Weekly Update: Expert Networks & Commoditised 1-1s: Misaligned Incentives

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Expert Networks & Commoditised 1-1s: Misaligned Incentives

Last year, we posted our analysis of GLG’s S1 and the future of expert networks. After another year of sourcing executives for fundamental equity hedge funds, we thought we’d share our updated views on the industry.

After 8 years of sourcing and interviewing 3,000+ executives, it has become clear to us that traditional networks are not structured effectively to serve long-term, fundamental public market investors. This misalignment is rooted in the culture and structure of traditional expert networks (“ENs”).

We never set out to offer EN services like 1-1 executive calls. We launched in 2020 as a research service for long-term fundamental investors and conducted all the interviews ourselves. Our mission was and is to understand how the world’s greatest companies create value. Connecting public equity investors with executives was an unplanned but logical evolution of our service.

Over time, we have refined our process for sourcing relevant executives for our own internal and client interviews. In this analysis, we share how EN’s are organized, serve different clients, and how we think about building a specialized primary research service for public equity hedge funds.

To understand how ENs work, it’s worth looking at where and how they earn the majority of their money:

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Inex One estimates PE and consulting drives ~61% of industry revenue. Excluding credit and distressed hedge funds, we believe PE and consulting contribute closer to 70% of a traditional EN’s revenue. Understandably, the needs of consulting firms and private equity funds have come to define the way in which traditional expert networks are structured and run.

An Apollo or McKinsey analyst typically has very different needs compared to a PM buying and owning public securities for 5+ years. This is an important nuance to how investors use EN’s: PE and consulting clients prioritize speed and volume while long-term, fundamental equity funds prioritize speaking to the best executives.

For example, Apollo’s LBO team has to move quickly to meet bidding deadlines. Speed is crucial. PE typically needs to rapidly climb the learning curve to understand the asset in the weeks before making a bid. Therefore, the volume of expert interviews and speed at which they are conducted is crucial for PE clients. The quality of experts is a secondary requirement.

Consulting clients have little skin-in-the-game and can have even stricter deadlines for projects. Again, the relevancy and quality of the expert is secondary to the speed and volume of experts sourced by the EN.

Because ~70% of industry revenue comes from PE and consulting, the culture at ENs is geared towards driving speed and volume. This delivers satisfactory results for PE and consulting, yet is suboptimal for equity hedge funds that own or follow companies for years.

A culture focused on volume and speed over quality has led to an org structure that is suboptimal for serving long-term, equity hedge funds:

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Account managers and ‘research analysts’ are typically young graduates with no background in business. A deep interest in business and investing is secondary to an ability to source as many executives as possible under extreme time pressure.

On the surface, the EN operational process behind the scenes is simple. The client sends an email to their account manager outlining a request: ‘I’d like to speak to former executives of X company to discuss XYZ’. The client sometimes offers competitors, customers, and any information that may help the EN source the right executives. Often little detail is given.

Each EN hires similar graduates, who use the same tools and conduct the same basic LinkedIn search of Former VP or Director at X company. Account Managers and ‘junior research analysts’ are optimising for speed and volume. They aren’t incentivised to go the extra mile and source the most relevant executive.

This leads to a commoditized service: each EN sources similar executives. For funds looking to compound knowledge on companies they know, there is an increasingly low ‘hit-rate’ of relevant executives per project.

The largest content platforms are commoditising 1-1s even further by not only producing thousands of hours of interviews, but by following the same operating model as legacy EN’s.

In 2019, content services such as Third Bridge Forum, Tegus, and Mosaic were producing a combined ~2,000 transcripts per month. Today, we estimate there are ~5,000 executive interview transcripts published every month. It’s a race to scale the quantity of interviews.

This not only creates noise rather than signal in the content library, but it disincentivizes the content platforms to focus on sourcing the best executives for clients. This volume game encourages rapid, high-volume sourcing of executives.

For long-term investors, unique perspectives from highly-relevant executives matter more than speed and volume. For such investors, we believe there is a better model. And we’re organizing ourselves to provide the best chance of delivering the highest-quality service.

After thousands of reps of sourcing and interviewing executives ourselves, we’ve organically built a deep research-first culture. This gives us an advantage to truly understand client projects and consistently deliver the most relevant executives.

A small but important difference in our team structure is that we hire young investment research analysts to help manage client accounts. These recruits join our new ‘Analyst Graduate Programme’ and are trained in the fundamentals of primary research. Not only do they learn how to source and communicate with executives, but they are interested in becoming an investor.

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Analysts work closely with more experienced executive headhunters to source executives. We train them on researching companies, reading filings, earnings calls, and modeling. In time, these analysts will also conduct interviews for In Practise internally.

This is no revolutionary change. It’s simple, but nuanced. Having someone who is trained and determined to understand the company of a project leads to multiple marginal improvements in the process: deeper understanding of client demands, a more complete picture of the value chain, an understanding of how a company works and relevant job titles, more accurate executive sourcing, and better communication with both executives and clients.

These small improvements across each stage of the process compound into a more consistent and higher quality experience.

This excites us. We’re committed to building the best primary research platform for public equity investors. Curated content and a quality executive sourcing experience. Not only for clients, but also because we are users of our own service. For long-term investors, there is always a desire to speak to the best people in the industry.

We want to partner with the best investors globally. If our approach is interesting to you and you wish to conduct published or private executive calls then please reach out. In the meantime, we will continue producing the best primary research possible!