Equity Research at

Investment Banking
Dr. Himanshu Joshi
Equity research and INVESTMENT
BANKING
Strategic Public Offers Equity
Investments (IPO / FPO) Placements

Venture Capital CORPORATE Mergers and

VALUATION Amalgamations

Private Equity Preferential Substantial

Offers / ESOPs Acquisitions
Institutional Sales at Investment Banks
• Serving the institutional client base, ‘Institutional Sales’ is a business
vertical that deals with equities, fixed income, currency and commodities
derivatives.
• Institutional sales involves working with in-house traders on the one hand
and the investment desks and treasury departments of clients, on the
other.
• Hedge funds are the most active clients for an institutional sales team.
• Institutional sales in equity involves shares, convertibles, and stock
derivatives.
• Fixed income sales includes bonds (investment grade, sub-investment
grade, and unrated), structured products, special situation securities such
as distressed asset bonds, project finance bonds, infrastructure bonds etc.
emerging market bonds, commercial paper and other short term papers.
• Derivative sales include currency derivatives, commodity derivatives and
credit derivatives.
Institutional Trading
Institutional Sales at Investment Banks

• Apart from pure sales, Institutional Sales function provides Prime

Brokerage Services as well. These involve securities lending to clients
for the purpose of providing liquidity for the trading activity.
• Prime brokerage usually maintain an inventory of securities to
perform the lending and trading activities for clients.
• In addition, they also provide financing by the way of margin funding
for trading positions and even extend credit for trade settlements
based on a collateral mechanism.
Institutional Trading at TWP
• TWP’s goal was to be a dominant trader in the stocks of companies that
were corporate finance clients or covered by research department.
• TWP was not in the large-scale proprietary trading as its bulge-bracket
competitors Goldman Sachs.
• 12 market makers who covered Nasdaq stocks
• 11 listed traders who covered NYSE stocks
• Each trader traded roughly 50 stocks and generated volume two ways-
(i) through order taking driven by research, and
(ii) market making.
Equity, Fixed Income and Quantitative
Research
• Research is considered as the backbone of the entire securities business,
especially for institutional sales, dealing and trading.
• Most full-service Investment banks have full-fledged research departments
spread across all segments – equities, fixed income securities, and
derivatives.
• Research analyst generate different types of products such as sectoral
reports, company reports, economic analysis and specific stock
recommendations.
• They also provide lot of back office support, especially for traders in
looking for evidence of market imperfection in stocks, under-valuation,
and mispricing.
• Based on the investment strategy adopted by the traders, there can also be
specific requests to the research department to look for unique
propositions such as value investing or dividend stripping (buying before
dividend declaration and selling it off right after the receipt of dividend).
Equity, Fixed Income and Quantitative
Research
• The usual segregation in a research division is into equity research,
fixed income research, and quantitative research that focuses on
derivatives, arbitrage, and complex modelling strategies.
• In India, the top tier investment banks and institutional securities
houses have well developed research departments catering to all the
above-mentioned segments. Many of them cater to institutional
clients such as DFIs, FIIs, Mutual Funds, and Banks.
• Trading and Research are powerful allies. Trading and Dealing are
natural allies.
Asset Management- The business of floating and managing pools of
public or private funds for profits from capital market and alternative investments.

• Investment banking shares synergies with institutional investing by mutual

funds and private equity funds.
• All major global investment banks such as Merrill Lynch (now part of BOA),
Goldman Sachs, Morgan Stanley, Salomon Smith and Barney (City Group),
Lehman Brother (now bankrupt), J. P. Morgan and Credit Suisse among
others, have fund management affiliates.
1. Fund management has helped these banks to wield tremendous financial
clout and become capital market powerhouses.
2. It has also balanced out the revenues a times when investment banking
went through market cycles.
3. More importantly, the real synergy emerges from the support that fund
management can provide for underwriting and securities marketing
businesses.
Asset Management
• Globally, investment banks paid huge considerations to enter the asset
management business by acquiring existing firms in that space.
• In 1997, Zurich Group paid Scudder, Stevens & Clark US$ 2 billion for the
acquisition. Merrill Lynch paid US $5.3 billion to acquire Mercury Asset
Management (UK). JP Morgan entered pension fund business through acquisition
of American Century. Goldman Sachs acquired Liberty Investment Management.
• In India SBI, ICICI, IDFC, Kotak Mahindra, JM Financial, HDFC, Axis Bank, among
others, have their mutual fund businesses apart from private equity managed by
some of them.
• The Real Synergy is in the garnering of investible funds which can be used for
institutional investing to further the growth of investment banking business.
• Institutional investing in primary markets (merchant banking) and institutional
investing in secondary markets (proprietary trading) are segments that combine
well with the business profile in investment banking.
• Mutual fund is more of a retail financial service and helps the investment bank to
develop loyal retail clients and strengthen its sales and distribution network.
From the Case Thomas Wiesel Partners.
Interdependence and Conflict between
different Verticals in Investment Banking
• There are different verticals in core investment banking and allied
businesses that enjoy synergies with one another.
• Market making is a part of the process of floating issues on SME platform
for small companies. Market making offers liquidity and depth to the
secondary market and thereby compliments primary market floatation.
• Corporate Finance advisory and transaction services have a close linkage
with merchant banking, such services culminate in merchant banking
assignment for a public issue or reverse floatation. Such services also helps
in maintaining an enduring relationships with clients during times when
merchant banking is not a hot activity due to depressed market conditions.
Interdependence and Conflict between
different Verticals in Investment Banking
• Venture Capital and Private Equity also have synergies with Merchant
Banking. Being in venture capital business enables identification of
potential IPO candidates quite early, which helps in generating good fee
income from merchant banking services, but also in good capital gain for
the venture capital invested at earlier round of financing in such
companies.
• Similarly, being in Private Equity business helps in harnessing the potential
offered by later stage and listed companies, which may approach an
investment bank primarily for merchant banking services.
• Providing exits to PE and VC investors through IPOs, Strategic Acquisitions,
and Secondary Sales has a close linkage with primary markets and M&A
advisory services.
Interdependence and Conflict between
different Verticals in Investment Banking
• Research (Specifically Equity Research) is the backbone of all the
core and allied businesses of the investment banks and develop and
support synergies among these diverse activities.
Interdependence and Conflict between
different Verticals in Investment Banking
1. Research Recommendations tending to become marketing tools for
merchant banking assignments by the same bank and analysts
getting paid share of such investment banking gains.
2. Ownership of stocks by research analysts in the companies that
they recommend for research.
3. Analyst leveraged their position in pumping up recommendations in
companies that they are interested in when they went public.
4. Investment banks issuing over-optimistic research and steering
shares in hot IPOs to important clients for vested interests.
Decline of Equity Research at Lehman
Brothers (Case C)
• Discusses conflicts within the bank divisions- especially between
Equity Research and Fixed Income.