Source: www.bloomberg.com
Behind frosted glass in rooms off- limits to anyone who isn’t cleared for access, analysts at research firm Copal Partners calculate company valuations, compile industry data and write case studies of past mergers. Their specialty is pitch books, the reports that investment banks use to win M&A deals.
The Copal team is working in an office building in the New Delhi suburb of Gurgaon; its clients are Wall Street banks halfway across the globe.
“Copal does some of the things that we would do ourselves, but frankly we don’t have all the time in the world,” says Stephen Green, founder and chairman of NoonMark Advisors LLC, a privately owned New York investment bank that uses Copal’s merger, company and industry analysis. “You have a need to constantly keep your cost structure down.”
Wall Street, which got hooked on shipping its back-office work to India earlier this decade, is taking the next step — outsourcing investment research. Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and UBS AG are among the firms staffing units in Bangalore, Hyderabad, Mumbai and New Delhi. They’re tapping analysts who in the U.S. and Europe would cost firms 200,000- 400,000 euros ($290,000-$580,000) a year and instead are paying a quarter to a third of those sums.
The banks are also relying on firms like Copal, which set up its unit in Gurgaon in 2003 and is based on Jersey in the U.K.’s Channel Islands. Its MBA graduates with three years of experience cost the company about 1.7 million rupees ($43,282) a year in salary, benefits and other perks, co-founder Joel Perlman says.
Research Conundrum
The recent turmoil on Wall Street is likely to accelerate the desire of investment banks to outsource research to cheaper locations, predicts Christopher Gentle, the London-based head of financial services research at Deloitte & Touche LLP.
“There will be a greater and greater focus on cost and on making sure that you have the best people doing the best activity,” he says. “This will be a catalyst for a greater move offshore.”
The research conundrum at investment banks started long before the subprime meltdown and departures of chief executive officers Charles Prince at Citigroup and Stan O’Neal at Merrill Lynch & Co. On May 1, 1975, trading commissions that had been 75 U.S. cents a share were deregulated — and have since fallen to less than a penny a share, according to Integrity Research Associates LLC, which tracks Wall Street research. In the 1990s, electronic trading kicked in.
Eliot Spitzer
A 2003 deal with former New York Attorney General Eliot Spitzer and other regulators delivered another blow. Firms agreed to separate their banking and research arms and shelled out $1.4 billion to settle charges that bankers were swaying analyst coverage to reap lucrative underwriting fees. Before 2000, investment banking paid for as much as 40 percent of research budgets, according to Integrity. Now, it no longer picks up the costs of research departments.
Wall Street’s plight is India’s opportunity, just as software companies, computer service providers and generic drug makers have discovered in their industries.
“It’s almost a no-brainer these days,” says Marc Vollenweider, 42, CEO of Evalueserve Ltd. The Bermuda-based research firm employs 2,100 people; 650 of them do financial analysis, and most of those are in India.
`People Like Us’
Amba Research, Irevna, Pipal Research Corp., Copal and Evalueserve say they can do what Wall Street’s junior analysts do. Amba, which is based in New York and has about half of its 550 employees in Bangalore, says it’s even testing strategies and models for quantitative hedge funds. For other hedge fund clients, Amba does everything except give advice on the size and timing of an investment, co-founder Anand Aithal says. Hedge funds account for about two-thirds of Amba’s 75 customers.
“At the end of the day, it’s people like us who are going to be running Wall Street,” says Pavan Kaur, 32, a vice president of fixed income and credit research at Amba. “It’s our calls, our analysis.”
U.S. and European banks aren’t bragging about their India connection. Many decline even to discuss it — or to credit Indian analysts for their contributions.
“Our recognition stops at our client,” says Sushma Madhusudhana, 29, another vice president of fixed income and credit research at Amba, who declines to say who those customers are.
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