Gerson Lehrman IPO "edge" is it doesn’t have one

The group stresses in its prospectus that it takes compliance seriously and makes sure experts stay within the law

  
Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., October 12, 2021.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., October 12, 2021.

REUTERS/Brendan McDermid

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

NEW YORK - Remember so-called expert networks The business of connecting investors looking for insight with industry insiders had an existential fright a decade ago. Gerson Lehrman, which this week filed for a U.S. initial public offering, was in the middle of the furore. Oddly enough, that experience might have set it up nicely as the go-to group in the industry.

GLG, founded in 1998, was a pioneer of expert networks. Yet the whole concept attracted suspicions that hedge funds, private equity firms and others were paying for information they shouldn't have been privy to, thereby gaining an investment "edge." In 2014, Mathew Martoma, a former portfolio manager at SAC Capital Advisors, was convicted of securities fraud after soliciting and trading upon material non-public information from a GLG network member. The firm itself was never accused of wrongdoing.

Now, the group stresses in its prospectus that it takes compliance seriously and makes sure experts stay within the law. Yet if investor clients aren’t gaining an unwarranted edge over rivals, it’s worth asking why they spent $322 million at GLG in the first half of the year, some 14% more than the same period a year earlier, and how GLG maintains gross margins above 70%.

Other things being equal, that ought to make GLG vulnerable to competing services, which could charge clients less and pay the experts in their networks more. Yet among GLG’s 25 biggest clients, 22 have used its services for over a decade, the company says, and recurring revenue makes up 90% of the top line.

That points to what might actually be GLG's edge. It's the oldest and largest expert network: GLG says it was more than twice as big as its nearest competitor, AlphaSights, in 2020 revenue. That along with its emphasis on compliance make the firm a safe one to hire, the IBM of expert networks.

That could also reflect how some clients have evolved into larger, less risk-tolerant institutions. The costs of consulting with GLG's experts are insignificant compared to big buyouts and investments. Using GLG shows that due diligence was done and that investment ideas have been validated by outside experts. That's more of a protective hedge than a sharp edge.

CONTEXT NEWS

- Gerson Lehrman, an expert network that pairs industry professionals with investors, filed a draft prospectus for a U.S. initial public offering on Oct. 18. The company did not indicate how many shares it planned to sell or give a price range.

- GLG's revenue in the first six months of this year was $322 million, an increase of 14% from the same period last year. GLG had a first half operating loss of $9 million, compared with a gain of $39 million last year.

- In 2014, Mathew Martoma, a former portfolio manager at SAC Capital Advisors, was found guilty of conspiracy and securities fraud after receiving and acting upon material non-public information solicited from a GLG network member. Neither GLG nor its employees were accused of any wrongdoing.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

(Editing by Richard Beales and Amanda Gomez) ((For previous columns by the author, Reuters customers can click on CYRAN/ SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS https://bit.ly/BVsubscribe | robert.cyran@thomsonreuters.com; Reuters Messaging: robert.cyran.thomsonreuters.com@reuters.net))


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