For years, equity research has struggled to develop a sustainable revenue model. The spectacular growth in private markets may provide the opening that Wall Street analysts have been groping for.
With US exchange listings having halved since 1996 and 1,489 unicorns now worth $5 trillion collectively, analysts are increasingly being asked to pass their slide rule over unlisted companies. JPMorgan Chase & Co. has launched coverage of OpenAI, and Citigroup Inc. hired a former Goldman Sachs Group Inc. technology analyst to lead coverage of around 100 names.
While the best analysts have long fostered relationships with private companies, the primary way of being paid for that work was via trading commissions in adjacent public equities. Now, tokenization of private company equity may provide a more direct revenue stream.
Robinhood Markets Inc. in June issued a derivative of OpenAI equity on a public blockchain, handing it out to European investors. “Our giveaway plants a seed for something much bigger,” posted Chief Executive Officer Vlad Tenev. “Since our announcement we’ve been hearing from many private companies that are eager to join us in the tokenization revolution.”
Brokers could take a commission on trading of tokens as they do on publicly traded shares right now, but they would also be able finance them and offer lending facilities, a boost to their prime brokerage businesses.
Although Robinhood may have been first, other firms are watching closely. In his latest shareholder letter, BlackRock Inc. CEO Larry Fink complains that the world’s fastest-growing companies are “locked behind high walls, with gates that open only for the wealthiest or largest market participants.” He, too, proposes tokenization as a solution to making them more accessible. The theme cropped up on earnings calls at banks including Goldman Sachs and Morgan Stanley.
Given the paucity of financial information, credible research on private companies would offer significant value. Without quarterly earnings calls or regulatory filings, investors would be more grateful for the insights that analysts provide. Could it herald a return to the glory days of equity research when star analysts like Mary Meeker and Henry Blodget moved markets with their recommendations?
For analysts, the challenge is to extract meaningful insights from companies that reveal little about their operations. Their work would require a return to fundamentals – intensive conversations with customers, vendors, and partners rather than waiting for packaged quarterly updates.
Outside the US, the task is somewhat easier: Companies House in the UK and similar registries elsewhere provide detailed financial information on private firms that analysts covering US firms can only dream of accessing. When Swedish fintech company Klarna Group Plc filed its S-1 prospectus ahead of an aborted listing in March, most of the key numbers had been in the public domain for some time. I often wonder if it’s cause or effect that the market with the world’s most valuable and numerous private companies also maintains the strictest financial privacy rules. We know that Stripe generated $3.8 billion in revenue when it last reported in Europe – with full details available through Ireland’s CORE registry – but we have no visibility into what one of the world’s largest private companies earned in its home market.
Whatever the difficulties, the expansion into private company coverage offers equity research a potential lifeline. Pioneered as a marketing tool in the era of fixed-rate commissions, it variously latched onto trading flows, advisory operations and proprietary trading to bolster its take. Its descent has been steep: headcount at the world’s 15 biggest banks has fallen to about 3,000 analysts from almost 4,600 a decade ago, while global spending on research has sunk 50% since European regulators forced unbundling in 2018. Equity research has become “an orphaned child that's always looking for a home,” as one former Citigroup strategist put it to Bloomberg News.
If the $5 trillion of value locked in unicorns eventually generates trading commissions and ancillary revenue through tokenization, it would create a massive new earnings stream for research departments. In a world where private is increasingly the new public, research departments that fail to adapt risk becoming as obsolete as the shrinking roster of companies they currently cover.
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