February 1, 2007
By Jed Horowitz Of DOW JONES NEWSWIRES
Goldman has been buying minority stakes in firms such as Investars.com, which ranks stock analysts by the performance of their picks, and will promote the companies to its clients in return for distribution fees. The biggest investment bank by market value has purchased stakes of 10% to 25% in three firms, and hopes to have about a dozen by year's end, said Tom Conigliaro, a managing director in Goldman's equities division.
Goldman is packaging the research offerings into a unit called Hudson Street Services, an offshoot of its soft-dollar business that lets clients pay indirectly for research through trade commissions. If money managers who work with the world's biggest independent investment bank prefer to pay directly for the research services, the firms will rebate some of the fees to Goldman.
"Hudson Street Services is a wonderful revenue model even if clients don't trade through Goldman," Conigliaro said, but added the program will initially be pitched to the company's 600 or so soft-dollar clients who are allocating a growing amount of their commission dollars toward third-party sources of research. "The fragmentation of the marketplace and the myriad of choices makes this difficult for them."
Goldman got a green light last month from the Securities and Exchange Commission to offer soft-dollar services from firms that aren't broker-dealers. Hudson Street responds to clients' needs and could produce substantial profits if the businesses it backs take off, Conigliaro said. The firm's distribution deals run from one to three years, giving the securities firm and its partners flexibility if the fee streams or business models change.
The development comes as large investors seek more efficient ways to choose and pay independent research providers, and as research firms, many of which are thinly capitalized, look to expand their customer base.
"As a high-tech growth company, we had a plan to take on additional capital and looked at various investment partners in the venture capital community," said Bruce Molloy, chief executive of Connotate, a 6-year-old "Web-scraping" firm that filters the Internet to source client-customized news and data. "We thought Goldman would be best because of their knowledge of financial services, their willingness to help through joint marketing and their credibility."
Goldman began explaining the business to its sales force this week, a spokesman said.
In addition to Investars and Connotate, Goldman has bought a stake in ASSET4, which sells a database correlating stock performance to companies' environmental, social and governance practices. Investars, which offers its analyst ratings free on its Web site, makes a profit by selling its models and licensing data to more than 40 Wall Street firms and institutional investors, said Kei Kianpoor, chief executive of the 7-year-old company.
Goldman has no immediate plans to add companies producing fundamental stock research such as that produced by its own research department, Conigliaro said. Other categories it is exploring include firms that do primary research, such as industry-specific surveys, and macro-policy analysis and that offer outsourcing services.
"We are looking for firms that provide something interesting and unique, that need strategic capital and that need our distribution," the executive said.
Goldman is not the first financial firm to centralize research access as it seeks to offset plummeting stock trading commissions with other revenue models. Bank of New York Co. (BK) recently spun off its research aggregator BNY Jaywalk into a joint venture that includes many of its stock execution and soft-dollar services, although Jaywalk focuses on access to fundamental stock research.
Goldman has a history of making investment bets on emerging players. It was an early backer of Archipelago, an electronic stock-trading platform that returned a hefty profit after its sale last year to the New York Stock Exchange. Goldman also booked a solid gain from its sale of electronic communications network RediBook in 2002.
The small research firms being incorporated into Hudson Street have lower potential for big returns and risk losing their value to investors if distribution gets too wide, said the head of an independent research firm who declined to be identified. Conigliaro said the short-term contracts should serve a foil to static growth by allowing Goldman to release participants and add new players. At the same time, the research firms can opt out of the program if they prefer independence or other partners, he said.
In branding the venture Hudson Street, Goldman carries on its tradition of using New York City street names. (Its multibillion-dollar Whitehall real estate funds are named for a street near its downtown Manhattan headquarters.) Hudson Street is meant to convey the "edgy" character of the street's location in Manhattan's trendy Tribeca area, where Goldman has an office, said company spokesman Ed Canaday. Marketing material for the new business plans to promote Hudson as an "intersection of research, services and technology," he said.
-By Jed Horowitz, Dow Jones Newswires; 201-938-4047; jed.horowitz@dowjones.com
Corrected February 1, 2007 14:28 ET (19:28 GMT)
Goldman Sachs Group Inc. (GS) sold its RediBook electronic communications network in 2002 to Archipelago, an electronic trading firm that it partly owned. Also, Goldman's Hudson Street office is in New Jersey, not New York.
("Goldman Buys Independent Research Co. Stakes For New Venture" at 1:27 p.m. EST Thursday incorrectly said Goldman sold RediPlus, a direct market access electronic trading platform that it still operates.)