Ex-Credit Suisse banker’s firm buys HK research house

Aletheia Capital is buying Richard Wallace’s IND-X Advisors as the research upstart doubles down on its efforts to build scale and provide investment ideas to fund managers in a post-MiFID II world.

Co-founded just last month by former Credit Suisse banker Ali Naqvi, the deal marks Aletheia Capital's second acquisition following the purchase of Jim Walker’s Asianomics.

Naqvi and his co-founder Prashant Gokhale, another former Credit Suisse executive, changes in the global regulatory environment (led by MiFID II) have opened a unique opportunity to build independent firms in a very competitive sector.

"For the first time ever in this sector you have pricing discovery," Naqvi told FinanceAsia in an interview.

MiFID II has clarified the price points of products along the value chain of banking, allowing specialists and new entrants who can not offer a suite of products to compete for each link in the chain.

"This does not only apply to research; competition will happen in execution, capital markets, all along the value chain," Naqvi added.

Naqvi left his role as executive chairman for global markets, Asia Pacific, at Credit Suisse, in July shortly after the European Union's new MiFID II regime came into effect on January 3, 2018. The new rules ended the bundling together of research and execution charges into commission rates, prompting the Swiss bank to restructure its equities division and cut jobs in 2017.

Banks face lower margins and are likely to continue to scale back their research for the next year, reducing seniority, degrading their product, and reducing client service, creating further conflict as other stronger competing interests take over, said Naqvi.

"The moment the US market slows down you will see another wave of changes coming through. You have to be a top three or four to be profitable through the cycles," said Naqvi.

For Naqvi, though, brokers' loss is potentially a major gain for smaller, independent firms. As banks drop smaller clients as it becomes uneconomic to serve them, independent brokers could step in.

The cost of global research services can be eye-watering. Hong Kong-based consultancy firm Quinlan & Associates says global bulge-bracket banks historically quoted ‘millions per year’ for providing the largest global fund managers with unlimited access to their research; at the lower end the costs are $250,000 to $300,000 per year.

The consultancy's chief executive Benjamin Quinlan last year predicted a decline of as much as 30% in global research expenditure by 2020.

IND-X provides fund managers with access to independent investment research, covering predominantly the markets and securities of the Asia Pacific region, but also global macro-economic strategy.

Hong Kong-based IND-X is the oldest and largest independent research platform in Asia, Aletheia said in a release on Thursday.

Founded in 2003 by Wallace, a well known banker in Asian circles, it has an existing client base of over 200 accounts, analysts and a licenced presence in the US, UK and Hong Kong.

Naqvi expects consolidation to continue in the sector. Alethia has already gathered around 30 analysts onto its platform.

“This is a highly fragmented space with exceptional niche products which requires a lot of consolidation. We are looking to capitalise on this opportunity by continuing to partner with talented teams and also grow organically,” Naqvi said.

Aletheia, named after the daughter of Zeus and used in Greek philosophy to mean truth, intends to overcome the typical scaling constraints of independent research through a partnership culture where the employees own the firm, buying other research houses and deploying disruptive technology.

Naqvi sees a research platform that is as user friendly as Netflix is for TV viewers. Instead of research distribution via email, he envisions research available in an app that is customised to investors' needs, graphs updated automatically, even predicting what they might want to read next based on consumption.

"There is no reason why you can't have a Spotify or an Amazon or an Uber of research, or of execution for that matter," said Naqvi.