What is Buy Side?
Buy-side refers to the investors or firms who advise the investors or institutional buyers for buying the securities and investments like private equity funds, mutual funds, life insurance companies, unit trusts, hedge funds, and the pension funds for them or for their clients as buying side constitutes half of the market.
The financial analyst who works for such firms is known as Buy-Side Analyst. This concept has to be viewed from the perspective of securities exchange services and “buy-side” are the buyers of the services. On the other hand, ‘sell-side’ are the sellers of the services. They are also known as ‘Prime brokers’.
The buy firms make up one of the financial markets with the sell-side comprising the second half.
- These firms are the money managers aiming to create value for their clients by purchasing assets that are potentially under-priced.
- They make use of complicated and sophisticated strategies that they believe can give them an edge over the other investors.
- Buy-side analysts conduct research for internal usage and if they derive any strategy that can help in beating the market, it is kept away from the public.
The buy-side will invest the assets owned by HNI’s (High-net-worth individuals), Affluent sections of the society and family offices. These assets will be either directly invested by the investors or outsourced to third-party managers acting as fiduciaries on behalf of these owners. These managers constitute the buy-side.
Some of the examples of the buy-side firms are:
- Fidelity Funds
- T Rowe Funds
- Vanguard Funds
Buy-Side Analyst Job Description
On a daily basis, the buy-side analysts are responsible for benefitting the funds with high returns and avoiding technical mistakes which can cost the performance of the money being managed. Some of the activities include:
- Reading the daily financial news and tracking associated information
- Building and maintaining various financial models to gauge the performance of investments
- Making stock recommendations that ensure definite profits and deepen their knowledge of their area of responsibility.
- The research process is genuine and there is no commercial aspect involved and efforts are made on identifying investment opportunities.
- They also attempt to find the best sell-side analysts in their area of expertise. It’s to be noted that research done by sell-side analysts directs the buy-side firm to execute trades through their trading department thereby creating profits for the sell-side firm.
One should also keep a note of certain skill sets which are essential for buy-side analysts such as:
- Winning new business opportunities
- Industry Research
- Excel skills
- Research report generation in a sophisticated manner
- Pitchbook presentation
- Client relationship management
- Selling and successful closing of deals
Examples of Buy-Side Advisor
When an investment banking firm is offering its advisory services to a firm for acquiring another company, investment banking is called as a buy-side advisor.
A buy-side engagement shall include the following:
- Target Identification – it usually requires significant knowledge or market research to assess the potential firms which match the criteria of the buyers.
- Target Assessment – This involves mandatory research on the financial performance of the target as well as the existing management team for determining if it fits into the overall future plans of the acquirer.
- Valuation – This typically includes a value of the target based on the position in the specific industry or what the buyer is willing to pay.
- Structuring – This involves making an assessment of what capital structure suits best for the buyer while satisfying the expectations of the target.
- Letter of Intent (LOI) – This step consists of crafting and presenting the LOI on behalf of the buyer. It generally consists explanation on how the Enterprise Value (EV) is calculated and the break-down of the proposed capital structure.
- Due Diligence – Buy-side advisors are heavily involved in the due diligence generally for the buyer. The primary responsibility is to prove the various assumptions considered during the target assessment and valuation stage.
- Closing Stage – It consists of working with other advisors, accountants, lawyers and tax personnel for ensuring all aspects are minutely assessed upon the close of the transaction.
Limitations of Buy-Side
Certain limitations of the buy-side firms are:
- These firms cannot involve external investors in trading based on their research conducted.
- Such buys side analysts are prohibited from releasing any private recommendations.
- They are restricted from any kind of brokerage activity
- for investors. Also, they cannot be involved in earning any kind of Brokerage commissions and Transaction costs.
- Investment costs and losses while buying the securities are covered by the buy-side firm and cannot be outsourced.
This has been a guide to what is Buy Side? Here we discuss the role of buy-side analyst, its job description and requisite skills along with examples and its limitations.