ER Biz Model/Unit Economics

Based on the most helpful WSO content, here’s a breakdown of the unit economics and business model of Equity Research (ER):

1. Revenue Generation from Broker Votes:

   • II-ranked analysts generate significant revenue through broker votes, as buy-side clients allocate votes based on the value they perceive in the research. These votes are tied to commissions paid by clients, which are a major revenue source for ER.
   • The exact revenue generated depends on the analyst's ranking, sector coverage, and the trading activity of their clients. For example, analysts covering high-trading sectors like biotech may generate more revenue due to frequent deal activity and trading volumes.

2. Cost Coverage:

   • ER teams are not directly tied to specific deals, but their bonuses and compensation can be linked to their "broad value add to the firm," which includes supporting deals indirectly. This makes it challenging to directly attribute revenue to ER, as much of it is accounted for under S&T or ECM.
   • Despite this, ER is not necessarily a cost center. It indirectly drives significant revenue by facilitating trades and supporting other banking activities like ECM and IBD.

3. Profitability Without ECM Activity:

   • ER can struggle to be profitable without ECM activity because sectors with no deal flow or trading activity generate less revenue. However, ER still adds value by maintaining relationships with corporate clients, providing coverage, and supporting the bank's reputation in the market.
   • Banks may cover sectors without deal activity for strategic reasons, such as maintaining a presence in the market, supporting long-term client relationships, or preparing for future opportunities.

4. Why Banks Cover Low-Activity Sectors:

   • Coverage in low-activity sectors can still be valuable for:
     • Building relationships with management teams, which can lead to future banking business.
     • Enhancing the bank's reputation and credibility in the market.
     • Supporting the efficient market hypothesis by providing information that helps price discovery.

In summary, while ER may appear to be a cost center due to how revenue is accounted for, it plays a critical role in driving indirect revenue and supporting other banking functions. Its profitability often depends on the level of trading and deal activity in the sectors it covers.

Sources: Where does ER go from here?, Equity Research Q&A with Flake, Where are the raises for ER??, https://www.wallstreetoasis.com/forum/investment-banking/how-ibd-makes-or-loses-money-and-why-that-matters-to-you?customgpt=1, Help with Writing ER Reports for Beginners (Value Investing)