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-side 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.firstname.lastname@example.org for any queries. For further details on Magistral and its services, visit www.magistralconsulting.com