from people in the industry, online information resources (i.e. Google) or other agencies. Every quarter the research team will compile what it has done into a Research Report which is issued to its clients. The projection work is similar to that of valuation in banking, the researcher will estimate growth rates and valuations for companies several years into the future. The Investment Banking Division will often use equity research reports as the basis for their models, and this is yet another example of how the front-office departments within a bank are interlinked. Unlike most other financial institutions, the junior level within Equity Research is called 'Associate' level whilst the more senior staff are called 'Analysts'. The most common way of joining an Equity Research team is either out of education (the same as in banking) or as a lateral hire from industry / another sector in the bank.
Sell Side Equity Research Analyst
Sell-side equity research analyst will build models projecting out company financials and also engage in some qualitative analysis by personally meeting with various sources such as suppliers, customers, competitors, etc. A sell-side research analyst will typically follow a rather short list of companies that are usually in the same sector (e.g. consumer retail). They compile their findings and analysis in research reports that are then put to use by both the firm and the firm's clients.
Buy Side Equity Research Analyst
Buy-side equity research analysts do similar work but are essentially looking to identify the greatest performers in the market, and also tend to follow a larger number of companies and in less detail than their sell-side counterparts. Due to the broader coverage, analysts can end up focusing on multiple industries and over 30+ companies at any given time. These reports tend to be proprietary as the research is usually done in-house and are commonly used as a supplement to public/purchased sell-side analyst research.
Exit opportunities for equity researchers are extremely varied and they can place well into hedge funds, industry sector private equity firms and the investment banking division. Due to the fact that an equity researcher has to analyze companies from the point of view of an investor, they already have the mindset and skill set to work well in hedge funds and other buy-side firms. As mentioned, each researcher will be familiar with a certain sector of industry, so their knowledge and insight can prove useful when transitioning into another role focusing on that particular sector.
**To learn more about this concept and become a master at valuation modeling, you should check out our Valuation Modeling Course. Learn more here.**
Module 1: Introduction
Module 2: Valuation: The Big Picture
Module 3: Enterprise Value & Equity Value Practice
Module 4: Trading Comparables Introduction
Module 5: Trading Comps: The Setup
Module 6: Trading Comps: Spreading Nike (NKE)
Module 7: Trading Comps: Spreading Adidas (ADS.DE)
Module 8: Trading Comps: Spreading Lululemon (LULU)
Module 9: Trading Comps: Spreading Under Armour (UA)
Module 10: Trading Comps: Benchmarking and Outputs
Module 11: Precedent Transactions: Introduction
Module 12: Precedents: The Setup
Module 13: Spreading Tiffany & LVMH
Module 14: Spreading FitBit & Google
Module 15: Spreading Reebok & Adidas
Module 16: Spreading Jimmy Choo & Michael Kors
Module 17: Spreading Dickies & VF
Module 18: Valuation Wrap-Up
Module 19: Bonus: Non-GAAP Practice