FinanceAsia published a feature earlier this week on one of the major hurdles facing research analysts — the introduction of Mifid II, and the unbundling that will follow. But regulations are not the only threat looming. Some start-up companies are also trying to cut into their business.
We talked to Raghav Kapoor, cofounder and CEO of one of those companies, research marketplace Smartkarma. He tells FinanceAsia the research industry is ripe for a shake-up.
FA: What made you start Smartkarma?
Kapoor: Two big drivers of change began to emerge in recent years. One was technology, which drove down margins for the whole buy-side and sell-side. Trading costs and commission rates were getting cheaper at a crazy pace.
The second driver was regulation. Up until 2012, it mainly focused on banks, but post-2012 the asset management industry started to see its regulatory and compliance burden accelerating.
What did the regulator want? Something very straightforward. They wanted to protect the interests of end investors whose pensions were managed. And they wanted to ensure that these investors were not being penalised with fees that were too high and weren’t being disclosed properly.
I come from a tech background and I saw the world’s most beautiful opportunity. Here is a big global industry that hadn’t innovated for 30 years, and two enormous tectonic forces were pounding on either side with the need for change.
Digital marketplaces are going to replace the functions and services that traditional banks and buy-side guys used to provide. If you look at one very simple service, which is trading — the buying and selling of securities — that has gone over largely to digital already.
The next big piece, which hasn’t changed at all, is research. The last big innovation happened in the 1980s when the PDF format took off. Then in the 1990s with email. Since then we have not innovated. So, by building a digital marketplace for investment research, we can change the way research happens.
FA: How does Smartkarma work?
Kapoor: Our research providers could be analysts who used to work at banks, data scientists, academics, or lawyers. These are sellers on our platform. On the other side we have asset managers, hedge funds, mutual funds, sovereign wealth funds, etc. There is a very simple business model. The buy-side pay a single subscription and they get unlimited access to the work from all the research providers. We keep 30% of the subscription dollars, while 70% are distributed to the research providers based on the quantified value-add, the alpha they are bringing to the end customers.
FA: What has been the take-up?
Kapoor: We launched Smartkarma in April last year. Now, close to 150 companies are using the product. Not all are paying customers. We generally have a third in our trial process and two-thirds paying. From each company, we have anything from 1 to 13 users.
In December, we signed a deal with Société Générale who can now distribute our platform to their customer base. It’s very transparent. They just on-sell our platform. It would be very expensive for SocGen to build its own platform, to build and grow its own in-house research team [in Asian equities], and with new regulations, costs are only going up. They saw the light.
We see it is harder and harder for banks to monetise their research product. The departments are heavily conflicted. Compliance costs are going up and with Mifid II coming, asset managers will have smaller and smaller budgets for research. As a result, everybody’s research dollar has to go a longer way. What Smartkarma has done is proposed the world’s most efficient marketplace.
I must have spoken to at least 60 funds just in the last two months. All these guys are cutting down bank counterparties. Where they used to use research from 20 banks, now they just want three, or four, or five. They just don’t have enough money to pay.
FA: Some of the investment banks are adding specialised capability to differentiate their research product.
Kapoor: The big global banks are adding bells and whistles to ensure they stay in the top five but are not changing their business model. They are just incurring more and more cost, hoping to receive part of a very fast-shrinking pie. That’s a very bad market. You are running harder and harder on the treadmill to stay flat.
What is the most efficient way for someone to bring independent research providers to asset managers? It is through our sort of marketplace: one subscription; alpha value-add; highly efficient; highly compliant. We are here to coexist with the top banks. We want to be the largest ex-bank platform for independent research.
FA: What infrastructure do you provide?
Kapoor: We have compliance layers, payment gateways, consumption analytics, data tools, brand-building tools, publishing discovery tools, engagement tools.
FA: Are former bank analysts who now distribute on Smartkarma making as much money as before?
Kapoor: No, they are not. But I can also tell you that analysts at banks are not making as much money as they used to. And their job security is going down by the day.
