UBS buys stake in alternative research firm

By Joseph A. Giannone and Jonathan Keehner

NEW YORK (Reuters) - Swiss bank UBS (UBSN.VX) said on Thursday it bought a minority stake in research advisory firm Integrity Research Associates LLC, a deal that will let the bank offer clients access to more than 1,600 untraditional research providers worldwide.

Terms were not disclosed.

New York-based Integrity helps fund managers identify and then purchase research from various providers. The service, currently available in the United States, will be expanded to other regions with UBS backing. It has 19 employees in the United States and India.

"We thought Integrity was quite unique," UBS global equity research head Mark Steinert said in an interview, citing its detailed database of providers and methods for matching research firms with investors. "We saw that as a point of differentiation for us."

Traditional sell-side brokerage research -- crunching financial statements and interviewing executives to generate buy, hold and sell calls -- has been under regulatory and market pressure for years, and Wall Street banks have been cutting back on research coverage.

Now a whole industry of firms selling new forms of market intelligence has emerged to fill the void.

There are channel checkers who interview employees up and down the supply chain; expert networks made up of professionals working inside different industries; environmental research; and "deep search" firms that mine the Internet for data.

Business is growing as fund managers seek that elusive edge that helps them beat the market.

"You see firms expanding their own research departments, but they also want inputs such as primary data, research tools and non-traditional research," Integrity Chairman Michael Mayhew said in an interview. "That is the underlying trend, and firms like Goldman, Merrill Lynch and UBS want to participate."

Wall Street banks slashed research spending after the Securities and Exchange Commission, worried about conflicts of interest, in 2002 banned firms from using banking fees to pay analysts. Efforts to unbundle research costs from commissions investors pay for trades also mean fund managers can steer their dollars to firms offering the best results.

Integrity estimates the market's spending on alternative research in North America will grow to $2.5 billion over the next three years, from $1.8 billion in 2006.

By comparison, investor spending on traditional brokerage research will drop from $4.9 billion to about $4 billion, while spending on internal research grows 28 percent to $7.4 billion in that period, Integrity said.

One of the biggest success stories is expert network firm Gerson Lehrman Group, which generates about $220 million of revenue a year. Gerson in December sold a stake to Silver Lake Partners for $200 million.

Another force driving demand for new sources of research is the growing use of client commission arrangements in the United States, which let investors control their research spending and also consolidate trading orders with a few brokers.

Growing demand for money-making research, and efforts to help clients spend their research dollars, has led to similar developments at other banks.