Investment banking is known as an industry of feast and famine. The reality is more nuanced: even as most bankers are feasting heartily, some will always starve. Equity researchers are the latest group on an involuntary crash diet.
Last Christmas, a third of all redundant employees passing through the doors of the Rialto Consultancy, an outplacement provider, came from an equity research background. Like other sectors in banking before it, the research world is being squeezed. The question for researchers, as for other starving bankers, is whether to switch careers or wait for the squeezing to stop.
Outplacement providers said researchers were suffering the same fate as corporate financiers in 2000 and high-yield specialists in 2002. Philip Beddows, a director at Rialto, said: 'You tend to get a wave of redundancies in the same sector. Once one bank has let people go, others feel they should be doing the same.' Short-termism can result: after cutting staff in 2002, high-yield desks were hiring again in 2003.
Beddows said the flow of equity researchers had abated slightly. But there may be more to come: Commerzbank made redundancies in equity research last November; Goldman Sachs, Citigroup and Deutsche Bank are making additional cuts.
The squeeze follows a period of slow starvation. Beddows said equity researchers had been steadily referred to outplacement providers since 2001. According to Starmine, an analyst rating service, the number of European equity analysts fell 13% in 2004. Brad Hintz, a banking analyst at Sanford C Bernstein, the sellside equity-research unit of Alliance Capital, said Wall Street equity research budgets had fallen 30% over the past two years. At Goldman Sachs he said the drop was 40%.
It is bad news for people working in the profession. Recruiters said redundant researchers would find it difficult to walk into equivalent positions, particularly if they are senior and focused on weak industrial sectors such as oil and gas or pulp and paper. HSBC is hiring about 100 researchers, but many will be mid-level and junior staff. The head of research at one international investment bank said senior researchers could be difficult to deal with: 'People are not keen to swap sectors and retrain. They know their market value would diminish dramatically.'
Monima Siddique, head of City Analytics, an executive search company specialising in research positions, said equity researchers have several options open to them, including moving into investor relations in the corporate sector, moving into credit research or moving to the buyside.
Tim Zühlke, a recruiter at Smith & Jessen in Frankfurt, said researchers could also move into hedge funds, or work as desk researchers giving advice to proprietary traders.
None of the options is likely to be easy. Zühlke said hedge fund and desk research positions were hard to find. Siddique said fund managers have become less willing to employ former sellside researchers and equity researchers moving into credit would need to retrain and learn about the yield curve. Not all are willing to do so.
'If people study risk modelling or learn how to price derivatives they will be more marketable,' said Siddique.
Despite an unwillingness to retrain, most equity researchers expect the rout to be enduring. One who recently lost his job said the sector was likely to remain down for at least five years. He said research was being battered by a combination of falling commissions and rising compliance costs. 'For the moment, it's the end of equity research as we knew it. But, at some stage, fund managers will realise that performance is under pressure without specialist research. At that point, they will start paying again,' he said.
Few researchers will sit out that long. Siddique said the employability clock started ticking as soon as redundancy papers are handed out. Michael Moran, managing director at Fairplace Consulting, a City of London outplacement firm, said all redundant bank employees had a maximum of 12 months to find a new position, during which time they should undertake some form of related consultancy work.
'After 12 months, people will say you are no longer in touch with the market,' said Moran.
However, recent examples suggest a protracted sabbatical or period of consultancy work is not always tantamount to career suicide. In January, Greg Mazur joined Merrill Lynch as managing director and head of M&A origination for Asia, after taking a two-year sabbatical from Citigroup. Jin Khang, a former proprietary trader at Kidder Peabody, spent six years trading his own account, before launching Opus Prime Capital, a hedge fund last October.
Piers Hartland-Swann, a former telecoms banker at Bear Stearns, spent time out of the market as a self-employed consultant. He said bankers should avoid specialising in cyclical industry sectors, where redundancies are likely to fall during downturns.
As Hartland-Swann illustrates, this is not always possible. After specialising in the oil and gas sector, he switched to telecoms on the assumption that as a utility industry it would be relatively stable: 'Little did I know that the telecoms boom was about to start.'
Two years after leaving Bear Stearns when the telecoms market crashed, he is back at MacArthur & Co, a London corporate finance boutique. This time, however, he plans to be a generalist. Starving equity researchers may come to the same conclusion.