Our biggest fear is Raj was found not guilty
—Lee S. Ainslie III, managing partner of Maverick Capital: via WSJ
The expert network brand has been severely damaged. Most insider-trading investigations to date have more to do with direct, corrupt relationships between insiders and their investment brethren. But these became synonymous with the handful of exchanges alleged to have been facilitated by the likes of Guidepoint Global and Primary Global. Through a failure of analysis, insider trading and expert networks became one and the same.
Whether it was Rajat Gupta and Raj Rajratanam or the alleged extracurricular activities of various attorneys and accountants accused of passing along material nonpublic information to a scurrilous group of investors in search of an edge, though they weren’t facilitated by a network, they certainly stained the networks. The consequences will be pervasive and persistent for the industry, and we can already see a handful of changes – among them, compliance, consolidation and repositioning. Nonetheless, the consequences will be good, and they will reinforce the benefits of expert networks.
Compliance will become a central leg of the service. Carlo di Florio, director of the U.S. SEC Office of Compliance Inspections and Examinations, spoke at the Millenium in March and validated the use of expert networks, but he emphasized the need for controls. Though the leading firms had long accepted these and presumably implemented them with varying degrees of success and sophistication, di Florio’s speech opened an opportunity for a reexamination of these procedures and policies. Within a week, Integrity Research had jumped into the breech and launched a specialized compliance service to manage engagements with expert networks. Branded Integrity ResearchCompliance, the service hastily deployed a recent accession from the SEC itself, the venerable Susan Mathews, a former lawyer with the SEC.
Many investors had meanwhile already approached their counterparts at the bulge-bracket investment banks and brokers. Knowing that the likes of JP Morgan, Goldman Sachs, Morgan Stanley, and Bank of America had long-been familiar with the complex rules and retribution of regulation, they approached analysts and sales-people to organize relationships and conversations with outside experts. The banks are regulated entities, and they have invested more than anyone in compliance procedures, policies and support. If anyone would understand or at least be able to provide cover, the banks would.
The expert network industry will consolidate. It’s not surprising. The chill that has passed over the industry has certainly shrunk the market and led to dramatic share-shifts within it. Primary Global, with a bounty of allegations and spate of guilty pleadings from its employees and clients, has encountered a rather prominent form of disgrace, the fault of which notwithstanding. Guidepoint Global, also among those tarred directly, if only allegedly, was said to have laid off half of its research staff coming into 2011. Neither look particularly strong at the moment, and many other marginal players will probably lose share to an established and cautious firm like Gerson Lehrman Group.
The benefits of scale will drive some players to merge. Sub-scale operations have been put on notice by di Florio. Compliance matters. It will matter more and more, and it will require investments in policies, procedures and systems. Business Connect China is merging with Circle of Experts and Tribeca Insights to form Advantus Global. Circle of Experts is the now disavowed network of Evalueserve, the Indian KPO, and Tribeca Insights was the project of Dazhi Chen, a former TMT analyst at MSD Capital, Michael Dell’s hedge fund. They now advertise 135,000 experts. It would not be surprising to see firms like Cognolink and Coleman Research begin to consider acquisitions or perhaps merging between themselves.
Integrity Research claimed more than forty-five expert networks at one point. Though their incentive as the research firm covering the industry was always to grow the list and perhaps suggest more competition and nuance than maybe existed, the number has no doubt declined. Mergers, acquisitions, and the general dissolution of marginal players will continue the trend as sub-scale competitors are driven out of the market or into one-another’s arms.
What hasn’t seen as much discussion is the migration of expert networks to other businesses. It’s no surprise that Guidepoint Global prominently features the five year celebration of its data-collection efforts tracking the Cardiac Rhythm Market (CRM). They’re not just connecting experts with investors, they’re doing primary, survey-based research – not unlike a multitude of established market-research firms.
Gerson Lehrman Group, though presumably having pursued the effort for some-time, especially considering the fancy outfit that advised them on the process, recently branded themselves anew. Gerson Lehrman Group became Gerson Lehrman Group inc, which now holds GLG Research, the money-making expert network business, and G+, a spunky little internet-venture that looks like a cross between quora, twitter, and a municipal social network. We wish it well. G+ has a bang-up logo, and they certainly have the tools to succeed, even if they find themselves fumbling with the odd and unfortunate accident. It slid through with the url – www.GOGplus.com. Yes, we know you mean Go G+, but it still looks like GOG Plus.
Compliance, consolidation and repositioning. The forces have been established, and we’re now seeing the consequences. How many players will fade into obscurity or be thrust into one another’s arms? Can Guidepoint become a publishing company? Will GLG become an internet company?