Tag Archives: Equity Research Outsourcing

Introduction

Investment Banking is a special type of banking that helps organizations or individuals raise capital and provides consulting services to them. It helps in conducting large complicated transactions such as mergers or acquisitions or raising an initial public offering (IPO) using underwriting.

Investment Bankers are experts in the field of finance who have their fingers on the pulse of the market. As acknowledged worldwide this is one of the most complex financial mechanisms in the world.

As has been the case with different sectors, it has been for some time now that organizations have started investment banking outsourcing services to third-party vendors as well. Outsourcing one means giving the authority to outsource one of its services to these third-party vendors so that the company can save on operating costs and get specialized services from highly skilled staff- all this while ensuring adequate data security and adherence to regulatory compliances.

This helps organizations not only streamline their services but also provide value-added services to customers that they couldn’t have thought about earlier.

It is important to note that the nature of investment banking outsourcing and the services provided by vendors have evolved alongside technological advancements. The first and foremost is business digitization, which has resulted in increased transparency and visibility for clients, as well as a better end-user experience for customers. This has resulted in improved strategic partnerships and, as a result, higher quality work being outsourced by investment banking outsourcing clients, which can only be met with strategic partners.

Challenges Faced by Investment Banks

Modern investment banking faces various kinds of challenges that are listed below:

Challenges Faced By Investment Banks

Scarce Capital Resources

Due to recession and depression all over the world, almost all markets, companies, and individuals are not comfortable investing their money in the capital markets. This has created a world where capital resources have become scarce. The job of an investment banker is to invest capital more efficiently, but due to the scarcity of resources, there is a reduced business for investment banks in general.

Need to Reduce Costs

Markets have become more competitive. As a result, the cost of goods and services is decreasing. This has an impact on the finance industry as well. Investment banks’ margins are shrinking, and thus their cost of capital is decreasing. As a result, they must reduce costs to encourage their investors to invest money.

Increased Regulations

The new structured products created and sold by investment banks go through strict regulations since the mortgage crisis in 2008. This creates a limit on the operations of investment banks. These increases cost for investment banks and they have to maintain a different department of qualified professionals so that they could create and bring in new investment opportunities after scrutinizing them.

Technology Disruptions

Rapid technological advancements have drastically altered every industry in the world, including investment banking. The fintech industry has emerged over the years as new technology. This industry revolves around providing the same financial services at a lower cost. They have access to cutting-edge technology and a modern network, allowing them to raise capital at a lower cost.

Cross Selling Complexities

A huge area of the investment banking services sector relies on cross-selling. For example, if someone is looking for mergers and acquisitions, the investment bankers provide them with the services such as issue management, capital structure advisory, and many more. This way they bring value to their clients. But due to limited budgets, they are limited to the services they offer. The declining budget causes decreased revenue for research and other departments.

Benefits of Investment Banking Outsourcing

There are several reasons why investment banking outsourcing is becoming increasingly popular. We have tried to highlight some of these reasons below. They are:

Benefits of Investment Banking

Focus on Core Business

Investment banking outsourcing can help companies in focusing on their core competencies rather than focusing on mundane tasks and being worried about their day-to-day operations.

Controlled Costs

Cutting operational costs is a challenge that exists with organizations throughout. Investment banking outsourcing provides an avenue where companies can take care of differences in the relative value of currencies to derive as much as 30-50% savings in costs.

Increased Efficiency

Investment banking outsourcing is a specialized operation and the workers who work for these banks need to be highly skilled for this. A similar talent of MBA’s exists in low-cost destinations like India where the operations can be outsourced to them. Highly skilled talent helps in improving the efficiency of investment banking services.

Changing Economic Factors

In today’s uncertain world, the political dynamics are changing daily. This has an impact on the economies of the world and since we are so intertwined today the ripple effects of adverse conditions in a globally connected country are bound to have effects on the whole world. Investment banking outsourcing ensures the risks are well hedged with specialized partners operating from different geographies across the world.

Technological Changes

Investment banking outsourcing has ensured that the companies are up to date with the latest technological advancements that are occurring worldwide at a fraction of the cost had they invested real-time into adopting them. The use of the latest technologies by third parties ensures that all the technological challenges are met.

Time Zone Advantage

The gap in time zones between your country and the area you are outsourcing to, in addition to the cost advantage, is another important benefit. By doing so, you can focus on your primary tasks all day long while also having finished your day-to-day operations by the time you get up the next day. It gives you the benefit of round-the-clock business operations.

Magistral’s Services on Investment Banking Outsourcing

The outsourcing of investment banking may be a way to cut operating expenses. In an era of growing complexity in both established and new industries, investment banks are extremely nuanced. Smaller investment banks have a difficult time juggling their project pipelines and manpower needs. Medium-sized banks are eager to develop their expertise in emerging industries, which are bustling with activity and volume. However, large banks are more concerned with cutting costs while maintaining the quality of the services they provide to their customers. Magistral provides a range of service options to support Investment Banks.

Some of the services that are associated with Investment Banking Outsourcing that is offered by Magistral consulting are:

-Deal Sourcing: Performing industry and market analysis, finding potential targets, and publishing newsletters are various kinds of services provided under deal sourcing.

-Data Cleansing: Data cleansing and mining are done to perform analysis on suitable data.

-Valuations: Valuations are done by creating financial models by various methods such as LBO/DCF Modelling, Comparable Analysis, Precedent Transaction Analysis, and Impact Analysis.

-Due Diligence: Research-based due diligence both primary and secondary are performed to uncover the true potential of an asset while giving a completely independent opinion on investment quality.

-Deal Execution: Teasers and Investment Memorandums are made along with identifying the potential investors/buyers.

-Portfolio Management: Providing ESG compliance monitoring, preparing financial reports, business development support, and procurement support is provided.

-Equity Research and Analysis: The services provided under this head include fundamental analysis, quantitative analysis, credit analysis, and country analysis.

-Marketing: This includes creating white papers, case studies, thought papers, CRM management, etc.

About Magistral Consulting

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates, and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modelling, Portfolio Management, and Equity Research.

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The article is Authored by the Marketing Department of Magistral Consulting. For any business inquiries, you could reach out to prabhash.choudhary@magistralconsulting.com

Introduction

By focusing on the fundamental variables that affect a company’s current business and prospects, the Equity Research and Analysis reflects the procedures used to estimate a security’s worth. It is the practice of analyzing the markets and companies to provide expert fund managers with recommendations on which stocks to buy. Equity research and analysis is the study of a company and its environment to judge the following:

– Whether to buy or sell its stock

– To calculate the price where one can bid for a target company

– To provide extensive financial insights and recommendations to investors on whether to purchase, hold, or exit a particular investment

Types of Equity Research and Analysis

There are three significant kinds of equity research and analysis explained below:

Economic Analysis

It entails evaluating or investigating subjects or concerns from an economist’s standpoint. This enables investors to examine the market from a broad perspective down to the individual stocks. Analyzing economic data may identify present market stability and understand the future.

Fundamental Analysis

Fundamental analysis is a method for finding a stock’s actual value. A stock’s current price may not accurately reflect its actual value. In the market, the stock might well be overvalued or undervalued. The fundamental analysis aids investors in determining the health of a company, resulting in the stock’s current value. This is accomplished by applying a variety of qualitative and quantitative parameters. The primary goal of this strategy is to find fundamentally sound organizations to make long-term investments in them.

Fundamental analysis examines connected economic and financial elements to determine a security’s intrinsic value. Fundamental analysts look at everything that can impact the value of a security, from macroeconomic issues like the condition of the market and industry circumstances to microeconomic elements like the company’s management effectiveness. The goal is to arrive at a figure compared to the current security price to determine whether these are undervalued or overvalued. Technical analysis, which forecasts the price direction by analyzing previous market information such as volume and price, is believed to oppose this stock analysis approach.

Discounted Cash Flow Analysis is a proven technique for fundamental analysis

Quantitative Analysis

It has to do with the information found in a company’s financial statements. It entails everything from collecting simple statistical information to doing complicated calculations. This study aids in determining investment possibilities, including when to purchase stocks.

Qualitative Analysis

It considers data that cannot be stated numerically. The factors usually included in the qualitative analysis are Management experience and performance, Industry and competition, and corporate governance.

Technical Analysis

Technical analysis is a study of patterns and statistical data to determine market trends and stock selection. It is a type of investment analysis that employs price and volume data, usually represented visually in charts. The charts are evaluated using several indicators to produce investing recommendations.

Importance of Equity Research and Analysis

The direct relationship between many local and global forces involved makes equity markets volatile. As a result, a better grasp of the equity market through equity research can help us better understand market changes and aid in the process of reaching our financial goals. As a result, equity research is fundamental, and the findings of equity research experts, from giant corporations to individuals who invest a portion of their assets in the stock market.

Equity research entails performing a comprehensive examination to determine the market value of a company’s stocks. Furthermore, it is used to indicate the probability of a rise or fall in its share price in a broader sense. It is common knowledge that the company’s expected financial results influence share price growth or fall over the next few years, and this serves as the analytical foundation upon which research analysts base their recommendations.

Importance of Equity Research

Because equity analysts interact with corporate management, they have a clear image of the firm’s current situation, and they have regular informal meetings with other research analysts, which allows them to propose a company’s position prudently.

These results will allow them to spot patterns in a company’s growth and fall, and investors will seek their advice, in general, to guarantee their investment goals are accomplished.

With the rise in volatility in the equity markets, decision-makers rely on equity research analysts who succeed at formulating premium equity research reports to measure the value of a company’s equity shares and try to decipher the likely future course of its fair price based on edging equity research report patterns. Along with the market for high equities research reports, there has been an increase in the demand for equity analysts to assess company fundamentals and advise investors on how to position themselves in its stock.

As a result of using top equity research reports or the expertise of a skilled research analyst, the investor would be much better equipped to make more cautious and educated equity market investing decisions. When done methodically and accompanied by research suggestions, equity investment can be considered a well-calculated risk that has shown to return many times for many investors.

Challenges in Equity Research and Analysis

– Obtaining data is the most challenging aspect of equity analysis. A large volume of data must be crunched in making informed market decisions, and the data quality supplied is crucial. The purpose of equity analysis should be to provide market information. Inefficiencies arise from a lack of information, resulting in stock misrepresentation.

– Technology is another crucial area as it is critical to have updated technology to analyze the financial data procured for equity analysis.

– Lack of capital is another factor that hinders equity analysis as it is equally important to have proper economic credentials to utilize the quality data and expert talent to analyze them.

Magistral’s Service Offerings in Equity Research and Analysis

Here is how Magistral helps its clients like Hedge Funds, Family Offices, Equity Advisors, and Other Investors in Equity Research

Magistral's Equity Research and Analysis Services

Here is how Magistral helps its clients like Hedge Funds, Family Offices, Equity Advisors and Other Investors in Equity Research

Fundamental Equity Research and Analysis

Fundamental analysis is the technique used to measure the stock’s intrinsic value. This analysis comprises customized models, quarterly earning reviews, earning call reviews, and equity and Industry themed reports which are further discussed below:

Customized Financial Models

Financial customized models are numerical representations of a company’s business throughout the past, present, and the predicted future. These models are designed to aid in decision-making. Company leaders could use them to estimate the expenses and profitability of a new project.

Discounted Cashflow (DCF) Modelling

It’s a method of valuation used to determine the present value of an investment based on its future cash flows. It helps to calculate how much an investment is worth today based on future returns. This can be applied to any investment or purchase of stock by company owners. It is a valuation method that can be used for private-held companies. DCF uses a discount rate to determine whether the future cash flows of investment are worth investing in. The discount rate is a risk-free rate of return.

Quarterly Earnings Review

A quarterly earnings report has been used to report results every quarter. Net income, EPS, earnings from continuing operations, and net sales are included in earnings reports. One can assess a company’s financial health and determine whether it is worth its investment by examining quarterly earnings reports.

Earnings Call Review

The information gleaned from earnings calls is used by analysts to conduct a fundamental study of the company. The company’s financial accounts are the starting point for fundamental research. Analysts will scrutinize these documents and listen to verbal indications from corporate management all through the earnings call. During an earnings call, analysts may inquire about main concepts or specific details in the footnotes, such as inventory and “less accumulated depreciation” sections.

Equity and Industry Themed Reports

It is in-depth research of a specific theme. Generally, themes are weighted differently for each sector. It identifies winners and losers in a single theme based on technology leadership, the position in the market, and other factors. It also improves the decision-making by a clear picture of fitting all stocks in a theme together.

Quantitative Equity Research and Analysis

It is the technique of using mathematical and statistical modeling, measurement, and research to understand the behavior of a particular stock. Analysts represent given reality in numbers. In data processing, cleaning and mining of data are done, and further, it is analyzed by correlation, regression, and various other tools, which are discussed below:

Data Processing and Analysis

Quantitative tools have now been routinely used to extract enormous amounts of data from several financial sources. To evaluate financial instruments, investment banks create equilibrium models; mutual funds use time series to identify risks in their portfolios, and hedge funds attempt to glean cues and statistical arbitrage through noisy market data. Quantitative finance’s ascent in the last decade is focused on creating computer systems that allow for the processing of enormous datasets. More quantitative finance research has shifted towards the microstructures of capital markets as even more data exists at a higher frequency. Data processing methods and quantitative frameworks are painstakingly constructed to efficiently extract information on financial data.

Commodities Performance Tracking and Analysis

Commodities go through cycles. When the supply of a specific commodity is scarce, prices will rise. Prices fall when there is an excessive amount of commodity in the market. Ideally, commodities that are performing at multi-year peaks or lows are viewed. The scenario tends to vary over time, resulting in a good trading opportunity.

Credit Equity Research and Analysis

Credit analysis is a form of financial research used to determine whether a company can satisfy its debt obligations. Credit analysis determines the proper degree of default risk when investing in a company’s debt instruments. Analysts perform a credit study on a company to determine its capacity to pay its debts. Following further analysis is performed to know more as explained below:

Country Risk Analysis

Establishing a country’s ability to transmit payments is known as country risk analysis. It considers political, economic, and social variables to assist businesses in making strategic decisions when doing business in a country. Every company transaction has some level of risk. Risks stemming from several national changes in the economic structures, policies, socio-political institutions, geography, and currencies are often referred to as country risks.

Company Risk Analysis

A company risk analysis assesses the likelihood of an unanticipated adverse event affecting critical company activities and projects. Organizations undertake risk analyses to determine when a negative consequence is likely to occur, the risk’s impact on a specific business sector, and where the risk may be minimized. In the worst-case situation, where an unexpected negative impact happens, a business analysis creates a control plan to return corporate operations to normalcy.

Reports and Newsletters

It is a strategic approach to creating and distributing valuable industry reports, indices tracking analysis, and event and news analysis. These are further discussed below:

Industry Reports and Indices Tracking

Industry reports are prepared using various tools, and further index trackers attempt to match the performance of a particular “index” of shares. It attempts to monitor the ups and downs of the index as closely as possible. It helps in choosing the better equity that is aligned with the index.

Event and News Analysis

An event study is a statistical method of evaluating the impact of a specific event or a piece of news on a company and its stock. A piece of bad news or event can bring the value of a stock down, whereas a piece of good news can bring the value of a stock upwards.

About Magistral consulting

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modeling, Portfolio Management and Equity Research.

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The article is Authored by the Marketing Department of Magistral Consulting. For any business inquiries, you could reach out to prabhash.choudhary@magistralconsulting.com

Introduction to Sell Side and Buy Side

The financial world is full of transactions of all sorts. Whenever a transaction happens, there is a party who sells the asset and there is another party that buys the asset. The party selling the asset is the sell-side and the party buying the asset is the buy-side. Assets could be private or public companies, real estate, and other financial assets that give returns or value appreciation over time. Buy-Side research plays a vital role in the success of a transaction.

The parties could be an Investment Bank, A broker, A Company, A Hedge fund, An asset manager, or any other type of entity owning the asset or representing the owner

What is Buy-Side Research and Analytics?

Buy-Side Research and Analytics concern with identifying the full potential of the asset that is being bought. It attempts to answer the following crucial questions about the asset being transacted. Finding the asset itself to buy is the most crucial part of the Buy-side research

– Does the asset have the potential to generate returns or value appreciation over time?

– Is the asset valued rightly?

-Are there any risks associated with the asset? If yes, what are the risks?

-Is everything makes sense from a legal point of view?

-Are the documents right and portray the complete picture?

-Are there any other assets that may be more suitable?

Buy-Side research attempts to uncover all aspects of the asset to ensure the transaction achieves its objectives of maximizing returns for its investors

Buy-Side research is a regular function at institutions like Investment Banks, hedge Funds, Family Offices, Fund of Funds, Private Equity, Venture Capital and M&A departments in Corporates

Types of Buy-Side Research

Buy-side research could either be categorized as per the asset class like public companies, private companies, funds, etc. or as per the institutions like Investment Banks, Fund of Funds that undertake them

Type of Buy-Side Research

Buy-Side Research Types

Buy-Side Research- Hedge Funds

Hedge funds operate on multiple investment themes. However, the most common one, the long-short equity hedge fund uses the buy-side research which is predominantly equity research. This comprises researching the stocks which are being taken a position on, long or short. A fundamental analysis using methods like DCF or comparables is quite popular with hedge funds. Apart from researching the stocks, the industry, or geography, or any other aspect related to the stock or Hedge funds’ investment theme is also researched. For hedge funds that take positions for the long term for a few stocks, the research is fairly detailed.

Buy-Side Research- Family Office

There is no set template or scope for buy-side research when it comes to family offices because investment mandates of family offices vary greatly. In family offices, buy-side research is mostly about equity research, manager research, asset research, and private company due diligence. Quite a lot of partner and broker research is also common. Equity research as with hedge funds revolves around the fundamental analysis of the listed stocks. Manager Research is about finding asset managers who could deliver superlative returns as per the investment thesis of the family office. A typical example of this would be say finding hedge funds that are investing in China and have delivered more than 10% returns annually over 10 years or more, with moderate or little risk. The assignment involves the collection and analysis of huge data to find the best performing hedge fund managers for the family office.

Asset research is done for family offices with an investment philosophy around a specific asset. A typical example here would be getting into the details of a Real Estate asset deal or a Real Estate fund or a cryptocurrency-based fund. Family offices work with all types of brokers, investment agents, and investment banks. Finding the right partner who has experience in the relevant area of investment and offers a competitive fee for the services is also common for family offices to research.

Buy-Side Research- Fund of Funds

Fund of Funds and Family Offices research funds to park their money. Here buy-side research concerns about finding the best manager to manage the funds. Information is collected on dozens of fund managers, analyze their performance for an objective evaluation on their potential to generate alpha.

Buy-Side Research- Private Equity and Venture Capital

Private Equity firms deal with both private and public companies whereas venture capital firms solely deal with private companies, sometimes very small ones. Buy-side research here revolves around the due diligence of the companies that are intended to be invested in. Another important aspect of the research here is finding the targets that fulfill the criteria for investments. A typical assignment would be to generate a list of all the SaaS firms with revenue more than $10 million, looking for Series B or beyond, with presence in the United States and products centered around blockchain. This is typically followed by profiling the right set of companies for investments or acquisitions. For smaller companies, there is primary research that is done to talk with people who may have information about the industry and the company

Buy-Side Research- Investment Banks

Research here acquires as many types as the investment banks themselves. It can range from Equity Research as in the case of hedge funds or list generation and company profiling as in the case of Private Equity or Manager Research as in the case of Limited Partners or Fund of Funds. The only difference here is that Investment Banks perform these tasks for their clients who may be looking for investments

Buy-Side Research-Corporate M&A

Bigger corporates continually evaluate targets for synergies with their business. Inorganic growth is a well-accepted way to grow. Not only growth but companies evaluate targets to acquihire, getting a tech, enter geography or industry or to eliminate competition. Buy-Side research in these cases pertains to building target lists as per the acquisition criteria and profiling companies.

Characteristics of High-Quality Buy-Side Research

Whether one is looking to outsource Buy-side research or building an in-house function. These are the qualities of good buy-side research, that should be paid attention to:

Characteristics of high quality buy side research

Depth of Research

Research on the surface seems easier, but intellectual curiosity is required to get into the depth of the information presented. A company that appears to be satisfying a criterion may not have any business in the key area that is the source of synergies. This requires studying lots of data and information to make sure if the target has all the right attributes for evaluation. Primary research and ghost interviews help the cause of getting into more details. Asking the right questions to management and analyzing the documents provided by the company holds the key to get into in-depth research.

Rapid Research

Deals are time-bound. Sometimes it requires quick and dirty analysis and other times it requires studying hundreds of documents over months. Whatever is the case, your outsourcing partner needs to be reliable about sticking to the promised timelines. Sharing interims before the finalized deliverables help too.

Expertise

Expertise in buy-side research ensures research is being done the right way. It ensures the right questions are being asked, the right information is being sought and the information is analyzed with all relevant angles to arrive at an objective opinion. Buy-side research outsourcing partner needs to be an expert in the financial sector generally and buy-side research particularly

Outcomes

All the research that does not yield any outcome is useless. Researching a target and then not acquiring it because of red flags pointed by research is still an outcome, which saves millions of dollars for the client. Whatever is the case the research outsourcing partner needs to keep an eye on the business outcomes of their research activities.

Accountability

Most research partners are great order-takers. If a list is to be generated, it is generated as suggested. But a great research services partner goes a step further and takes accountability. After making the list from secondary research, they do primary research to make sure the information collected from secondary sources is correct. They ask the right questions from Asset Managers to ensure the client gets what they are looking for and not “unverified” data in an excel sheet.

Engagement Flexibility

A great buy-side research outsourcing player offers complete flexibility to their clients, with scalable engagement models, and have contracts that carry no significant exit barriers. Whatever is the engagement model the work quality is not hampered

Magistral Consulting has helped multiple Investment Banks, Family Offices, Hedge Funds, and Private Equity firms in outsourcing buy-side research functions. It has clients based out of the United States, the United Kingdom, Europe, and Australia. To drop an inquiry get in touch here

About Magistral

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modeling, Portfolio Management and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The Author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsutling.com for any queries or business inquiries.

Introduction

Equity Research of listed stocks forms a major part of operations in Hedge Funds, Investment Banks, and many Asset Management firms.

Though methods may differ, all the exercises related to equity research mostly pertain to finding the intrinsic value of the stock and then inferring if it’s overvalued or undervalued currently, prompting buy sell or hold recommendations for the asset managers or their clients.

What makes an equity research exercise comprehensive?

Though equity research exercise could potentially be a theoretical exercise where an Equity Research analyst puts in a few hours’ of efforts, crunch numbers, and comes up with a recommendation. These models are almost always prepared and just need P&L, Balance Sheet, and Cashflow numbers, which are available in the public domain for a listed stock, fed in, to find out the valuation and the recommendation for the stock.

It is however the further details that determine the quality of the research. These are a variety of sources, qualitative inputs and their quantification, Evaluation of the ongoing news and buzz related to the stock, social media activity, rumors, and the subjective calls of analyst that makes the difference. It’s amazing that some analysts even track the brand of the watch that the CEO wears to the analyst conferences. They make subjective calls on the stock on an information point as minute as that or say body language of the management in a conference call.

If a stock is to watched as closely as needed to take calls worth millions, it’s not possible for an equity research analyst to proceed in a templated way for all the stocks she needs to track. It needs to go much beyond that.

Parts of a comprehensive Equity Research exercise

Here is what differentiates a comprehensive analysis from a basic one

Sources of Information: Sources of information if more the merrier. Sources of information if diverse allows us to analyze the stock closely. For example, a database that carries information about all the legal cases pending against a company would add color to the analysis that will have a material impact on the overall recommendation for the stock. Usual sources of information are P&L, Balance sheet, and cash flow statements, all of which are publicly available for a listed stock apart from news about the stock, regulatory filings, 10Ks, conference calls, and ESG related compliance documents.

Forecast and Assumptions: A financial forecast can easily be put together sometimes by just extrapolating the past growth in the future. That is a simplistic but not correct way of doing it. The heart of a financial or earnings forecast is the assumptions made to arrive at the same. All assumptions need to be reasonable and preferably vetted by industry experts. Companies may be bullish about their latest strategy and its financial impact, but that needs to be looked at cautiously if at all it is going to lead to any impact, and if yes, how much. That is where industry studies come into play. A company forecast needs to be compared with industry forecasts and if the company’s growth forecasts are more than that of the industry, has there been any past instances when the company had beaten the industry forecasts. For example, if a healthcare company is planning to launch equipment that will take a leadership position in five years, has there been any past instance for this healthcare company to take a leadership position within five years of the launch in the past? The key to a robust model is going into detail about all the assumptions and making sure all assumptions are validated by past numbers.

Company Valuation Analysis

Equity Quantitative Research methods aim at valuing the company using more than one method to see if all valuations are consistent with each other. If there is a huge variation in valuations of companies by different methods, the analyst needs to arrive at the best suitable valuation with sound reasoning. The most common equity research models to find out the valuation of a company are DCF modeling, Relative Valuation, Sum of Parts, and Risk Assessment. DCF that stands for Discounted Cash Flow analyzes all the future cash flows of the company and discounts it to the present value. Relative Valuation compares the company valuation with peers to see if it is relatively undervalued or overvalued. The Sum of parts breaks a big company into smaller chunks and finds if the sum of all parts of valuations of a company is equal to the overall company valuation. The risk assessment identifies all the risks and quantifies the material impact of risks into the valuation

Qualitative Assessment

Numbers do tell the story but miss while indicating the future, which is unknown. That is where the qualitative inputs come into play. An experienced analyst can convert these qualitative inputs into quantitative ones that impact the valuation. Some of these qualitative inputs are quality of management, Competitive intensity in the industry, ESG initiatives and risks, and analyzing Porter’s 5 forces. It’s to be noted that Porter’s 5 forces is a highly qualitative model and needs to be put on a quantification scale.

Different institutions approach equity research differently depending on their business and operational needs. Here is how Equity Research differs across institutions

Equity Research for Investment Banks

Equity Research at Investment Banks is as much as a Marketing exercise as it is operational. Usually, an Investment Bank would send stock recommendations to all its current and potential clients. These recommendations are sometimes not detailed as the detailed research is kept for high paying clients. An equity research report is prepared for every stock. The report is templated and carry similar content for all the stocks that the bank tracks. It also suggests the buy, sell, or hold recommendations along with the price range to expect for each stock. Detailed equity research is also done for the buy-side. There are multiple research report templates that are available with an Investment Bank.

Earlier the research cost was added to the brokerage cost for an investment bank. Now a regulatory notification in Europe bars Investment Banks from clubbing brokerage and research costs together. This means now research needs to be high quality and needs to be provided only when the client demands. It’s just a matter of time that these regulations catch hold in the United States and other financial markets across the world.

Equity Research for Hedge Funds

Equity Research for hedge funds is done towards the aim of portfolio management and taking long and short positions regarding listed stocks

Hedge Funds are quite secretive about the methodology they follow while picking up stocks. Sometimes the secrecy is warranted as they have something that is really unique but most of the time it’s just a marketing gimmick to avoid further questioning about their methodology. Many claim to use Machine Learning and Artificial Intelligence to pick up the stocks. Equity Research in Hedge Fund parlance is the most critical part of Operations. There is also a huge reliance on Technology with trades mostly intraday and sometimes in milliseconds!! But there is nothing that has replaced the good old fundamental analysis.

Hedge Funds also specialize in technical analysis apart from fundamental analysis. Technical analysis uses mathematical formulas to project trends and thus the future stock price for short term trades.

Equity Research for Private Equity

Private Equity usually deals in Private stocks but sometimes they do pick up stake in listed companies as well. Equity Research in Private Equity is very different than what is done in Hedge Funds and Investment Banks. It is because mostly Private Equity is interested in buying a significant stake and thus has far more information and management bandwidth at its disposal. It uses that leverage to get and analyze information that is usually not available in the public domain.

Equity Research for Asset Managers

All other forms of Equity Research vary in complexity and methodology but mostly sticking to finding the intrinsic value of the stock with the aim of finding undervalued stocks for investments. Some Asset Managers specifically perform equity research for retail investors.

Magistral’s Approach for Equity Research

Magistral is an equity research firm that focuses on Fundamental Research to find out the intrinsic value of a stock using multiple sources. Our methodology takes into account multiple sources to start with and those sources are continually refreshed to update the model to carry the latest intelligence. We also prepare customized Equity Research report. Here is how our Equity Research Process looks like

Magistral’s Equity Research Methodology

Our equity research services are customizable and scalable as per clients’ requirements. Magistral has delivered multiple Equity Research projects in the past

About Magistral

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modeling, Portfolio Management and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The Author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsutling.com for any queries or business inquiries.

Introduction to Hedge Fund Outsourcing

Operations Outsourcing for Hedge Funds is slowly becoming a viable proposition to improve analytical excellence and reduce the operations’ cost. Almost all types of hedge funds can benefit from outsourcing and research support services. It aids the smooth functioning of Hedge Fund operations. Hedge Fund outsourcing not only helps in reducing operations cost, but it is also immensely helpful in raising the analytical standards of the fund.

Hedge Funds are investment vehicles that invest in stocks to give superlative returns to their investors. They follow multiple strategies like long-short equity, market neutral, merger arbitrage, convertible arbitrage, event-driven, credit, fixed income arbitrage, global macro, Short only, and Quantitative. Here is what these strategies are and what could be outsourced by each strategy

Long-Short Equity Hedge Fund

This is by far the most common form of Hedge Funds. Here the fund manager takes long and short positions on the stocks where he believes the stock will go up and the stock will go down respectively. Ideally, long positions should match short positions, so that risk from overall market movements is hedged. However, in practice, the ratio of long and short positions varies with every fund manager. Generally, there are more long positions than short ones. Taking long positions on expected winners acts as collateral to short positions in the expected losers

Long-short Equity is an extension of pairs trading, where a fund manager takes opposing positions in similar stocks in the same industry. If a stock looks overvalued as compared to another in the same industry, the fund manager goes short on the overvalued stock and long on the undervalued one. This relative positioning hedges the risks of market fluctuations in either direction

Hedge Fund outsourcing in long-short equity funds have reduced operations cost by 40-70% and at the same time is known to bring the new skills to the fold of the fund.

What could be Outsourced

Here is what could be outsourced conveniently in a Long-Short Equity Hedge Fund

-Equity Research

-Middle Office

-Fund Administration and Accounting

-Data Management (Collection, Cleansing, Automating and Templatizing for Insights)

-Industry Research

Market Neutral Hedge Funds

Market neutral hedge funds are long-short equity funds that hedge the value of long and short positions. The value and volume of long positions match the value and volume of short positions. This ensures that the risks of market movement are minimized. That also means that the returns from such hedge funds are far moderated than the funds that are biased towards long positions. As its type of a long-short equity fund, outsourcing carries similar potential.

Here is what could be outsourced conveniently in a Market Neutral Hedge Fund

-Equity Research

-Middle Office

-Fund Administration and Accounting

-Data Management (Collection, Cleansing, Automating and Templatizing for Insights)

-Industry Research

Merger Arbitrage Hedge Funds

This is a unique kind of event-driven hedge funds that play on a merger event. Whenever a merger event is announced, the fund manager buys the shares in the target company and shorts the shares of the acquiring company in the prescribed share swap ratio. It creates a spread that incentivizes the fund if the merger goes through. This is however a risky proposition and fund loses in case the merger does not go through due to any regulatory or internal reasons.

Apart from usual activities, here is what could be outsourced:

-News tracking related to M&A

-Merger Modeling

-Valuations

-Industry Reports

Convertible Arbitrage Hedge Funds

Convertible Arbitrage is securities that combine bonds and equity. Fund Managers are usually long on bonds and short on the equity that they convert to. Fund managers maintain a delta neutral position throughout. So if the equity value goes down, they need to buy more equity and hedge more if the stock price goes up. It forces fund managers to buy low and sell high. These funds return superior performance if there is volatility in the market.

There are multiple facets of operations that could be outsourced here

Event-Driven and Credit Hedge Funds

This is another unique type of hedge fund that thrives on special situations like bankruptcy. These funds focus on acquiring senior debt that gets paid over other kinds of debts in case of bankruptcy. Credit Hedge Fund on the other hand looks for arbitrage between senior and junior debt from the same issuer. They also trade between securities of different qualities from different issuers

Apart from regular operational aspects, here is what could be outsourced here

-Research around the events that allow the opportunity to kick in for the Hedge Fund

Fixed Income Arbitrage Hedge Funds

These Hedge Funds buy securities on one market and sell them on another market and make money from the arbitrage existing between the two market prices of the securities.

Global Macro based Hedge Funds

Some Hedge Fund focus on macro trends around countries, markets, commodities, trades, etc. to bet on different investment and trade from opportunities that these macro changes may throw-in.

Global macro changes research could be outsourced here.

Short Only Hedge Funds

These Hedge Funds bet on the failure of a company. They look for companies that may have unsustainable business models and go short on them. It’s the short part of the Long-Short Equity Hedge Fund.

All the elements of the Long-Short Hedge Fund could be outsourced.

Quantitative Hedge Funds

Quant based Hedge Funds solely depend on mathematical models to make buy or sell decisions. Their algorithms are obscure and they use tools like Machine Learning, Artificial Intelligence, High-Frequency Trading, and other technological tools to produce returns.

All regular activities related to Hedge Funds like Administration could be outsourced here.

Here are the activities that Hedge Funds commonly outsource:

Activities that are commonly outsourced by Hedge Funds

Equity Research Outsourcing/ Hedge Fund Outsourcing

Equity Research Outsourcing is by far the most important element of Hedge Fund Outsourcing. Equity Research outsourcing helps the in-house team track more stocks and sometimes to give more depth to the same set of stocks that are tracked by the fund. Fundamental and technical equity research, both could be outsourced effectively. DCF models are prepared for each stock and then tracked progressively for any changes or news related to that particular stock. Earnings call transcripts are duly recorded and analyzed for a recommendation. A short 2-3-page report is prepared for every stock with the overall recommendation and the rationale for the recommendations. Hedge Fund Research tasks are completed seamlessly with the offshore team acting as a natural extension to the in-house team

Markets/Industry Research

If an investment theme is weaved around a specific country, industry or an emerging theme, its imperative to track that industry, market, or theme closely and regularly. A market is tracked for any macro-level changes like new tech, change in regulations, key movements, trends, etc periodically say quarterly. Several indices are also tracked regarding this. It’s quite common to track 14 S&P industries or some of its components therein. For index hedge funds, the performance of various indices is tracked

Typical examples may be tracking the insurance market in North Africa or metals and mining in South America. If your fund has a bigger interest in stocks that are based in those markets, it makes sense to have the key metrics of these industries reported to you regularly.

Manager Research

This is important for Fund of Funds. As part of their investment strategy, they are continuously on a look-out for hedge funds that fulfill a given set of criteria like vintage, past returns, investment themes, etc. Each fund is analyzed for risk-adjusted returns over a fairly long period like 10 years or so to find out the most suitable funds.

This requires getting in touch with multiple funds across the globe, collecting information, analyzing it, and then presenting holistic recommendations on where the fund stands. All of this could be outsourced.

Bond and Other Fixed Income Instruments Research

For hedge funds that operate on the lines of fixed income, the research is done that is related to sovereign and government bonds, corporate bonds, fixed income instruments, and several other investment options like that.

Fund Administration and Accounting

Fund Administration is outsourced for activities related to accounting, bookkeeping, and general administration of the funds. This also forms part of Hedge Fund Middle Office Outsourcing. Some bookkeeping aspects also come under Hedge Funds’ back-office outsourcing. It keeps the documentation trail of all the trades, makes sure all operational processes are followed and exceptions are duly approved. Hedge Fund books are maintained in the prescribed format. It also takes care of investor communications like portfolio allocations, portfolio valuation, capital calls, taxes, profits, fees, NAV, portfolio, etc. Customized Hedge Fund newsletters for investors is sometimes prepared and sent separately to current and potential investors.

Investor Relations

This is a subset of the Fund Administration process. However, some elements of organic investors’ reach out could be outsourced as well. A tool or a portal for all the investors with all relevant information for them is prepared for seamless and updated communication. This is communication related to the Hedge Fund investments made by the investors. This might be customized to carry Hedge Fund news, Strategy, Returns, and Performance. In the case of Fund of Funds, the performance of all the underlying funds is covered.

About Magistral

Magistral has helped multiple hedge funds in outsourcing operations. You can check www.magistralconsulting.com for more details.

About the Author

The Author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsulting.com for queries on this article or business inquiries in general.

Investment Research Outsourcing

Multiple Investment Services firms like Investment Banks, Private Equity, Venture Capital, Hedge Funds, Family Offices, and Asset Management firms are looking to outsource investment research in the post-Covid 19 pandemic era. The article describes the concept of Investment Research and the ways to go about outsourcing the process.

What is Investment Research? Investment Research Definition

Investment Research and Analysis or Investment Analytics combines multiple activities related to investments in Equity of companies (both public and private) and other financial instruments.

The major activities related to securities research are equity research, Fixed Income and Credit Research, Index and Quantitative Research, and Macroeconomic Research.

Another important aspect of Investment research is the support services towards Corporate Finance and Valuations. It includes activities like Investment banking support, Valuation support, business information services, and Private Equity and Venture Capital support.

Investment research also comprise of data governance-related activities like outsourced CFO.

Is Outsourcing a Good Idea?

Investment Research Outsourcing is fast catching up. Here are the trends that are leading to expending the concept of Investment Research Outsourcing

The pressure to lower costs: Investment Banking is not what it used to be. The digital world has shrunk the opportunities to make big dollars brokering big deals or IPOs. This has also led to pressure on costs. This leads to outsourcing non-critical jobs to low-cost countries like India.

Diversification on investment types: An Investment manager has way too many asset classes to handle today. It’s not only limited to public equity but now has diversified into private equity, real estate, cryptocurrencies, commodities, REITs, Index-linked instruments, and many other asset classes. If the investment team is small, it’s difficult to have a combination of skillsets to provide a holistic solution to their clients. As outsourcing vendors understand Investment Research dynamics well, Outsourcing helps in bridging the skill gap. Outsourcing vendors also have access to multiple investment research tools.

Information Sources and Databases: With the proliferation in investment type, also gone up is the requirement of multiple databases for varied data points. It’s a costly affair to maintain access to multiple databases in-house. Investment research tools are also used to fine-tune the data and information.

Confidentiality: There is pressure to keep all information confidential. An outsourced team doing due diligence is perfect, as it leaves no trace of who the client maybe, that is doing the due diligence. An analyst can talk to potential target with or without introducing the client.

Quality: Outsourced players have better quality than the in-house team. The outsourced team typically is bigger and has done similar tasks multiple times before. In the process, they usually create an information bank or templates that are ready to use. They also sit on the hoard of best practices for multiple situations. If the outsourced player has its knowledge process well documented, they are in a better position to offer work quality.

Effective Supervision: When internal teams are working on an analytical project, it’s difficult for a partner to take time out to get into the details of data, information, and analytics therein. But with an experienced outsourcing player, there are multiple levels of supervision, governance structures, and quality control processes to establish an error-free work every time.

Variable Costs: Outsourcing agreement can be changed to pay for hours consumed or assignment outsourced other than hiring a virtual investment analyst. This brings immense flexibility in terms of costs. An investment firm can hire only for the assignment and then go back to the original structure, once the job is done. This is very useful for smaller investment teams and firms with partners only, who need an on-demand investment research analyst. An investment research team can come together ad-hoc and then could be dismantled when the job is done.

What jobs can be performed with Outsourced Investment Research? Outsourced Investment Research Activities

There are multiple elements of the Investment Research Process, that could be potentially outsourced:

Equity Research: Equity Research is the most voluminous work as Investment Banks usually outsource quantitative investment research. Equity research typically revolves around the fundamental analysis of the set of stocks that are tracked regularly. A report carrying all the developments and valuation-related matrices is published once a quarter for every stock covered. These Investment Research Reports are updated periodically. The format of these reports is customized and can be changed as per the client’s preferences. Outsourcing this activity allows the in-house team to cover more stocks than it would have covered otherwise. Also, this task could be broken into multiple streams before outsourcing, say preparing the DCF model, updating the model periodically or analyzing the investor calls from the company’s management. Investment Research Analysts work as an extended offshore team to the in-house team. Investment research software aids the in-house tech capability.

Due Diligence of Private and Public Companies: Due diligence is time-consuming and requires huge efforts. Sometimes the due diligence can last even for a year analyzing tons of data and information. A support team that takes up the requests and delivers as promised increases the efficiency and makes sure that due diligence is completed in prescribed time limits and suitable valuations. It also makes sure that the asset generates the intended value for the investors after the investment.

Fund Administration and Investor Relations: There are multiple activities of fund administration and investor relations that could be outsourced like Newsletters, MISs, Expense Tracking, Accounting, Company Registration, and multiple other similar activities. Investment Research management software or Investment Research Platforms are used to coordinate multiple related activities.

Outsourced CFO/ Outsourced CMO/ Outsourced CPO for portfolio companies: This is very relevant for Venture Capital and Private Equity firms that go into the nitty-gritty of operations for portfolio companies. Rather than hiring a full-time Chief Financial Officer, Chief Marketing Officer, or Chief Procurement Officer, one can just outsource these activities and pay for the services when needed. Some activities related to lead generation in sales and business development could be outsourced as well. Outsourced CFO is the most popular option.

Research and Strategy: Research and Strategy projects are generally run parallel to the main operations. There are instances of hyperactivity followed by the lull in terms of number of the projects and initiatives. Outsourcing these keep the focus of operations’ team on the day to day operations and an unbiased view of the strategic potential from someone who has a fresh eyes perspective on things.

Financial Modeling: Financial modeling is more of an art than science. Asking the right questions and then capturing the details is a skill that is honed over time. Most internal teams are not skilled in these activities as it may be one-off activity once in a while. An outsourcing entity has ready templates and has done these over time to know the exact pain points and the right questions for the perfect financial model. Investment Banking Research Analysts are well versed with multiple aspects of financial modeling.

Deal Origination: Deal pipeline should be continually populated for a Private Equity or a Venture Capital firm to run like well-oiled machinery. Most activities related to deal origination can be outsourced effectively. It can again be broken into sub-activities before outsourcing and then outsourcing the non-critical jobs. Decision making related to investments can be kept in-house but company profiling, list generation, initial due diligence can be outsourced. Once the investment decision has been taken parts of detailed due diligence could be outsourced as well.

How to Go About Outsourcing Investment Research?

There are multiple investment research companies and investment research firms which assist in outsourcing investment research services by offering virtual investment research analyst. They are varied in size and geographical presence. There are multiple investment research firms in India, that offer low-cost advantages. You can make a list of suitable vendors either from Google search, references or when a sales leader reaches out to you. The very first step towards establishing suitability is to ask for past work samples. Once you have had a look at the work samples and they appear good quality, ask for a proposal for a pilot project. A pilot is a smaller project that is undertaken before outsourcing the bigger chunk of the operations.

A pilot project should ideally last from a week to a quarter. This should give you ample time to experience the vendor’s capability and skills. Once the pilot is successfully completed, a bigger engagement should be negotiated. Also, make sure the price that the vendor offers is competitive for the quality of services offered.

Magistral Consulting has helped dozens of buy-sides and sell-side firms in outsourcing their investment research operations. It is one of the leading Investment Research companies in India with the capability of performing global investment research. It is a one-stop-shop for all requirements of investment research and analysis. It has delivery centers in India that give it a cost advantage with sales offices in all the major cities across the world. To drop a business inquiry with Magistral, click, https://magistralconsulting.com/contact/

The author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsulting.com for any queries. For further details on Magistral and its services, visit www.magistralconsulting.com