youDevise's Expanding (First) Coverage

Integrity Research Associates - 18 March 2011

New York– youDevise Ltd. ofLondonand First Coverage of Boston recently announced that they would combine their firms to form one entity which will operate under the youDevise name.  The two companies expect the combination of services to be complete by 2011.

The most obvious reason for the merger is that the combined enterprise will now have a stronger presence in two continents, North America and Europe.  youDevise expanded intoNorth America in 2007 but First Coverage’s North American based headquarters will allow the sales forces’ from the two companies to combine more effectively.

The two companies will also have the added benefit of being bigger, now providing a system that will serve over 150 institutional investors and combine ideas from more than 560 sell side firms with more than 2,000 ideas a day.  This should help them compete with FactSet’s Alpha Network, a product that FactSet acquired as part of its purchase of StreamVPN in September of 2005.

Commonwealth Capital Ventures of Boston, GrandBanks Capital ofBoston, and JLA Venture s ofTorontoall invested in the merger.  Each of the firms was also an initial investor in First Coverage.

Even with these added benefits, the obvious question that remains is whether alpha capture platforms have gained significant traction with the buy-side.  A Financial Times article provides this quote from Matt Simon at Tabb group:  “In theUS [an alpha capture system] hasn’t really taken off yet, as it has inEurope to some degree.  US hedge funds are still reluctant to try it in their everyday decisions…Some firms thought it sounded backwards: They were the ones generating ideas to give to their brokers.”

Another interesting idea is whether trade ideas platforms such as these violate regulatory requirements which mandate that a firm’s research is distributed to all clients at the same time.  Systems such as these may incentivize salesmen to focus undue attention on clients with these systems in place since they know that their commissions are directly tied to the performance of their ideas.  It is important to note that no regulators have started investigations into this topic.

One final thought pertaining to independent research providers is that models such as these, which charge the research firms for the right to send their ideas over the platform traditionally, have worked well for the sell-side which has the resources to pay to push their ideas to the buy-side but may not make as much sense for independents.  In the case of a one man shop, can the analyst really afford to pay $100 a month to channel his ideas to his clients or would it make more sense to do the deal directly with the buy-side in the first place.