In each weekly email, we write a short summary of our learnings from an interview on a particular company that we’ve studied the previous week. We only intend to share our analysis if we feel it’s incremental to what is already known about the business or industry in question.

This week is a little different because GLG, the largest global Expert Network (hereafter EN), filed an S1. We spent the weekend reading the filing and while there are already articles from two great writers here and here, we thought we could share our views on the industry, competitive advantages for EN’s, and our mission at In Practise.

Founded in 1998, GLG, a traditional expert network, is in the business of connecting domain knowledge experts to investors and corporations in 1-hour private phone interviews. Historically, there have been three major users of ENs: strategy consultants, private equity, and hedge funds. Each group uses the service in slightly different ways - this is key to understanding the nature of competitive advantage in this industry.

The way expert networks are used in the private market typically goes something like:

  • Company X is put up for sale
  • Private equity funds simultaneously contact multiple ENs with a project brief to source executives on company X for interviews
  • ENs race to source the most relevant executives to send to the client and schedule interviews
  • The private equity fund, if it takes interest in the deal, commissions strategy consultants to conduct commercial due diligence on company X
  • Strategy consultants contact multiple ENs to schedule interviews with executives
  • Where there is staple financing required, credit funds would also conduct interviews via EN’s on company X
  • Company X is sold, and the process repeats for the next asset for sale

Most large private equity funds have contracts with multiple EN providers to maximise the likelihood of converting project requests into interviews with executives. From a client’s perspective, having multiple networks compete for projects is seen as a way to drive better performance from the EN service provider. In a private market transaction, this often leads to a situation where multiple private equity bidders speak to the same executives, at a similar time, discussing very similar topics.

Shortly thereafter, the PE fund would pay consultants to again conduct similar interviews with similar executives. The consultants then package their interview insights into the commercial due diligence for PE funds who then add their own insights to sell the proposed bid to their investment committee.

The incentives within the private market are also important to the stickiness of EN services. Consultants typically charge back the cost of primary research to their PE client so they don’t directly pay for the primary research. Tight private market bidding deadlines plus the low-cost high-value nature of an expert interview also makes PE funds highly price inelastic. These two dynamics create a sticky revenue base for ENs who serve PE and consulting clients. GLG reports 22 of the 25 top clients have been customers for over a decade and the average wallet retention, a proxy for net dollar spend per client, has been over 90% for the last 10 quarters.

This is great business for both the ENs and the executives. The EN recruits an executive to their network and charges the client ~$1000 per interview and pays the executive ~$250. This leads to a ~74% effective take rate for GLG, the equivalent to revenue minus cost of sales in the S1.

GLG ‘Direct’, the $1,000 private 1-1 executive interview service, is the first evolution of the EN industry. So does GLG have any structural advantage in this line of business?

Probably not on the supply side. Most executives work with multiple networks. Because asset managers have multiple EN relationships, this leads to a brutal game where ENs compete to send the most relevant executives to the client first. Given most operators use the same recruitment tools and hire similar graduates it’s hard to build a sustainable edge in sourcing executives. Any differentiation in access to supply doesn’t last long.

Low operating costs and a negative working capital cycle explains why there are hundreds of EN upstarts globally - anyone with Linkedin premium and a phone can start sourcing executives for a client. We’ve always wondered what could happen if Linkedin purchased a payment processor.

Although there may be little structural advantage on the supply side, the demand side dynamics are slightly different. One way to frame EN’s is a compliance layer built on top of Linkedin. ENs hire thousands of graduates to recruit executives via Linkedin to serve vetted and compliant leads to clients. Large institutions not only pay to save time but more importantly to outsource compliance. This creates demand-side benefits that drive GLG’s consistent 90% wallet retention.

Clients are also on yearly credit-based subscriptions which, if not fully consumed, roll over to encourage annual renewals. Also, given consultants are charging PE shops for primary research, and bidding for private assets is very competitive, one would imagine the majority of the consulting and PE business will continue to be conducted in the form of private 1-1 interviews rather than recorded and published to everyone.

This leads us to the second evolution of the industry and the potential risks for incumbents like GLG: content subscriptions.

Almost 8 years ago, we joined Third Bridge, a GLG competitor, to kickstart their content subscription business. This involved hiring analysts to conduct recorded interviews internally which were made available to all Third Bridge clients. By recording interviews and reselling subscriptions to multiple clients, the cost per hour of executive insight is significantly reduced. This format was immediately popular with hedge funds.  More recently, Tegus has led the third phase in the evolution of the EN industry by outsourcing interviews to clients in a give-a-little-get-a-lot model. Clients are given access to executives at cost in return for the interview being published to all subscribers. This is a highly effective way to scale a content library and has led to an explosion in the amount of executive insight available.

Going forward, these factors are likely to pressure GLG’s hedge fund business more than consultancy or PE revenue which is more protected due to the private market structure and incentives at play. Although the largest hedge funds could still prefer the compliance umbrella of GLG over smaller upstarts, the volume and pricing of 1-1 interviews conducted by hedge funds will remain under pressure. Content subscription services will continue taking share from incumbents in the hedge fund vertical but the insatiable demand for actionable insight will continue to drive the EN market’s growth over the next decade.

So where does In Practise fit in?

We got into this industry because we love learning about how the world works through the study of business and are fascinated by the game of investing. We founded In Practise to serve the best investors in their quest to understand the mechanics of the highest quality companies globally.

Executive interviews form the core of our service today. Our north star is a commitment to understand how the best companies operate. We believe conducting great primary research is critical to achieving this north star. We focus on conducting the best executive interviews in two ways; for internally conducted “IP Hosted” interviews, we build on our experience of over 2,500 hours of interviews and for investor-led interviews, we only partner with experienced investors with skin in the game.

Going forward, we plan to offer a range of services exclusively to Premium subscribers to help them conduct the best primary research possible. This will involve regular live online workshops to help experienced investors prepare, conduct, and review executive interviews and much more. The high quality of In Practise investor-led interviews drives a better experience for all In Practise subscribers.

However, we also understand that a minimum breadth of content is table stakes. By Q4 2022, we plan to 4x the investor-led content we publish to a total over 500 interviews per year all for the same $400 core subscription price.

For us, executive interviews are just the beginning; it’s one format to learn about businesses. In the near future, we will experiment with many other formats to help you learn about companies. It’s our vision to build a community of the highest quality investors with a passion of allocating capital to the best operators. If this excites you then please sign up and share with like minded friends.