Monday, August 4, 2014

Institutional Research: Ed Hyman Made It Work

Institutional Research: Ed Hyman Made It Work

International Strategy & Investment  (ISI) was just acquired by Evercore, the investment bank.  The value of the transaction isn’t clear, because Evercore also acquired the minority stake in its own institutional equity business.  The Wall Street Journal reports that the deal could value ISI at $400 million[1], if ISI meets certain growth targets over the next several years.   ISI’s revenues of just under $200 million don’t add up to much in a world where a billion dollars is considered small change.

However, the ISI transaction shouldn’t be overlooked, because Ed Hyman, ISI’s founder and chief economist, has created a remarkable exception to the general rule of Wall Street research.  The general rule states that Wall Street research can’t be profitable, unless it is somehow attached to or subsidized by investment banking.  You may recall that Eliot Spitzer attempted to drive a wedge between Wall Street research and banking about ten years ago.

Ed Hyman’s business model was pretty simple and very daunting.  For decades he produced research reports for institutional clients and hoped that they would direct enough trading business to his firm to pay for the research.  With commissions and spreads plummeting, many large firms and research boutiques found that they couldn’t make enough money to produce research.   ISI stuck with the business model and slowly expanded its reach as others withdrew.

My reliance on Mr. Hyman’s work goes back to the days before fax machines, when his Weekly Economic Report would arrive in the mail from a research firm called CJ Lawrence.  The reports were a series of charts and graphs along with Mr. Hyman’s comments superimposed in magic marker.  In 1991, Mr. Hyman set up ISI with a handful of employees.  As I moved from one job to another, I kept doing business with Mr. Hyman and ISI.  In fact, a huge number of institutional investors did the same thing, and Mr. Hyman has been rated the #1 economist for well over three decades.  Today ISI has 226 employees, including 28 analysts and 94 sales and trading professionals.

How did Mr. Hyman build a business where so many others failed?  As far as I can tell, he stuck to his core mission of providing high quality independent research to his clients.  Moreover, he helped portfolio managers make sense of the world and sort through the reams of economic data pouring out of government offices and surveys.  He provided a very high level of client service.  Most importantly, ISI wasn’t trying to push a particular product.  Over the years, Mr. Hyman expanded this model into numerous market sectors and added a fund company to the overall business.

While the Evercore transaction validates the economic value of ISI, the transaction may be the beginning of the end for ISI.  As the institutional research arm of an investment bank, ISI’s independence has come to an end.  Clearly, Evercore hopes to reap benefits in its banking business from the research, relationships, and reputation of ISI.  At some point, the banking business will pollute the ISI brand.  For Mr. Hyman’s sake, he will have retired from the business when that happens.


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