We have all heard the adage that information is power - this could not ring more true than it does with financial planning, investments, and M&A.
With this idea in mind, the function of equity research is to provide high-level information and analysis of a company (or sector) so that other companies can in turn use this information to guide investments and investment banking M&A transactions.
This work is completed by professionals on both the buy-side and the sell-side. Specifically, on the sell-side, the equity research division is comprised of analysts and investment bankers, while on the buy-side it is usually a division of senior analysts that work directly for the company. They study small groups of stocks (about ten - give or take) within a specific industry, becoming experts in their domain, and produce formal reports to communicate their findings, namely whether clients should buy, sell, or hold stocks.
In this article we will explore investment banking vs. equity research as well as equity research buy-side vs. sell-side. Additionally, we will provide a list of equity research firms.
A Guide to Equity Research
Equity Research vs. Investment Banking
Equity research sell-side is related to investment banking, though it often does not get the same amount of attention. The research analysts relay information to the investment banks’ sales-forces and executives. We will discuss additional differences between these two areas in the career section below.
The sell-side’s mission is to sell opportunities and/or assets, therefore, the analysts on the sell-side are usually investment bankers trained to study capital markets in the interest of providing investment recommendations to the buy-side (also known as institutional investors) or to the investment bank itself. For example, the buy-side might use the research to decide whether to buy a specific stock or company.
The sell-side researchers must possess robust research skills and have the ability to produce valuation models and research reports. Additionally, they must be experts in financial modeling and analysis as their work influences a company’s value and is made public. Sell-side analysts will also spend time using a finance data room to complete due diligence with the buyer.
The buy-side is comprised of asset managers, hedge funds, and institutional investors; its goal is to expand its opportunities, increase its assets, and raise capital. With this in mind, buy-side equity researchers and analysts study and build financial research on companies. More specifically, they examine and analyze companies to ensure that risks are limited and future investments stay true to their institution’s overall strategy and mission.
Consequently, it is critical that they track current news and trends in order to craft strong financial models. Here we should note that buy-side equity research reports differ from sell-side equity research in that they are not for public consumption. Finally, additional skills buy-side equity researchers should possess include the ability to analyze risks, the ability to produce high quality reports in a timely fashion, the ability to identify and track new business opportunities, and the ability to effectively communicate.
Equity research Buy-Side or Sell-Side Reports
Whether a report is a buy or sell- side equity research report, it is prepared by an analyst and usually include the following:
- An industry research overview, including trends and news related to competing companies
- Company overview, specifically any new information as well as quarterly results
- Investment thesis, which is the analyst explaining why he/she thinks the stock will or will not perform well; the share target price is also included here - many consider this the most important piece of the report
- A forecast of the company’s income, cashflow, and valuation produced from a financial model
- Risks associated with stock
Things To Consider When Hiring An Equity Research Firm
Here we must return to the notion of information being powerful and valuable. Equity research can allow companies to gain capital and entice new buyers and/or investors. Equity research firms can also help companies generate new ideas and identify potential red flags. When you are looking to hire an equity research firm to address these needs or others, the following are top considerations:
- The background, training, and skills of the research analysts
- The quality of the firm’s research reports
- The analyst’s ability to understand the type of information that is relevant to you as the client
Equity Research Firms
The following are some top ranked equity research firms:
- Merrill Lynch Bank of America
- JP Morgan
- Morgan Stanley
- Wells Fargo Securities
- Guggenheim Securities
- Washington Analysis
- Zelman & Associates
- Wolfe Research
- Deutsche Bank
- Goldman, Sachs & Co
- BGC Partners
- BMO Capital Markets Corp.
- Sberbank CIB
Careers in Equity Research vs. Investment Banking
Careers in capital markets tend to fall into the two categories of investment banking and equity research. Equity researchers must be strong writers since they communicate critical information through reports, as well as skilled financial analysts. The abilities to stay organized and work in a timely manner are also essential - in many regards, equity research can be seen as a highly structured career. This does not mean, however, contrary to the stereotypes of analysts vs. investment bankers, that equity researchers and analysts do not need to possess strong social and oral communication skills.
In fact, the best equity research analysts meet with clients and help facilitate meetings; therefore, they must be able to communicate effectively both on paper and in person. Oftentimes, on larger teams, the senior team members spend more time meeting with clients and companies, while the junior team members tend to spend more time working on financial models.
There is a general consensus in the industry that financial analysts tend to face lower levels of stress and work fewer hours than investment bankers. On average, financial analysts are recorded as working 12 hour days, while investment bankers are usually reported as working 16 hour days. For example, during due diligence, investment bankers may spend 50 plus hours a week solely inside the finance data room. (Read also How to find the right data room for investment banking)
Of course, buy-side or sell-side equity research analysts do deal with stress, as one does in any job, but reports show the job is generally less stressful than the constant high stress endured by investment bankers. Generally, the most stressful time for equity researchers is during earnings season. Additionally, M&A deals will certainly create longer hours and higher stress for these individuals.
To pursue a career as a research analyst, one must have at least a bachelor’s degree, although MBAs are often preferred. To truly progress in this career, one should earn the Chartered Financial Analyst certification (CFA), which requires at least three years experience in the field.
Equity Research vs. Private Equity
Another two industries that often get confused is equity research and private equity. The difference is that equity research consists of finding the valuation of the listed companies on stock exchanges, while private equity is researching and analysing the private companies and interpreting the results.
An equity research analyst would speak with firm’s traders and brokers for discussing and sharing investment recommendations for clients. Where as a private equity analyst uses financial modeling techniques and a private equity software and CRM to research and analyse private companies. Just like with banking, private equity analysts also use a private equity due diligence checklist template to work with their clients and collect information during diligence.
While equity research produces valuable information, we would be remiss not to acknowledge that the industry has faced some criticism in recent years, which has led to reports of a decline in industry practitioners; however there are some sources that predict the number of jobs in this career will actually increase faster than other careers in the next few years.
Whatever the number of practicing equity researchers, it is important to note that one should not rely solely on equity reports when making major decisions as analysts can both make mistakes and exaggerate or compose information in ways that benefit their customers and/or the market. For instance, the sell-side might work to frame its subject in a favorable light to potential buyers. While one should be aware of these trends and potential red flags, equity research is still a substantial part of our business world, specifically M&A.
If you have a deal coming up check out our software for an efficient M&A process on the buy-side, software for an efficient M&A process on the sell-side, or our software for investment banking by DealRoom.