Industry Information: An Investment Bank’s Most Powerful Tool

market share concentrationRegardless of their size and scope, investment banks need timely and accurate industry information because it improves investment decisions, saves time and reduces costs. Although large investment banks typically have extensive and well-trained research departments, they still sometimes require information on a niche industry, where few deals have been brokered in the past. Additionally, analysts in different departments access consistent data and analysis through third-party market research, ensuring their decision-making is based on the same information. On the other hand, boutique investment banks do not have the resources to employ a large research department, resulting in a greater need for industry information that they can use to help determine a company’s health.

Recent downward pressure on trading commissions and increased regulatory scrutiny are forcing investment banks to downsize their research departments, making independent research an attractive solution to their information needs. Such regulatory pressures increase costs for investment banks, which reduces the amount firms can spend on labor. Industry research helps investment banks achieve greater organizational flexibility, allowing them to adapt quickly to technology and regulatory-driven changes in macroeconomic, financial market and industry competitive conditions.

In addition to focusing their own resources more effectively, investment banks can also use industry research reports to minimize any vulnerability to fluctuations in the market. Access to a collection of industry reports helps investment banks understand how a company fits into not just its industry, but also the entire economy. With such an understanding, an investment bank can reduce industry concentrations and diversify its client base, thus increasing growth consistently throughout business cycles. Investment banks’ primary goal is to help grow not only their own business, but also their clients’ businesses through investment advisory and assistance with mergers and acquisitions. Industry research gives banks a timely, accurate and consistent method to analyze various markets, thus helping clients make the best decisions.

cost structure

Timeliness

Investment bank employees regularly provide timely, up-to-date information to their clients. Such information often includes specific data on company financials, but also statistics on industries to help employees gain perspective. In the case of boutique investment banks, it is critical that understaffed research teams consistently source relevant, accurate information to define market size and industry landscape for valuation, advisory and lending purposes. In particular, investment bankers use industry research to build financial models and form pitch books that often require revenue and growth trends, along with trends in the number and size of firms and major players. For example, an analyst might look to the cost structure benchmarks section (Figure 1) to compare a particular company’s operations with industry averages for valuations and corporate financial advisory services. In addition to information on cost structure benchmarks, IBISWorld reports also include sections detailing an industry’s life cycle and competition, which help bankers understand how to evaluate companies.

Industry research is not only valuable to investment bankers at the analyst level. The organization of industry reports allows analysts to identify detailed information such as supply chain (Figure 2) risks quickly, and it also provides period-based industry activity summaries that can help a vice president, or even a managing director, obtain a concise overview of an industry prior to a meeting. Investment banking professionals often lack the time to perform comprehensive research due to the highly cyclical and evolving nature of their business. With industry research, investment bankers can quickly identify industry size and landscape, while also minimizing cost and time.

supply chain

Accuracy

Investment banking professionals gather and aggregate a diverse array of information to create company valuations. For example, they typically gather historical and projected company financial performance data and macroeconomic, financial market and transaction conditions. However, to accurately portray how a company fits into its industry, it is important to be aware of the factors that tie individual businesses together. A solid grasp on how an industry’s upstream and downstream counterparts are performing can help investment banking professionals identify risks that may not be evident from other data.

Risk ScoresIndustry reports can highlight the situation an individual company faces within its industry and also how activity along the supply chain affects industry performance. In addition to industry reports, investment banks can also benefit from business environment reports that aggregate all factors that affect an industry into a set of risk scores, which can help investment banking professionals accurately identify companies that are ripe for possible mergers and acquisitions. In particular, IBISWorld Risk scores are calculated based on an industry’s current and expected operating environment. These scores, which were developed in collaboration with the Risk Management Association (RMA), comprise the three components of risk: structural risk, growth risk and sensitivity risk. Structural risk is calculated using an industry’s fundamental operating environment, including barriers to entry, competition and technology change, while growth risk is based on changes in revenue and sensitivity risk is tied to an industry’s external drivers. For example, investment banks can use growth risk scores to identify potential performance fluctuations that might affect valuations, deal timing and trading opportunities.

Consistency

While industry reports are especially useful for boutique investment banks that are industry generalists, there are benefits for large investment banks as well. Today, banks are highly diverse in their operations and many of the largest ones have extensive commercial banking arms to go along with their investment banking divisions. Industry research reports can be a significant asset to commercial banks in assessing credit quality. However, by using industry research reports in their investment banking divisions as well, banks can create stronger ties throughout their operations, while also developing consistency in vetting opportunities in their investment banking, trading and commercial banking operations. Furthermore, when investment banks need to present a variety of opportunities to clients, they can substantiate their claims with a single source, making prospects easier to compare.

industry at a glance

Following the recession, investment banks have been forced to operate in more regulated space with fewer resources. Consequently, many banks have been downsizing their operations by outsourcing preliminary research. IBISWorld’s reports offer investment bankers a timely and accurate picture of industry performance and landscape (Figure 4) that they can use as a foundation for financial models and trend analysis. Furthermore, all of IBISWorld’s reports come in standardized formats and are frequently updated to provide investment banking professionals with consistent and easy-to-find information instantly. All of these factors help investment banks increase efficiency while cutting costs.

risk graph

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