India’s nascent research industry rises, falls on Wall Street fortunes

India’s nascent research industry rises, falls on Wall Street fortunes

New Delhi: 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 merger and acquisition (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 US and Europe would cost companies $290,000-580,000 (Rs1.15-2.3 crore) a year and instead are paying one-fourth to one-third of those sums.

The banks are also relying on firms such as Copal, which set up its unit in Gurgaon in 2003 and is based on Jersey in the UK’s Channel Islands. Its master of business administration (MBA) graduates with three years of experience cost the company about Rs17 lakh a year in salary, benefits and other perks, co-founder Joel Perlman says.

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 1 May 1975, trading commissions that had been 75 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.

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 attractive underwriting fees. Before 2000, investment banking paid for as much as 40% 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.

“It’s almost a no-brainer these days," says Marc Vollenweider, 42, chief executive 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.

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 even has 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."

The US and European banks aren’t bragging about their India connection. Many decline even to discuss it. “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.

One reason for the secrecy: Investment firms and brokers may be afraid they’ll be cut out of the equation as clients shop directly in India, says Manoj Jain, Pipal’s 39-year-old founder. “If it happens that their clients know that such a thing can be done out of India, there is a possibility that these firms can get bypassed."

Already, Boston-based Fidelity Investments, the world’s largest mutual fund manager, and others are starting their own Indian research centres. Fidelity has more than 5,000 people in three cities—Bangalore, Chennai and Gurgaon. While most employees do computer-related and back-office work, 29 are involved in research, spokeswoman Anne Crowley says.

Goldman Sachs has 2,000 people in Bangalore. It won’t say how many work in research. Citigroup has more than 20,000 employees in India—half in banking and half in call centres, transaction processing and other back-office jobs. Nearly 400 people are in investment research. Morgan Stanley set up its centre in Mumbai in 2003. Its 900 workers help the New York-based firm’s investment management division with accounting, compliance support and fund administration. Analysts provide company and industry research and build earnings models. JPMorgan, which has 9,000 people in India who work in Mumbai and Bangalore, declined to comment.

Distance can prove a stumbling block. At Pipal’s glass-and-red-stone office in Gurgaon, Saurabh Srivastava leads a team of 10 analysts who pore over the profits of Canadian Imperial Bank of Commerce, uranium producer Cameco Corp. and two dozen other Canadian firms. The project, although he declines to say so, is for Goldman Sachs. “Whenever a company announces earnings, we have to come out with an update in four days," says Srivastava, 29, referring to one of the reports he generates for Goldman Sachs.

Goldman Sachs confirms its work with Pipal. Yet after two- and-a-half years, it says, it’s pulling the plug. The reason: Customers want more contact with the people writing the analysis, Edward Naylor, a Goldman Sachs spokesman in Hong Kong, says.

Pipal, Amba and the others aren’t certified to provide investment ratings, and their research can’t advise clients to buy, sell or hold a stock, says Mohan Alexander, managing director of Amba. Because of such limitations, Alexander, 47, says he doesn’t see Indian firms moving beyond basic research anytime soon for its clients that sell securities.

NoonMark’s Green, the customer for Copal’s pitch books, worries that, ultimately, banks may be short-changing themselves. As work moves to India, Wall Street will need fewer junior analysts, undermining the foundation of investment banking. “If you don’t hire analysts, you are not training the next generation of leaders of your firm," Green, 44, says.

For now, India’s young research industry rises and falls on the fortunes of Wall Street. Pipal got its start in 2001, when investment banks were reeling from the Internet bust and the Spitzer campaign against analysts who talked up questionable, mainly dot-com, stocks.

Srivastava joined as a senior research analyst that September. The same month, Firstsource Solutions Ltd, a Mumbai-based company that processes transactions, took a 51% stake in Pipal.

Does Srivastava want to make the leap to Wall Street?

“I don’t want to relocate," he says. “I’ve always enjoyed working in sunrise industries in India." The money isn’t bad either. “I have whatever I wanted," he says.

Srivastava won’t disclose his salary. A financial research manager at Pipal, such as Srivastava, makes about Rs20 lakh a year, Jain says. An annual bonus ranges from 20% to as much as 50% of salary. With the full bonus, the pay works out to Rs30 lakh a year.

Some 1,100 miles (about 1,770km) south of Gurgaon in Bangalore, Amba occupies a 12th floor office in a granite and glass building.

Alexander and three other equity analysts got the idea for Amba while working for multinational banks overseas. Like Jain, they speculated that after the Internet crash and Spitzer settlement, investment banks and brokerages would outsource research.

That quartet went to Colombo, Sri Lanka, in mid-2003. “Since investment research outsourcing was a brand new industry, most of our time was spent in explaining the concept and convincing prospects to offer us a trial," co-founder Brad West said in a 7 November email, declining to name the customer.

Alexander and West both came from Deutsche Bank. The two other founders—Aithal and Andrew Houston—were from Goldman Sachs and JPMorgan Chase. They decided on Amba as an acronym for their first names: Andrew, Mohan, Brad and Anand. Within six months, Amba had about half a dozen customers. Gradually, it began attracting hedge fund firms, which wanted quantitative analysis.

In 2004, Paul Alapat, chief economist for Asia excluding Japan at Nomura Holdings Inc., was looking to return to India after 14 years abroad. He joined Amba as managing director and head of quantitative services. Alapat, 45, a PhD in international finance from the University of California, Los Angeles, started with a team of statisticians, math wizards and software experts. The group, which now numbers 75, tests strategies, runs simulations and designs technical screens.

“We’re not consultants or advisers," Alapat says. “We understand quite a bit of what you want, but you generate the idea, and we will execute it." bloomberg

Kambiz Foroohar in New York contributed to this story.