April 2007
« Mar    
  • Links

  • Venture Capital/Private Equity

    • A VC, Musings of a VC in NYC
    • Beyond VC
    • Burnham's Beat: Thoughts on software investing
    • BusinessWeek DealFlow
    • Dan Primack's Private Equity Week Wire
    • Due Diligence
    • Feld Thoughts
    • Jason Ball's Tech Bytes
    • Jeff Nolan
    • Josh Wolfe's Weblog
    • NWVentureVoice
    • Occam's Razor
    • Section One
    • TJ's Weblog
    • VC Ball
    • Venture Blog
    • VentureWiki
  • Public Markets Investing

    • Integrity Research Blog
    • The big picture
    • Tom Brown's
    • The Kirk Report, one pro's view of the stock market
    • The Capital Spectator
    • Seeking Alpha
  • Online Networks

    • Apophenia
    • Clay Shirky's Writings about the Internet
    • David Weinberger
    • How to Save the World
    • Keith Hampton
    • Life with Alacrity
    • Many-to-Many Blog
    • Mathemagenic
    • Networks, Complexity, and Relatedness
    • Raindrop
    • Ross Mayfield's Weblog
    • Smarter, Simpler, Social, Lee Bryant
    • Stowe Boyd
    • TechCrunch
  • Miscellaneous

    • The Privacy Marketing Review
    • Internet Time Group Blog
    • Internet Marketing and Sales Technology from the Trenches
    • John Robb
  • Profiles

    • Blogstreet Profile
  • Blogging Resources

    • NYC Bloggers Map
  • Productivity

    • 43 Folders
    • Lifehacker
Circle of Experts

Brain Food Blog
Posts in Private Equity Investing

Tools and resources from the Nitron Advisors team. We tend to blog about investing, leadership, management, career acceleration, personal productivity, securities research, and online networks.

March 27, 2007

Ten things you must do in your next investing pitch

Posted in General, Private Equity Investing, Public Markets Investing
by David Teten @ 6:30 pm —

Via Laura Athavale Fitton:

“Just in time for Spring Pitching season and all the venture fairs coming up, we’ve published a pair of tip sheets for startups to make their pitches stronger:”

March 14, 2007

A marketplace for research

The team from AQ Research (at whose conference I’ll be speaking tomorrow in London) has written a blog post about an idea I’ve chewed on for a while: ‘A Marketplace for Research’. There are a number of gross inefficiencies in the current research business, and inefficiencies are usually the breeding ground for new business models can be created.

Some of the gross inefficiencies that one can see include:

• Hundreds of people on Wall Street are paid huge amounts of money to do identical work, e.g., probably hundreds of investors have slightly different models of what Microsoft’s earnings will be

• Money managers are paid very high compensation for a product whose quality is to a large extent driven by a quality of the inputs. Shouldn’t research firms get a larger chunk of that value chain?

There’s an old saying that “50% of the money I spend on advertising is wasted; I just don’t know which”. Research firms have the opposite problem; they are sometimes grossly overpaid or underpaid, but rarely know which.

The idea of a marketplace for research addresses many of these inefficiencies. As one small example, I know of a boutique research firm which explicitly auctions off certain new analyses to, e.g., the top four bidders among their clients.

Another model: there are quite a few startups which provide a marketplace for retail investors to share their research, although of course in the vast majority of cases this research is far inferior to what is sold to institutional investors. These sites are hoping to benefit from the wisdom of crowds effect, as does the Nitron Circle of Experts. For example:, which channels contents from hundreds of bloggers to provide insight on a range of industries. They pay the bloggers nothing, but monetize the traffic through advertising. Bloggers participate for exposure.

Marketocracy , a research company and fund which has recruited over 55,000 people to manage over 65,000 model portfolios. It then invests based on the best picks of those participants.

Feeling Bullish, BullPoo, Digstock, and SocialPicks - all of which are discussion sites in which your public discussion of investment ideas is systematically ranked. The SocialPicks site is currently down.

Stocktickr positions itself as a “trading journal” in which you can keep track of your trading ideas. Asking people to submit this information manually won’t work—they need to have partnerships with all the major online trading services.

Bivio, a site which helps individual investors form investment clubs. They provide accounting and fund management services, including investment partnership accounting and tax software.

Motley Fool CAPS, a Motley Fool service that lets users place predictions on a publicly listed stock’s performance vs. the S&P 500 over a given time frame ( See Techcrunch’s writeup)

November 27, 2006

Wall St. Journal of Today: Big Investors Turn to Network of Informants

Nitron Advisors is featured on the front page of today’s Wall Street Journal:

Big Investors Turn to Network of Informants

“For professional investors, something akin to what has done for the nation’s singles…hooking up middle managers from hundreds of companies with professional investors desperate for an investing edge.”

More (requires subscription or two-week trial)

UPDATE: Michael Mayhew posted the article’s text in full, without the graphic which discusses revenue of Nitron and other players in the space.

November 12, 2006

Ian Bremmer- Hedging Political Instability for Insight and Profit

My colleague Scott Lichtman took notes on Ian Bremmer’s talk Monday night at this past week’s World Hedge Funds Summit . Dr. Bremmer’s prediction that Rumsfeld would resign proved accurate within 48 hours.

Ian Bremmer, President of Eurasia Group, and author of The J-Curve: A New Way to Understand Why Nations Rise and Fall, spoke about understanding the stability of political regimes and how investors can pick the right countries/regions, sectors, and investment strategies to make the most of this analysis.

Opening question: Why is Iran a much greater risk to the world economy than North Korea? What does China take from the US during business negotiations that Russia doesn’t?

These questions are addressed through his theory of the “J-Curve”. Imagine a graph with Societal Openness on the Y axis and National Stability on the x axis. The graph line starts high on the left as very closed nations are very stable, plunges downward moving right as nations that attempt small become much less stable quickly, then gradually rises towards greater stability as open policies such as rule of law, freedom of press and democratic voting proceed. Think of the Nike swoosh with the tail opening on the right – or a check mark with a rounded bottom.

Iraq, on the upper left, was stable under Hussein’s closed (oppressive) regime policies, in terms of impact on the economic markets. The direction of shifts in the J-curve has implications for the size, type and duration of investments in a given country. Some of this is common sense, but Bremmer’s knowledge of the political environment, layered on the J-curve analysis, makes for very worthwhile food for thought.

See more below on China (and role in Africa), India, North Korea/Japan, Russia and oil, and the US elections.

North Korea: The j-curve tells us that regimes like this naturally rebound to maximum ‘closed’ status. Open democracy is far too risky for the regime to ever consider, so trying to isolate the country through sanctions actually is a reward for Kim Jong-Il. They’re calculating their position – alerting the world ahead of a nuclear test, so that the US and China could coordinate positions, with China’s interest in maintaining status quo to gradually ascend as regional superpower, damping any real sanctions.

The worst case for Korea is if Japan and China agree and N. Korea can’t play them off each other. Japan may become the ‘Israel of Asia’ – close US ties, longstanding differences with its neighbors, nuclear capable . If Japanese and Chinese economies slow and their governments want to bolster popular support through rhetoric, watch out for potential sea-based military conflict. But it’s most likely that those economics grow and N. Korea is relatively harmless - all the government really wants is money and self-preservation. (and cigars and brandy)

In China, the pro-growth politicans are out. That’s not a problem, because for 5 years there has been gridlock on any issue like IP protection or foreign investment in assets. With a more conservative government in place, they can actually afford to make a few accommodations in these areas that will keep relations stable with the US.

Bremmer predicts a worsening situation in ’08, at the time of the Olympics in Beijing. “Scheduling it in 08 was a mistake.” That’s in the middle of a US election, when congressman will use the high profile event to put pressure on trade and human rights issues. While the Chinese will do their best to focus on a smooth Olympic event with an agenda on Tibet, free press, the Shanghai faction will attempt to make noise or worse. There’s a 20-40% probability of a modest shock occurrence during the event. Compare the Atlanta Olympics.

China is taking maximalist investment positions in unstable countries. Chinese is being taught as second language in African schools. 2 months ago in Zambia elections, a candidate promised he would recognize Taiwan as a nation. That even being an issue shows a lot of anger about China investing in copper, being close to dictatorial local governments, smashing trade unions, etc. China is starting to control commodities sources.

One offsetting factor for the decline in US influence is Bill Gates and the Gates Foundation, which has more influence in certain failed countries than the US and many European nations. “Bufffett’s donation to the Gates Foundation was some of the best foreign policy news I’ve heard.”

India: A great environment for the top 2% of the population, which makes a case for investing in luxury products. But will they gain a solid middle class? Bremmer thinks most pundits are too optimistic and we’ll see slower than expected growth in metrics like purchase of cars.

Russia: Relations with the US are in their worse state since Kosovo. The government is going after the metals, telecom, auto, aviation industries – anything they perceive as strategic. If you are working or investing in a strategic sector and not aligned with Putin, you are in trouble.

Russia has a rising middle class, even in Siberia. If you’re part of this market – consumer brands, high-end services, corporate office building – then you’re making money.

Russia feels humiliated about zero sum game with West in last 10 years. Under Clinton, we created an oil pipeline from the Caspian Sea to Europe bypassing Russia. Russia lost control over Georgia and the Ukraine, now they’ve gotten the Ukraine back and are trying to get Georgia back. If that happens, the trans-border oil pipeline contract will be renegotiated.

The good part about investing in Russia is they just want to rip you off monetarily. In contrast, in China they want to take your intellectual property, then compete with you.
Russia sees Iran as a useful geopolitical hedge against US in the region. China sees it as a problem to be contained.

Eastern Europe: looks good/stable. Romania/Bulgaria are relatively closed and hard to invest in, but their P/Es are cheap compared to other Eastern European countries.

Iran – He predicted some sanctions will pass unanimously. The markets won’t react immediately. Somewhere in 2007 it will get ugly. Iran has open press, young activists, which puts it on the volatile part of the j-curve. It benefits them to focus their population on the nuclear confrontation with West. Sanctions help them. But military action by Israel wouldn’t help him (stability-wise).

We have 18 months until the point of no return, when Iran can make nuclear weapons on their own, then 3 years until weapons are readily transportable, according to intelligence in US & Israel. Similar in Britain.

If moderates gain ground, then maybe political actions from the West will make a difference. But oil prices are too strong, which makes the closed society more stable. Israel will likely choose to attack Iran if it comes down to a close-range nuclear threat.

US elections: Bremmer predicted the elections’ impact, noting “Elections are tomorrow, so I get the chance to be wrong immediately.” He predicted Rumsfeld and/or Cheney stepping down, Cheney ostensibly for health reasons. This would allow the GOP to insert a fresh VP that could gain national prominence and become a momentum leader for the presidential race in ’08, saving the GOP from a wide-open (unstable) race. McCain is a front runner but is having good and bad days now (even for a President, he’s relatively old at 72). It’s very likely that neo-isolationism will pick up on many fronts – you’ll see it in trade protectionism, reactions to offshoring job losses, and immigration restrictions.

November 9, 2006

Nitron Advisors joins The National Research Exchange, Inc.

Posted in General, Private Equity Investing, Public Markets Investing
by David Teten @ 10:52 pm —

I’m happy to report that Nitron Advisors has joined The National Research Exchange, Inc. Here’s the press release:

Leading network of frontline industry experts broadens The NRE’s platform

NEW YORK, NY, November 7, 2006 /PRNewswire/ — Nitron Advisors, Inc., a leading provider of direct access to industry experts and leaders, has joined The National Research Exchange, Inc. (The NRE). Nitron Advisors will allow The NRE to enhance its product suite and service delivery in areas that drive value to research firms, investment banks, public companies, and investors.

“Nitron Advisors is a perfect complement to The NRE menu of research related offerings. The Circle of Experts brings relevant experts for investors’ needs, ranging from macro analyses to specific technical expertise to due diligence in support of capital investment. We are very pleased to add these capabilities to our platform,” said David Weild IV, President and CEO of The NRE.

“The NRE’s Intermediated Research(SM) program allows companies to increase institutional investors’ interest in and knowledge of their firms Further, The NRE’s analytical system, StreetView(SM), provides users with the ability to assess research provider strategy and investment banking fit,” said David Teten, CEO of Nitron, “We are delighted to join The National Research Exchange.”

Briefly, The NRE and Nitron Advisors will provide the following service:
==> A Company seeking to increase institutional investor awareness hires The NRE to provide Intermediated Research(SM) coverage.
==> The NRE in turn pays Nitron to introduce some of Nitron’s institutional investor clients to members of the Nitron Advisors Circle of Experts who have insight into the Company. In addition, some of Nitron’s clients will pay Nitron directly for this service.
==> Nitron pays members of the Nitron Advisors Circle of Experts for their time and insights.

About The NRE

The National Research Exchange is the leader and originator of Intermediated Research(SM). Our proprietary platforms enable equity Issuers and investment banks to systematically evaluate the competitive landscape of banking and research providers in order to mitigate the risks inherent in public offerings and ensure sufficient aftermarket research coverage. Our patent-pending technologies help companies to secure greater visibility and liquidity in the public markets, thereby lowering the cost of capital and improving shareholder value. Visit for more information.

About Nitron Advisors

Nitron Advisors, Inc. is an independent research firm, specializing in providing institutional investors and law firms with real-time, frontline information through our proprietary Circle of Experts. Our clients learn from our experts through one-on-one consultations, customized surveys, and interactive events. Our clients include investment banks, hedge funds, mutual funds, private equity firms, and law firms. Visit for more information.

Nitron Advisors Contact:
Scott Lichtman, 1-212-682-6679, slichtman(at)

The NRE Contact:
Richard West, 1-212-595-4600, richard.west(at)

SOURCE: The National Research Exchange, Inc./Nitron Advisors, LLC

November 7, 2006

Toronto Hedge Funds Summit: Investment Research Panel

Posted in General, Private Equity Investing, Public Markets Investing
by David Teten @ 11:18 pm —

I’m enjoying visiting Toronto this week at the . Here are my notes on today’s Investment Research Panel, preceded by the speaker biographies.

Moderator: David Weild IV

The National Research Exchange (The NRE) is the originator of Intermediated ResearchSM, which helps public companies to secure greater visibility and liquidity in the public markets and research providers to establish new sources of sustainable revenue. Their proprietary analytical tools enable users to evaluate the competitive strengths of research providers and the equity capital markets performance of investment banks.

David Weild IV served as vice chairman of The NASDAQ Stock Market and spent fourteen years at Prudential Securities, where he served as president of, head of corporate finance, head of technology investment banking, and head of equity capital markets. He also chaired Prudential’s Equity New Issues Commitment Committee.

Doug Atkin

Majestic helps investors gain an independent perspective of companies and their sectors based on our exclusive relationships with proprietary data sources. We are experts in identifying and securing industry data licenses and turning that information into meaningful research. Doug Atkin was previously President and CEO of Instinet Group, where he conducted the IPO (NASDAQ: INGP), developed Instinet’s research, international trading and correspondent clearing businesses, and led a consortium of nine global brokerage firms that took a majority stake in the virt-x stoc exchange. He served on both the Trading Committee and Market Structure Committee of the SIA. Doug was selected one of the Top New Yorkers of 1999 by New York magazine for his leading role in redefining the financial marketplace. In 2000, Institutional Investor profiled Doug as one of the top 10 individuals making the greatest impact on e-finance, and was presented with The Travers Bell Memorial Award of Distinction sponsored by the SIA. Doug serves as a member of the Board of Directors of Starmine and WR Hambrecht. He is a graduate of Tufts University.

Scott Lichtman

Nitron Advisors, Inc. is an independent research firm, specializing in providing institutional investors and law firms with real-time, frontline information through our proprietary Circle of Experts. Our clients learn from our experts through one-on-one consultations, customized surveys, and interactive events. Our clients include investment banks, hedge funds, mutual funds, private equity firms, and law firms. Visit for more information.

Scott Lichtman has nearly twenty years of experience in financial services, technology and consulting companies. Among his previous positions were oversight of Messaging/Collaboration Product Management and Marketing at Communicator Inc — a provider of communications, compliance and operations-related information services for institutional investors and brokers; Senior Director of Marketing at InterWorld, the e-commerce software provider that drove the online growth of firms including Nike, Disney and GTE; Senior Director of Strategic Marketing at Oracle Corporation — where he managed pricing, e-commerce sales support and business development; and IT & Strategy consultant at Deloitte Consulting. Mr. Lichtman also ran his own online-collaboration consulting firm, Vitaltouch Consulting, and in that capacity guided operations for a firm that provided banking services to low-income individuals. Scott has written analyst reports and articles on topics ranging from pricing strategies in the technology industry to online communities. He received an MBA from Harvard Business School, a Master of Economics from the London School of Economics and a Bachelor of Science degree from the Massachusetts Institute of Technology.

Paul Spillane

Through experienced sales and trading professionals, Soleil Securities Group connects institutional investors with an expanding network of accomplished independent research providers. They gather and filter insightful, actionable research ideas and deliver them to portfolio managers, buy-side analysts and trading desks. They also provide trading services through which asset managers can direct order flow as payment for the ideas and services they value. Paul Spillane has been in the securities industry for over 25 years. He started his career at Goldman Sachs, where he worked in fixed income, foreign exchange, commodities, futures, and options products. He then moved to Deutsche Bank, serving as managing director and head of global market sales for the Americas. Spillane subsequently transferred to global equities as a senior member of the executive team responsible for building the global equities businesses. Most recently, he was responsible for establishing Deutsche Bank’s Global Relationship Management program.

Paul Warme

Lusight is an independent investment research firm, with a focus on Global Emerging Markets. They have taken a unique approach to the production and distribution of investment research by developing a web-based Open Research Platform that allows clients to access our research reports, plus all of the inputs and tools we’ve used to produce our research, including company data, interactive financial models with base case forecasts, and a powerful analytical tool. Lusight conducts much of its operations in Toronto, leveraging an international research staff that has emigrated to Canada. Paul Warme is a co-founder of Lusight, and currently serves as Managing Principal and Head of Research. Paul has 15 years of international banking, M&A and capital markets experience. He began his career with Scotiabank’s strategic investment group and was involved in evaluating and executing acquisitions in Latin America and Asia. He also spent two years in Chile advising Scotia’s local affiliate on banking best practices, and one year in Mexico restructuring a distressed bank. Most recently Paul spent five years in New York as a senior analyst covering emerging markets financial institutions at Paribas and ING Barings, where he was also head of Latin America research. A Canadian citizen, Paul holds an MA from the Johns Hopkins School of Advanced International Studies.


Doug Atkins: Majestic is a data-intensive research firm. Very technology- and data-based. Just like technology augmented the trading model, we’re augmenting research through technology. We scrape 100m websites/month: number of eBay listings, what people are paying for keywords on Google, what 3500 doctors are prescribing, what they’re offering as samples. Our team brings these multiple data sources together to give another perspective to investors on the companies and markets they have holdings in. The goal is to either track, confirm or refute their hypotheses.

Scott Lichtman: Nitron helps institutional investors increase their returns by providing direct access to senior industry experts. The experts we provide are used via phone and in-person consultations. These industry executives have highly specialized expertise and are provided on short notice, to comment on questions ranging from likely customer response to a new technology, to means of estimating production from an oil or mineral deposit, to predicting the impact of regulation impacting healthcare service providers.

We serve hedge funds, bulge-bracket prop desks, mutual funds, private equity and venture capital investors in the US, Canada and Europe. Our clients particularly find our service useful in two situations: a) a quick take on a situation for opportunistic investors that are scanning across sectors and continents for opportunities, and b) specific due diligence on an investment target by long-hold and private equity firms.

Paul Spillane: Our goal is to be the premier aggregator and distributor of intellectual content, providing a range of services to our clients. We do specialty dinners, bringing management on the road, etc. Our analysts only get paid if you, the consumer of research, value their insights and choose to pay them. We are a virtual research organization, partnering with outside, 3rd-party providers.

Paul Warme: announced as the ‘Canadian representative’ on the panel, as Lusight and all its analysts are based in Toronto. They not only serve BRIC (Brazil, Russia, India, China) but other countries such as Kazakhstan, Colombia, etc. We have both dedicated and opportunistic emerging market investors as clients.

David Weild: What does your firm do that investors value most?

Paul Warme: We focus on mid-caps/small-caps in those emerging markets. The companies usually are not covered at all, or only by local brokers. We deliver not only research product, but also all the models and raw inputs that went into that research. We do this with a proprietary research platform we developed—a workflow tool.

Paul Spillane: Some hedge funds like our anonymous trading desk, some like our recommendations, some like our access to management. Each and every client can use us as a virtual research dept.

Scott Lichtman: Clients value that Nitron’s industry experts are (1) senior, (2) specialized and (3) have fresh insights.

1) Senior. We seek the most senior experts to validate investment hypotheses of our clients. Example: a Senior EVP of Operations for one of the largest automotive firms; a chief strategist of a major group at Microsoft; the former chief of exploration for one of the world’s largest oil & gas firms.

2) Specialized. One client recently asked for an expert on the specific extraction costs and political conditions surrounding a proposed mining project in the Andes mountains. Only a small number of people in the world are qualified to answer that question.

3) Fresh. Because the questions posed to us are so specialized and because we reach over 100,000 experts to address requests, we’re careful to use experts sparingly. This means that the same opinion is often accessible to only one or two firms rather than the many that may receive typical published reports.

Doug Atkins: Majestic’s customers are looking for info that tracks, confirms, or blows out their investment thesis.

David Weild: What specific services are you focusing on now?

Paul Spillane: We’re looking at 3-5 new research models/week that come out. Moving into fixed income—recently signed with partner that covers 350 fixed income issuances. Will soon expand into international services.

David Weild: I’ve heard of funds saying, "I’ll be your 12th customer, but I don’t want you to take anyone else." How do you balance their desire for limited access, with your desire for growth?

Paul Spillane: Every client wants to feel like your #1 client. We spend a huge amount of time understanding our clients. They all want to be treated as individuals. In our model, we’ll just provide best service to the funds who pay us the most—-which is often not the largest company.

Doug Atkins: The traditional Wall Street model is hard to fathom. As an analogy, I’d love to get a car, drive it for a year, then tell the auto salesperson how much I’ve decided to pay for it. And maybe say, "I didn’t use the car so much; I don’t want to pay." We have 90% client renewal rate. Cover 110 names in 9 sectors. We also do a lot of custom work.

The way we address the challenge of balancing exclusivity with growth is through tiered access. We also will Dutch auction off our ’silver-bullet’ data to 2-3 people.

David Weild: How do you all price?

Scott Lichtman: We provide more help when customer shares more about their strategy. We charge a quarterly retainer, or occasionally charge on a by-project basis.

Paul Warme: We’re primarily a commissions-based model, which is what clients prefer. We spend a lot of time trying to figure out how to charge for our services.

Paul Warme: Subscription model. A lot of custom/bespoke work, priced on an ad-hoc basis. For clients who have formal internal voting processes, we’re on the voting list for about 10 firms, and usually generate additional votes that mean clients pay us more than their base subscription price.

David Weild – It’s a sign of the dynamic nature of the research business that each firm here is using a variation of pricing models.

David Weild: How do funds measure value?

Doug Atkins: First, some thoughts on the regulatory backdrop:

+ Big issues are soft dollars. SEC just says there needs to be more disclosure.

+ Reg FD.

Paul Warme: A lot of Asian Emerging Market IPOs are taking place in London, partly to avoid the Reg FD/Sarbox issues.

David Weild: Good news: the SEC is very sensitized to the issue of over-reactive regulation, and trying to make US environment more friendly to attract more listings. I expect this legislation to be right-sized to be more accommodating.

David Weild: What are the biggest changes you expect to see in the research product or industry over the next three years?

Paul Warme: You’ll see a proliferation of research models. Some of the innovations will be completely unexpected from today’s standpoint.

Paul Spillane: There will be a lot of consolidation. This is the most exciting time to be in the research industry. Next 3-5 years will be a cornerstone of next 25 years.

Scott Lichtman: Certain trends are evident though it’s hard to time the future. The New York State Criminal Code used to state that persons "Pretending to Forecast the Future" shall be considered disorderly and liable to six months in prison. But in terms of trends, traditional/background research is becoming a commodity—can be delivered quickly and thoroughly by PhDs offshore who are paid $25,000-$50,000/year (e.g., Evalueserve).

What you will see as one response to research commoditization is the aggregation of different forms of research in tools that aggregate multiple viewpoints on a market or issue. For example, with a research aggregator, we’re now piloting the capability to pull up a ticker, review related research reports, then click on a ‘talk to a relevant expert’ button with professional biographies to review, all from one screen/one interface.

With the commoditization of traditional research and the decline of that economic model, I think we’re also seeing a significant reduction in coverage of smaller cap firms. The economics just aren’t there for the sell-side to provide as broad coverage as before. So instead people will come up with new economic models to address the ‘long tail of coverage’. In fact, we are announcing today a unique partnership with the National Research Exchange. They serve companies that want to deepen their coverage by facilitating research coverage, and we provide the experts who are readily available to analysts and investors to comment on markets. The experts are chosen and accessed independently from the covered companies, providing greater independence to their commentary.

Doug Atkins: The analog is what happened to trading platforms. Customers will be able to take fundamental data from Majestic, and combine it in-house with their own research.

November 1, 2006

Seeking Ecommerce Experts for NY, Boston, Chicago, SF Hedge Fund Dinners

I thought that some of our readers might be interested and qualified to attend one of our upcoming private hedge fund dinners.


Seeking Ecommerce Experts for New York, Boston, Chicago, and San Francisco Hedge Fund Dinners
December 2006 / January 2007


Nitron Advisors is organizing a series of dinners for Ecommerce experts to talk with major hedge fund investors interested in this sector. These invitation-only events will be taking place in New York on December 11th, Boston on December 12th, San Francisco on January 16, and Chicago on January 17. We will compensate you for flight expenses, and give you a stipend for joining us.

We’re looking for senior industry executives and other experts with the following backgrounds:
+ online specialty retail (eBay, Amazon, Blue Nile, Overstock, Audible, etc.)
+ online auctions (power sellers on eBay, other auction sites)
+ search engine space (Google, Yahoo, MSN)
+ consumer generated media/ free video hosting services (YouTube, MSN Video, Yahoo Video, Google Video)
+ online advertising/marketing (ValueClick, 24/7 Real Media, aQuantive)
+ lead generation players (Autobytel Inc, Move Inc, Bankrate, IAC InterActiveCorp, HouseValues, etc.)
+ Online media (PRIMEDIA, New York Times/, etc.)

Qualifications: As an expert, you have at least four years senior experience in the eCommerce space. You have a “big picture” perspective on different firms in the space.

If you are not already a member of our Circle of Experts, please visit and apply to be a member of the Nitron Advisors Circle of Experts. Please contact Mr. Jesse Mandell, 1-212-682-6455, JMandell(AT), with any questions. Please note that we must review your bio and talk with you before we can accept you for the dinner.


I should also mention that we’re hosting a dinner on Nov. 15 for consumer technology experts in New York. We’re interested in experts in PCs, flash memory, MP3 players, GPS systems, and mobile telephony. Register at Contact Mr. Jesse Mandell, 1-212-682-6455, JMandell(AT) , for details. We’ll reimburse flight expenses.

October 18, 2006

Mohamed A. El-Erian, President & CEO of Harvard endowment, on the global economy

I went to a very worthwhile talk last night at the Harvard
Club by Mohamed A. El-Erian, President and CEO, Harvard Management Company, which manages the $29 billion Harvard endowment (as of 6/30/06). The endowment has had consistently impressive performance. As background, I’ve posted on the blog below an article I wrote for the Harbus, the HBS school newspaper, back in 1998, profiling Jack Meyer (Dr. El-Erian’s predecessor).


One of the marks of a sophisticated thinker is that he can make complex subjects seem simple. The global economy is certainly complex (especially now) but this talk boils it down to just a few key issues and tensions.


My notes:



"Navigating a Fluid World"

Presentation to the Harvard Club of New York

Mohamed A. El-Erian, President and CEO, Harvard Management Company

and Faculty Member at Harvard Business School

Oct. 17, 2006




You’re obviously not Mets fans or else you wouldn’t be here.


Will discuss impact of global economy on investing. Internally,
we’ve gone back to 1st principles as we rebuild HMC.


Signals from the market are increasingly inconsistent (i.e.,
confusing). We’ve come across issues that are systemic in nature, uncertain in
impact. And we have lots of questions. Some will think we don’t know the
answers. Some will think we know but aren’t telling. And you’re both right.


Market signals which used to appear sequentially
inconsistent now appear simultaneously so. So very tempting to dismiss them as
noise. Don’t dismiss them as noise—they’re consequential in terms of info




1. What are the markets trying to tell us?


Signals have gone from being sequentially inconsistent to
being simultaneously inconsistent. 3 examples:


A) In the world’s most liquid markets, are US equities or
US bonds correct?
Equity market is doing well. Suggests vibrant economy.
But bond market suggests economy is slowing down very quickly. Last week, both
shape & level of interest rates suggest something more sinister than a soft


B) What to make of the unusual dispersion in interest
rate forecasts in the context of subdued volatility?
Some suggest by Dec.
07, Fed will cut rates to 4%. Some suggest Fed will raise rates to 6%. I’ve
never seen such a range in terns of magnitude and sign. Reason: we’re at an
inflection point in the economy.

Market volatility has declined (VIX index). Intra-market
differentiation in developed markets has also declined (graph: FTSE All-europe
valuation dispersion). EM Credit spreads have tightened in a quasi-linear
fashion (graph: EM Sovereign spread over USTs). FX market volatility has
collapsed (graph: avg. GX implied volatility).


C) Michael Cullen, New Zealand finance minister, says
investors in NZ are "irrational".
"Just how badly do we
have to do on the current account before investors notice? … I have to think
someone would have to be slightly strange to take a bet on the NZ dollar right


I can explain each of these inconsistencies, but not in a
self-consistent way. Harvard prof told me about this: "This is complex. But
in academe, we can just go to something less complex."



2. What are the underlying drivers?


3.5 major structural changes ongoing:


1) Global productivity shock. Secular, long-term in

Communications costs plummeting. Internet users spiking.
Less and less capital controls. Transport costs down. More and more regional
trade agreements. Greater involvement of new segments of the labor market.



2) Global terms of trade shock. Secular, long-term in

Significant increase in demand (from China, India, etc.) which won’t go away.



3) A financial innovation shock. Secular, long-term in

Proliferation of derivative-based instruments that lower
entry/exit barriers and facilitate many permutations of risk securitization,
tranching, and bundling.


3.5) New marginal price setters. Possibly short-term.

New set of marginal price setters have emerged: central
banks, hedge funds, private equity, etc. (Graph: Notional amounts outstanding
of credit default swaps have swelled enormously) This is ‘half a change’
because it’s not as yet clear whether it is cyclical or secular



Seemingly different objective functions, time horizons, and
guidelines now have an important marginal influence. I’m particularly talking
about central banks in emerging countries who have huge influence—China has $1trillian in reserves.


Compare playing the game of Risk. It’s a purely
probability-driven game. You’ll win if you can calculate probabilities. When
someone joins the game and behaves irrationally, all the others have to adjust
accordingly. In the financial markets, these are the non-commercial players
who have entered the marketplace.




A. Convergence in real economy indicators. Standard
deviation of global growth rate has converged to US growth rates. Global
interest rates have also converged to US. US is the global locomotive of
growth. It’s the Goldilocks economy.


B. Portfolio diversification and reduction in home biases.
Both assets & liabilities are becoming globalized. Countries own more
and more of one another; so does the corporate sector in each country. Over 50%
of US treasuries are held outside the US. This is a good thing—it’s
international risk sharing.


C. Unprecedented global payment imbalances.

US current account balance is at -$800B. Largest deficit
any country has ever run in terms of global GDP. In 1995, many countries ran a
deficit. Now, the US runs a huge deficit and relatively few other countries
do. We’ve never seen this imbalance. (Shows powerful slide from IMF.)


This is our "vendor-financing relationship" with Asia, aka "Bretton Woods 2". Asia supplies goods (and India supplies services),
and Asia also supplies credit for us to buy it. It’s like Ford financing your
car. It makes great sense for the US consumer, using his house as an
ATM—consuming above his income.


Why is Asia doing this? They don’t think about bits of
paper. They think about the benefits of being massive export machine: creates
jobs, which attracts foreign investors. Easier to import FDI (foreign direct
investment). Lastly, once you acquire market share, it’s hard to lose it.


This all turbo-charges int’l reserve growth among oil
exporters. They’re accumulating even more reserves than Asia.



3. What are the implications?

This is a "stable disequilibrium" (quoting PIMCO)


No agreement on lifespan of this. How long will Asia take bits of paper for their goods—when the bits of paper will lose value?




A. Optimists ("new paradigm school") looks
at: US productivity gains, demographics, entrepreneurship. Maturation of key
emerging economies. Gradual resurgence of Japan/Europe.


B. Cynics. Others believe we’re on verge of large
disruption: size of huge current account deficit, leverage in financial sector,
bubble in housing market, risk of a change in the asset preferences of holders
of US financial assets.



C. All the views in the ‘muddled middle’: those
noting ‘dark matter’ (measurement error), enhanced policy credibility, system


This is a frightening slide. Endowments and foundations have
to focus on long term, and there are question marks about what the long term is.



Future is function of four factors:


Developments in the US in private consumption. Will consumption
soft- or hard-land?

Developments in surplus countries, including relative asset
preferences and ‘managing success’ (suddenly being in surplus). Finance
minister told him: "Managing success is more difficult than managing a

Interactions between the two. They’re two sides of an income

Prospects for orderly re-alignment of exogenous and endogenous


The challenges for policy reaction functions in advanced

- navigate payment imbalances

- understand and adjust to structural changes

- counter protectionist tendencies


The challenges for emerging economies:

They’re used to running a deficit—that’s what the
textbooks suggest. How do they handle this?


Theoretical orderly global solution exists, and is
discussed at every G7

+ Rebalance of US economy—US must consume less.

+ Structural reform in Euroland and Japan to grow faster.

+ Asia has to consume more.

+ Oil exporters provide cheap financing in the interim.


BUT: if any one of these parties moves first, they’re hurt.
This is a classic game theory dilemma/prisoner’s dilemma. So without
coordination, it’s best not to move.


G7 can’t act as a coordinating body because it excludes the
countries in massive surplus. So we rely on IMF and other multilateral


At a time when int’l coordination is essential, legitimacy
of multilateral institutions is being questioned due to: lack of representation,
governance, resources etc.


Business models have to adopt: new two-way flows between
advanced & emerging economies. Regional and local product development.


Just 5 years ago we thought emerging economies were a
destination for capital; now they’re the major source of capital.


Most companies have outperformed lately because growth
outside US has been stronger than envisioned.


Investment management is about 3 things: asset allocation,
investment vehicles, and risk management. Not very complex.


Key questions for investors:

striking the right balance between forces of economic synchronization
and de-coupling.

Portfolio positioning in the context of binary medium-term outcomes

Appropriately handle the internationalization of investment management

Dealing with asset class fluidity and correlation changes

Ensuring value for money in accessing investment vehicles


Navigating organizational challenges.


Buying real estate in Mexico is very different than buying
bonds there.


Traditional classifications no longer make sense.


How to ensure value? Fees get very high when everyone wants
a certain asset.


Risk management is going to be increasingly important.
We’re rebuilding and reinventing the institution of HMC.




These signals are meaningful. Global economic convergence
has continued while fluidity of int’l monetary system is increasing.

At public sector level, we need to test and retest
robustness of nat’l policy reaction functions and global governance.





Q: As you know there are 8,000 hedge funds. Is this a


Hedge funds are not asset classes; they are a means of
managing investments. They do 2 things different from tradition: a) they
leverage, b) they can go short and long. Like everything else, if taken to
extreme, these actions can cause problems.


3 distinctions:

- Are they a threat to stability? Amaranth at least was not,
despite losing more money than LTCM.

- Are they a threat to the small uninformed investor? Those
investors shouldn’t be in them.

- Do they potentially contaminate economic relationships?
Are they a level playing field?


Q: Insights on Africa, Egypt? On carry trades?


Most crowded carry trades in April were in NZ, Turkey—all funded by yen. You could borrow at 1%, get 10-17% returns in NZ, Turkey. Then certain markets dropped by 20-30%—and nothing blew up. Carry trades have
tendency to become more crowded.


Q: How do you handle risk management?


1)      Buy
cheap insurance on fat tails

2)      Analyze
correlation of exposures across and within asset classes.


Q: What is optimal compensation scheme for outside funds
and for your own employees?


Several new hedge funds have overly generous comp schemes,
and we tend to avoid them.


For our own employees, we have clawback provision. If they
don’t consistently outrperform, the carry they earn is clawed back.


Q: Aren’t US markets much more sophisticated? US markets
providing a service to global economy.


There’s a view that Asians don’t trust their own markets.
So they delegate capital allocation to the West. I think that’s an outcome,
and not a bad outcome, but it wasn’t by design.


Part of the orderly solution is for emerging markets to
develop more sophisticated capital markets.


At some point Asian populations will ask for bridges,
schools, etc.


Q: Opinion on china?


HMC has increased the emerging markets allocation by $1b+.

One of the reasons managing success is tough is that the
typical emerging market is not used to deal with large capital inflow.

How do you get out of overinvestment? Because China is mostly a closed economy, you can work off overinvestment over years, unlike the typical
boom/bust of Thailand, Argentina, etc.


Q: Hedge funds account for ½ of NYSE volume. Doesn’t
that call for regulation?


Have not thought about this.


Q: Where are you investing?


We think US fixed income market is near a secular top.

We think US economy will soft-land, either for endogenous
reasons (housing market corrects but corporate investment picks up) or will soft-land
because of enormous monetary market flexibility (Fed could cut rates). It’s
hard to imagine foreign markets doing better than US when US goes into
recession. So there’s no safe refuge.


If world goes into recession, you want a liquid market. We
think of recession as a risk under our ‘fat-tail’ insurance.





Profile of Jack Meyer, (former) Harvard Management Company President

As background for my next blog post about Dr. Mohamed El-Erian (current President and CEO of Harvard Management Company), I’ve attached below an article I wrote for the Harvard Business School newspaper (the Harbus) back on July 7, 1997.


The Financial
Future of Harvard is in HBS Hands


"Harvard Management Company is the only first-class
investment institution owned by a nonprofit." Bold words from Jack Meyer,
MBA 1969, President of Harvard Management Company, but perhaps justified by
impressive investment performance.

Harvard has the largest endowment of any private university
in the USA: $9.4 billion. Harvard Management Company (HMC) is a wholly owned
subsidiary of Harvard University, founded in 1974 to manage the University’s
endowment, pension assets, working capital, and deferred giving accounts. A
Board of Directors, appointed by the President and Fellows of the University,
governs HMC and its 160-person staff. The Board is comprised of professional
financiers, including HBS Finance Professor Jay Light and Goldman Sachs partner
Eric Mindich. HMC manages a total of $11.7 billion, including Harvard’s
pension accounts, gift annuities, and other non-endowment funds.

A Day in the Life of Jack Meyer

Mr. Meyer, 52, graduated from HBS in 1969 as the youngest
member of his class. His was the first HBS class to stop wearing a coat and
tie. After graduation, he spent three years with Brown Brother Harriman.
Since 1979, Mr. Meyer has specialized in managing money for nonprofits. Prior
to HMC, he was Treasurer and Chief Investment Officer of the Rockefeller
Foundation ($2B endowment). Before Rockefeller he was Deputy Controller of New York City, where he managed $20B. He lives in Cambridge with his wife and two

In a wide-ranging interview, Meyer said that the most
important parts of his job are "to find the right people, motivate them
properly, and maintain the HMC culture." Less important than the people
tasks, he is responsible for tactical asset allocation, which generally does
not fluctuate widely.

Meyer commented that, every year, it becomes harder to
attract and retain top investment talent, both portfolio managers and back
office staff. In a competitive marketplace, many employees are attracted to
HMC’s Boston location. Many of his team are also attracted to the strictly
defined HMC compensation system. According to Meyer, employees at many money
management firms are compensated based in part on ambiguous criteria, such as
how much the President likes the employee. At HMC, Meyer says that the
compensation system is unambiguously pay-for-performance.

Meyer observed that HMC is not large enough to train people,
so he focuses on recruiting people with significant asset management
experience. HMC does not typically hire new MBAs.

Controversial Issue: Compensation

By far the most controversial issue involving HMC is
management compensation. HMC’s compensation data is available in its federal
tax filing. Fiscal 1996 compensation for the 160-person HMC staff tripled to
$57 million, up from $16 million in 1995. The top ten highest paid people at
Harvard are all HMC employees. Jonathan S. Jacobson, a domestic equity
manager, earned $4.7 million in 1996. Meyer earned $897,523, a 25% drop from
$1.2 million in 1995.

By comparison, Harvard’s top professors can earn $176,000
(excluding outside income, such as consulting fees). Because HMC managers earn
so much more than President Rudenstine, or even HBS professors, they receive
some uncomfortable publicity every fiscal year. Mr. Meyer commented that this
publicity is by far the least enjoyable aspect of his job. The Boston Globe’s
observation was that the high salaries "have created considerable angst
within the Harvard community."

The HMC Board compensates Meyer and his staff based on their
performance against the Policy Portfolio. As Meyer observed, other
universities are also paying large salaries to money managers. The key
difference is that high-paid people like Mr. Jacobson work directly for
Harvard, so their salaries are public knowledge. A million-dollar-a-year
manager at Fidelity may be managing money for Princeton, but her salary does
not appear in Princeton filings because that endowment is primarily externally

Meyer must balance a fundamental tension between the
University’s very long-term perspective and the short-term perspective of most
money managers. In order to align the interests of the managers and the
University, compensation is split into a small base salary and an incentive
bonus, based on performance relative to benchmark. This bonus can be either positive
or negative.

When a manager earns a significant bonus, the bonus is held
in escrow for up to 3 years and subject to "clawback". When returns
are below benchmark, the manager’s bonus is docked from the money held in
escrow. Certain managers have earned negative compensation in some years, as a
result of this structure. Meyer’s primary goal: to prevent a manager from
earning excess return by taking excessive short-term risk.

Whether it is the compensation system or Meyer’s management
skills, the performance numbers indicate that HMC is doing very well.

Impressive Performance


Investment Type

Target Percentage of Portfolio

5-Year CAGR (7/1/91-6/30/96)

Benchmark Policy Portfolio CAGR





























Real estate









































*Extensive use of futures causes cash
to appear as a negative percentage of total asset value.

The HMC portfolio is diversified across both asset class and
industry. HMC’s target portfolio includes a higher allocation to foreign
securities and commodities and a lower allocation to domestic fixed-income
assets than the typical institutional fund. The fund holds roughly 5,000
different securities.

In the past five years, each asset class has outperformed
its benchmark, with the exception of commodities and private equity
investments. Among 82 comparable large funds, Harvard ranked #2 behind Yale
(which manages 90% of its money externally). Meyer observed, "No other
investment manager tries aggressively (and successfully) to add value across as
broad an array of asset classes as HMC." In the past five years, since Mr.
Meyer joined Harvard in September 1990, the endowment has returned 16.1%
annualized after fees. An appropriate comparison for total HMC performance is
the performance of comparable large trusts. The "Trust Universe
Comparison Service" median total return for Master Trust Funds was 11.1%.

For Fiscal 1996 (which ended June 30), the Endowment outperformed
the Policy Portfolio by 3.7%. Approximately 0.3% of that 3.7% was due to
successful tactical asset allocation decisions (under or over weighting asset
classes). The remaining 3.4% was due to outperformance within asset classes.

Harvard is unique among major universities in managing 88%
of its endowment internally. Most major universities externally manage close
to 90-100% of their endowment. According to Harvard President Neil Rudenstine,
HMC manages money for substantially less than Harvard would have to pay outside

Meyer’s goal is to keep pace with or outperform the growth
in university expenses each year. HMC disburses 4.5%-5.0% of the fund’s
capital value each year. Those disbursements accounted for 24% of the
University’s 1996 revenues.

When HBS or any other Harvard department receives an alumni
donation, it has two options: either it can invest in a money market fund for
working capital purposes, or it can invest with HMC. The primary rationale for
this aggregation of funds is that HMC achieves economies of scale by working
with the funds of all the Harvard departments combined. As of June 30, 1996,
HBS had an endowment of $571 M, ranking it third among all Harvard
departments, after the Faculty of Arts and Sciences ($3.8 B) and the Medical School ($1.0B).

Investment Philosophy

In maximizing returns, Meyer takes full advantage of
Harvard’s unique position. The University’s credit is rated AAA, because of
its highly liquid endowment and well-diversified sources of income (grants,
tuition, endowment, and business operations such as the HBS Publishing
Corporation.) The endowment’s large size facilitates hedged transactions. As
a nonprofit, HMC only has to pay trading fees, not capital gains taxes. In
most cases, HMC can reclaim any withholding tax deducted on dividend payments.
Whether the school receives money as a capital gain or as income is

Unlike many institutional investors, Harvard’s long-term
perspective allows it to invest in illiquid, volatile investments, such as
venture capital funds and emerging market shares and bonds. Many private
equity investors enjoy having Harvard as part of a syndicate, because of the
school’s prestige. Lastly, HMC can put money into an extremely broad range of
deals, because of its flexibility in both capital type and size. One
limitation: HMC generally does not pursue transactions that are subject to high
start-up, technology, or exploration risk.

Meyer focuses on finding market anomalies and taking large,
hedged, leveraged bets on them. A comparable for-profit fund could not trade
as frequently as does HMC, because it would have to pay capital gains taxes on
every profitable transaction.

A classic arbitrage maneuver typical for HMC: it buys a
Japanese bond that looks undervalued relative to the bond’s futures, and
simultaneously sells the futures. HMC’s expectation is that the two securities
will converge in value; the bond will rise and the future will drop.
Theoretically, this arrangement allows for zero market risk. Although HMC’s
percentage profit may equal only one basis point, its dollar profit will be
significant because HMC can invest such a large sum in the trade.

HMC is a highly sophisticated user of leverage and of the
derivatives market. As of June 30, 1996, HMC was long $16.2 billion and short
$14.5 billion in total fixed-income market exposure. By comparison, its fixed
income balance sheet position in cash was long $7.5 billion and short only $0.6


September 21, 2006

The State of Independent Research, at NY Society of Security Analysts

Nitron Advisors’ COO, Scott Lichtman, took detailed notes on last Thursday’s panel on “The State of Independent Research” at the New York Society of Security Analysts. It was a well-attended event that covered questions ranging from how independent research firms are capturing value through new delivery models to the impact of Elliot Spitzer’s global research settlement and prospects for research jobs on the buy-side and sell-side.
NYSSA notes that, ‘These are the opinions of speakers at NYSSA’s Career Chat on Independent Research and do not necessarily reflect the opinions of NYSSA or its members. NYSSA does not endorse or promote any of the opinions or products mentioned.’

Eric Alexander, President, Institutional Services, Wall Street Access
Michael W. Mayhew, Founder and CEO, Integrity Research Associates, LLC
Paul Spillane, President and CEO, Soleil Securities Group, Inc.
David Teten, CEO, Nitron Advisors
David Weild IV, President and CEO, The National Research Exchange
CHAIR: Richard G. Lipstein, Boyden Global Executive Search


Eric Alexander is president, institutional services, for Wall Street Access, which offers research and execution to hedge funds and money managers. He is responsible for strategic development of the firm’s research offering, including coverage of mergers and acquisitions, energy, healthcare, and special situations. Previously, he served as director of marketing, and was instrumental in forging strategic relationships that helped the firm grow over the next decade. Prior to joining Wall Street Access, Alexander was a vice president with the public relations firm Burson Marsteller, where his clients included AT&T and American Express.

Michael W. Mayhew is founder and CEO of Integrity Research Associates, LLC, a ratings, analysis, and consulting firm for the equity research industry. Prior to founding his firm, he was CEO and president of Garban Information Systems, the financial information division of Garban/United News & Media. Previously, he was director of strategic planning and business development for Standard & Poor’s Financial Information Services Group. Mayhew has been quoted widely by various newswires, newspapers, and industry magazines, including Reuters, Investment Dealers Digest, Institutional Investor Magazine, Bloomberg News, Forbes, The Wall Street Journal, The New York Times, Financial Times, and Business Week. He is a member of the Board of Directors of Investorside, the nonprofit trade organization for the independent research community, and chairs a committee of the board to establish best practices for the research industry.

Paul Spillane, president and CEO of Soleil Securities Group, Inc., has been in the securities industry for over 25 years. He started his career at Goldman Sachs. where he worked in fixed income, foreign exchange, commodities, futures, and options products. He then moved to Deutsche Bank, serving as managing director and head of global market sales for the Americas. Spillane subsequently transferred to global equities as a senior member of the executive team responsible for building the global equities businesses. Most recently, he was responsible for establishing Deutsche Bank’s Global Relationship Management program.

David Teten is CEO of Nitron Advisors, a unique research firm that provides hedge funds, private equity funds, venture capital funds, and law firms with direct access to a global network of carefully selected frontline industry executives, scientists, academics, and consultants. David also is the coauthor of The Virtual Handshake: Opening Doors and Closing Deals Online, the first business book describing how to take full advantage of blogs, social network sites, online networks, and other “social software. ” He runs, a resource site and blog, and co-writes a monthly column for Teten was CEO of an executive recruiting firm that he sold to Accolo, and CEO of GoldNames, an investment bank focusing on serving the internet domain name asset class. He has worked with Bear Stearns’ Investment Banking division as a member of their technology/defense mergers and acquisitions team, and was a strategy consultant with Mars & Co.

David Weild IV is president and CEO of The National Research Exchange (The NRE), an innovator in products and services that support capital formation. The NRE provides patent-pending analytics and facilities that enable the systematic evaluation and long-term funding of research and related services. Weild served as vice chairman of The NASDAQ Stock Market and spent fourteen years at Prudential Securities, where he served as president of, head of corporate finance, head of technology investment banking, and head of equity capital markets. He also chaired Prudential’s Equity New Issues Commitment Committee.

The entire research industry is undergoing a seismic shift that will produce both winners and losers in the coming years. Some of the more innovative research providers will continue to experience growth, while the total number of independent research firms is to expected to fall almost two-thirds by 2009. The need for good research, however, will never go away. Learn the reasons for the coming shakeout and how you can be among the success stories.

Scott Lichtman’s notes:

Richard Lipstein Question: Please describe your business models for independent research.

David Weild IV: We are a utility for Wall Street to get research paid for explicitly, while achieving coverage and liquidity for smaller public firms. Coverage continues to be shed across the industry. Fewer IPOs are symptomatic of this. There were < 200 IPOS in each of last 3 years. Pre-bubble, there were 460 IPOs/year avg. We have 14 patents.

David Teten: We provide access to frontline industry experts who can provide deep insight into the companies and industries you are analyzing. There is a circle of economic agents around any company – suppliers, customers, regulatory observers-- who are in an appropriate position to provide fresh information to investors. We provide access to that circle. This means your analysts are drawing conclusions and making the buy/sell recommendations (not us), while you benefit from ready access to unique sources.

There are three trends that drive the fast growth of our model:
1) The destruction of credibility of sell-side research.
2) Trend towards more people, including senior executives, who are managing their careers individually, without assuming they are wedded long-term to a given firm. These "corporate alumni’ are an exceptional base of knowledge.
3) A trend towards people having a public, articulated virtual identity, through personal web sites, bios and resumes online, social network sites, and software that is aggregating people’s backgrounds into a chronological whole. I discuss these technologies in more depth in The Virtual Handshake- Opening Doors and Closing Deals Online.

We are actively seeking out consulting firms and individuals who would like to consult through our platform.

Paul Spillane, Soleil Securities. Our goal: Premier aggregator and distributor of intellectual content. We are a registered broker dealer. We have a significant distribution platform, analysts all around the country and an agency trading desk in New York. Covering 320 stocks, 32 analysts, 3-5 alternative products. Analysts work when they want, get paid based on deliverables. Incorporating Fixed income, Commodities, Equities, and commentary on data sources. If you can think of a new idea, you can provide content in our model. We are looking for employees, firms to partner with and new sources of content.

Michael Mayhew: Integrity is the leading provider of information assessment and evaluation on the research industry. We publish research on the industry including a blog, web-based tools, due diligence on 436 research firms. Now adding 60 firms in Europe to the database. We help funds find research to add alpha, and mitigate risk in using research. Very little due diligence is typically done on hiring a research firm, especially compared to investing in a fund or fund-of-funds. We help funds reduce their risk in hiring a research firm.

Eric Alexander: We offer clients an integrated service, including access to a team of leading analysts in M&A, special situations, oil and gas, utilities and agribusiness. We also offer clients access to a proprietary network of healthcare experts. Also have a trading desk – important for clients to gain a full range of service and for us to get paid appropriately. We customize offerings for each client.

Richard Lipstein Question: What are challenges facing independent research firms.

David Teten: Research has a very unusual economic model: You usually get paid well after the service is delivered, you usually don’t know how much you’ll get paid, and neither seller nor the purchaser knows the exact value of the service. The value of research varies enormously from highly negative to many millions of dollars, yet it’s not common to define, let alone track, the metrics to place a value/price on it. Also, declining commissions on a per trade basis are putting pressure on the economic equation.

Michael Mayhew: 2 major trends.
1) Biggest challenge is proving value, day in and day out. The kind of research that could be sold 20 yrs ago has changed. Today folks want trading ideas and proprietary data points. Very large % of research firms have a tough time proving value, and probably shouldn’t be in business.
2) Getting paid is hard, even if you prove value.

David Weild IV: A rough statistic: He took all research analysts, divided by (monthly) trading volume, and got 20,000 shares/analyst. If 50% is program-based, 50% of what’s left is algorithm based, and therefore there’s only 5,000 shares traded to pay each analyst. That’s roughly 250 shares/day. At 5c/share that is not a lot of money to spread around, and 5c is a high figure by current trading standards. The business is fundamentally bankrupt at some level.
Clients want 3 things – 1) access to management, (2) experts, (3) traditional research. People want things that no one else has.

Eric Alexander: A lot of what the industry does is a commodity. Some of the forms of compensation are a thing of the past. It’s much more entrepreneurial now.

Richard Lipstein Question: Buyside firms are decrying the lack of research but cutting back on # of research suppliers. How did we get in this contradictory situation?

David Teten: The buyside is not seeing enough compelling research from the sell-side. However, the number of buyside analysts is way up, which shows a commitment to proprietary sources.

Michael Mayhew: Other trends are happening too. There will be a significant reduction in # of firms getting paid. Firms will separate research fees and execution fees. You may only have 20 firms getting commissions, but hundreds getting research checks.

Richard Lipstein Question: Paul, how does one manage a virtual corporation?

Paul Spillane: Everything about the decline in research firms/getting paid is music to our ears. This is the only industry I’ve seen that has no idea of COGS (cost of goods sold). We love a value-driven model. If you can add value, clients will pay you unlimited amounts. So good analysts in their virtual workspace are making 2-3x what they did in a bulge-bracket environment. “We manage by compensation.”

The industry needs to get away from the lack of connection between quality and reward – casual votes on who should get what. We have the same regulatory framework that any registered broker-dealer has, with the analysts being registered 86s or 87s. Our good analysts work “24×7″ at times because they love the work and get paid well, and other times take a break.

“It’s an absolutely fantastic time to be an analyst. The bottom is here.” The # of stocks covered by bulge-bracket firms is going lower and lower. The bottom line is here, there will be less people around, but those who are good will be making money. Like Nitron, we only pay an expert when they get a phone call.

Eric Alexander: Research revenues might go from $3.9bn to $3.6bn, but it’s still a big opportunity.

David Weild IV: Wall St research firms are getting smart that they do get paid. Roughly 50-70% of bulge bracket revenues for an offering are for the deal, and 30% is to provide coverage, but the funds aren’t always allocated to that purpose. It seems like Reuters and Thompson want to know who is consuming their research and cut out people who are drinking for free. The tide is turning on getting paid.

Eric Alexander: We are still committed to trading desk model. It’s hard without a desk; it’s integral. The buyside sees their traders as integral to their team and so do we.


Q to Soleil: What does it mean for an analyst to “deliver” value and get paid commensurately?

Paul Spillane: There are many ways to signal how to pay: a voting mechanism, # of visits set up, commissions paid. Clients now are responsible, e.g. Via the UK’s regulations, to say how research is allocated. More hedge funds have a formal voting mechanism due to regulatory requirements. Checks come in with specific analyst names on them to us.

Michael Mayhew: All about producing good research. To one client that’s management access, to another it’s industry expertise, and to another it’s performance recommendations. Issue is that if you produce me-too maintenance research, models that don’t outperform, you have to worry.

Question: What about outsourcing research to India and other places.
Eric Alexander: This question is symptomatic of how much has become commoditized. Reg FD has commoditized information.

Michael Mayhew: Couple years ago, the avg cost of wall st to cover a company was $192K – per company. There was an absolute need to lower that cost, so moving some research oversees made a lot of sense. But value-add of a research firm can’t be outsourced.

David Weild IV: But you can create new value by leveraging offshore resource. It may become a necessity to have competency in offshore inputs.

Paul Spillane: The last mile is where the value is. We get 7 calls/month from Indian firms to provide us with outsourcing. Most of those analysts don’t have 86s/87s and don’t talk to management. Offshores won’t complete with mainline analysts, they will focus on filtering through existing data in more conventional ways, at least for now.
Offshore won’t be a huge threat. We think $8bn will be paid out, over time, in hard research. If you look at outsourcing initiatives in the technology world, JPM outsourced their platform to IBM in a multi-billion deal, but brought it back in-house when the deal expired. We’ll all experiment with it, but when cost goes up for offshore it will lose competitiveness. We used to pay $25K for an associate abroad, now its $50K.

Richard Lipstein: One bulge analyst I know is having increasing quality issues, exacerbated by language barriers, time differences. They didn’t see benefit anymore.

Michael Mayhew: I’m concerned about long term risk. If we outsource associates, when do future senior analysts come from? Are we going to hire the offshore people and bring them here?

David Teten: All of this gloom & doom is great news for Nitron. Offshore people working off same public data further commoditizes publicly available analytics. Basic Yahoo! finance data is free. There are so many hedge funds out there, and they’re all obsessed with chasing alpha, which they can’t do with the same tools as everyone else. (The hedge fund incubators, incidentally, remind me of the dot-com incubators we used to see, which is a sign that there is a surplus of hedge funds. 2006 is the first year when we’re on track to see more hedge funds shut down than open up.)

Audience Question/Observation: In the last few years, lot of great info free on internet has become available in forms of blogs. Incredible corporate-experience types, speaking their minds and providing insights while going after eyeballs. They are getting paid $550K/year monetizing eyeballs (Editor’s note: I know extremely few bloggers earning that type of money!).

Paul Spillane: This industry has to recognize that as a threat. The audience member asking the question has worked in tech – so she’s better able to know where to find quality information. The insights aren’t there for (isolated) associates to make money.

Michael Mayhew: There is a model that’s been developed over a few years, for readily available info: Research that is restricted to small # of clients (and which delivers alpha). Hedge funds will pay lots and lots of money for restricted access, which means 30,40, or 60 clients. Hedges won’t trade off blog content because it’s available to thousands/millions of people. Also, most hedge funds don’t want to say: “if this deal blows up, I’ll tell my manager I got the info free off the internet. ” Give me a break!

David Teten: If I have really good info, am I giving it for free on a blog? Publicly-available information (on a blog, New York Times, etc.) is designed to be relevant to the average person. If you want customized analysis for your portfolio/your situation, then you typically pay the person who produced the analysis that’s broadly relevant. He proves his credibility with his general analysis.

Eric Alexander: Blogs are a threat. Collaborative relationships deliver distinct ideas. You need a talented, experienced analyst with an expert network to find the alpha idea. Blogs don’t work standalone but they are a valuable contribution.

Paul Spillane: Most investors have an overload of info. We have a product to grade blog: Collective Intellect. Using AI to sort through hundreds of millions of blogs a day to rate for accuracy. This product is on desks of some of the largest prop trading desks in the world. It can be a CYA, but you can’t sort through all the available info and it becomes more productive.

Audience observation: Great bloggers are identified and filtered by word of mouth. Experienced people don’t read every single blog.

Paul Spillane: But imagine if you can also grade them all. We’re excited about the prospects.

David Weild IV: In my west coast conversations, a lot of funds are using expert networks. One guy I spoke with was a well respected 1990s internet analyst. Widely followed. He said that one key problem with Wall St research is deteriorated quality. Because of Reg FD, executives are uncomfortable with sharing corporate info. Sourcing of independent experts has become very important. One guy is using expert networks to do due diligence on potential portfolio co’s. Won’t replace need for direct access.

Audience Question: What’s the career opportunity and income oppty for sell-side analysts. Do you see migration to buyside? What about buy/sellside relative compensation?

Eric Alexander: It’s important to be part of an organization with a regulatory structure, so the analyst can focus on the work. There’s an opportunity to be more entrepreneurial these days. Locked in salaries and guarantees are much less available.

Richard Lipstein: The top of the Internet bubble skewed compensation and demand for analysts. Comp for internet analysts gone down significantly. They used to be able to make 7-8 figures. Compensation has bottomed out because of disappearance of guarantees and extreme salaries. Not easy for sell-side analyst to move to the buyside because they’re viewed as a salesperson. However, hedge funds hire more sellsiders, young ones, than mutual funds.

It’s worth noting that a typical analyst will make more than 98% of the US population rather than 99.9% in the past.

Paul Spillane: You summed it up perfectly. It’s not easy to move to the buyside. But everyone is still paying people 6-7 figures. A lot of doctors, lawyers, fireman who don’t get paid that – who arguably provide critical value to society.

David Teten: I saw a talk by a prominent person in the research industry, who said, “If you meet an analyst that’s been on sellside for more than 5 yrs, they’re not good at picking stocks, because if they were, they’d get a job on the buy-side.”

There is increasingly a disaggregation of analyst’s responsibilities. Management access is highly valued by the buy-side–but that’s a concierge service firms like ours (Nitron) do more effectively than generalist research firms.

Richard Lipstein Question: The typical independent research firm is much smaller than bulge bracket dept. There have been problems, eg took a research firm to court for allegedly being part of a plan to devalue and short sell the stock. How can small firm deal with intimidation of big corporation, particularly when issuing negative research?

Paul Spillane: Associate yourselves with a firm with strong compliance. Reputation of your employer is important to focus on when you are an analyst. Unless you commit fraud, you are in a good position to make clear statements - your opinion is your opinion. One analyst whose opinion dropped a stock 50% (is rumored to have) received death threats – from a retail firm!

Richard Lipstein: I think it’s more an issue of small research firms can’t cover legal costs to defend themselves.

Paul Spillane: Agencies like SEC, NASDAQ won’t allow that intimidation…and the First Amendment.

Eric Alexander: Be clear who the customer is. It’s not the company covered, it’s the investor.

Paul Spillane: WSJ or NYT would love to ‘defend’ the small guy with strong opinion. The court of public opinion doesn’t cost much. And it’s great PR.

David Teten: Most of time, the analyst is doing right thing. Owen Lamont research showed that, the more a corporation fights a critical analyst, the more likely it is later on that the analyst is correct. Jeff Skilling said “They’re on to us,” in response to a certain piece of independent research. That’s a great ad for independent research! (As Jim Chanos pointed out in a recent talk).

Audience Question: Given internet bubble, do you see another shakeout?

David Weild IV: There’s a rationalization, but other models are flourishing. The big shoe that dropped wasn’t the bubble, it was decimalization in 2001. That cuts 95% of the commission flow. The internet brought direct transaction models and commission compression – commission went from $350 avg to 5 bucks.

David Teten: Creative destruction is a benefit, not a bug, of capitalism. Net net, people are making a lot of money in finance. The industry is always evolving, companies change, people move around, but the quality people do just fine.

Michael Mayhew: For sell side research, unbundling will have a big impact. When asst mgr has ability to select research and broker independently, that will really impact someone like Goldman Sachs. If they charge 4c/sh, how much is for research and how much will get they for this

Question: What’s the track record of Spitzer agreement to channel $s to indie firms?

Eric Alexander: Some large firms got huge funds channeled to them. We’re not in that space at all. I’m hopeful this is over soon, it hasn’t been effective at all.

David Teten: Spitzer uses lawsuits effectively for gubernatorial campaigns, but not necessarily in the pursuit of justice.

Someone asked a panel I participated on earlier this year “where should I invest, as a retail investor?” Look, you as a retail investor have the worst information and the worst prices. You’re much better off hiring a professional, by putting your money in a mutual fund, hedge fund, or hiring a Financial Advisor.

Spitzer agreement was a solution in search of a problem. The retail investor will almost inevitably have inferior returns to the professional, because of the nature of the industry.

Richard Lipstein: The Wall St. Journal said ‘you can’t legislate against greed’.

David Weild IV: I’ve talked to many of the NASD regulators. All agreed that the Spitzer agreement has been an “absolute disaster”. Jack Coffee, of Columbia, on their board, calls it a new form of government. It has created a level of paralysis – 3 years left, and firms are afraid to innovate. Every bulge bracket says behind close doors won’t pony up again. It hasn’t expanded coverage to new names. It was a grand experiment that failed. “This is a drug.” Has failed to expand coverae.

The audience member asked what are usage statistics for the independent research that had to be posted. 5% of retail hits are on the indie research, the rest is from the main provider. The only success from the agreement is focusing people on the problem – Wall St research has greater integrity today.

Teten: There is one pressing, highly important public policy goal that the Spitzer settlement achieved: Spitzer won the primary.

Question: Comment on future consolidation in independent research firms. Is pace likely to quicken? A panelist said there are over 400 firms today.

Michael Mayhew: 450 firms in N. America. We certainly believe in consolidation but not across the board. Restricted providers will do quite well. Fundamental data-based research will consolidate. My partner has argued that research is frankly a lifestyle business for many. If you have a dozen clients paying $100K each, you can have a nice business for a few analysts. I suspect the number therefore will be unusually high, but fundamental traditional research will find it increasingly difficult to get paid.

David Teten: Consolidation per se doesn’t concern us. I would be worried if the overall pie shrinking dramatically. But to my knowledge, expert networks are the fastest growing sector in the research business. Consolidation means we buy or get bought, and there are worse things that can happen.

Eric Alexander: For full disclosure, my business partner in the audience asked the consolidation question. The alternative to a lifestyle approach to making some money in research is being part of collaborative effort. When someone like Monsanto wants to do a deal, they can turn to one of our deal specialists.

Richard Lipstein Question: What about the idea of a corporate rollup, e.g. how Eric Alexander got Foresight.

Eric Alexander: That wasn’t an acquisition but a subset of analysts were attracted to our platform.

David Weild IV: Question for Michael–What # of firms have > 5m revenues?

Michael Mayhew: Quite small, < 10% of 450. Lot of folks with $1m revenue. Some consolidation when firms go out of business, other when firms get bought.

Question: Going back to the value of research, how is the way investment firms are compensated linked to value? In an unbundled world, mutual funds are asset-based profit-makers, not performance based, so they should worry less about costs. Hedge funds are compensated by assets and performance, so they are looking for research value. Would mutuals prefer bundled research?

Michael Mayhew: The audience member asks analysts how they judge good research. They say, “I’ll know it when I see it.” This means, many buy-side people don’t know what makes good research to them. That only has a chance of working if they get research for free, use it, then decide later on if they liked it, but its still subjective.

David Teten: There are 3 reasons why hedge funds are desirable clients. They have a lot of money compared to cash/overhead requirements, they don’t usually have an easy way to measure the value of your unique product (compared with tools available to measure ROI if you are selling, e.g., bottled water to them), and they are paying with soft dollars, i.e., other peoples’ money. I have problems with how soft dollars are used when applied too broadly, but the system works to the benefit of research firms.

Eric Alexander: It’s a lot harder for a research firm to penetrate/develop business with large mutual fund. “I’m sitting with a fire hose of info” says one large-fund portfolio manager. They need barriers to access, not more info.

Question: What are new models on how to pay for research: Is it arbitrary or still predominantly through trades?

Paul Spillane: 85-90% is still via soft dollar. It will take a lot longer to wean off than anyone thinks. If a large mutual fund company wanted to separate costs, it could be 3% of their management fee. For a smaller firm, its entire management fee could be allocated to research cost.

Richard Lipstein Question: Last question. For someone looking to get in the research business, what does this business mean for the up-and-coming professional?

Eric Alexander: Paul Spillane and I say same thing. Be good, and be entrepreneurial. If you have been a salesperson, bone up on analytics. If you are an analyst, participate in selling.

Michael Mayhew: Ample opportunities for good and great analysts. A lot of analysts have spun off with high expectations.

Paul Spillane: If you love it and are passionate about it, there’s never been a better time. If you don’t love it, join a bulge bracket firm. You get real motivated when you wake up thinking “how am I going to make money for my family?”

David Teten: Be focused to add value. There is a story, true I believe, of one analyst making over 2 million covering one stock (McDonald’s). Pick a domain you can own, then become the recognized expert in that domain.

David Weild IV: 1) Being a research analyst is a wonderful thing, whether starting independent and or bulge bracket. You learn a real discipline in a dynamic market (securities). You can switch to private equity or corporate side. It’s a great training ground. I’d like my kid to do this.

2) Just to mention separately, this is anniversary of 9/11. There is a wonderful organization on that was on 60 Minutes called Tuesday’s Children, which provides services to kids who lost parents. Helps them get through college. Annual event at Cipriani’s 9/27. They placed kids on take-your-child-to-work day. I’m on the board of directors. Please consider supporting them.