What is the Buy Side?

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 the “buy-side” are the buyers of the services. On the other hand, the ‘sell-side’ are the sellers of the services. They are also known as ‘Prime brokers.’

Importance

The buy firms make up one of the financial marketsFinancial MarketsThe term “financial market” refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces.read more, with the sell-side comprising the second half.

  • These firms are the money managers aiming to create value for their clients by purchasing potentially under-priced assets.They use complicated and sophisticated strategies that they believe can give them an edge over the other investors.These 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.

Examples

The buy-side will invest the assets owned by HNI’s (High-net-worth individuals), Affluent sections of the society, and family officesFamily OfficesA family office is a management entity that holistically manages the investment and other finance-related needs of ultra-high-net-worth families. It is difficult to define the qualifying level to be branded as a UHNW family.read more.

These assets will be either directly invested by the investors or outsourced to third-party managers acting as fiduciaries on behalf of these owners.

Some of the examples of such firms are:

  • Fidelity FundsT Rowe FundsVanguard Funds

Buy-Side Analyst Job Description

Daily, these analysts are responsible for benefiting the funds with high returns and avoiding technical mistakes, costing money performance. Some of the activities include:

  • Reading the daily financial news and tracking associated information.Building and maintaining various financial models in excelFinancial Models In ExcelFinancial modeling in Excel refers to a tool used for preparing the expected financial statements predicting the company’s financial performance in a future period using the assumptions and historical performance information.read more to gauge the performance of investmentsMaking stock recommendations that ensure definite profits and deepen their knowledge of their area of responsibility.The research process is genuine, no commercial aspect is involved, and efforts are made to identify 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.

Requisite Skills

One should also keep a note of certain skill sets that are essential for buy-side analysts, such as:

  • Winning new business opportunitiesIndustry ResearchExcel skillsResearch report generation in a sophisticated mannerPitchbook presentationClient relationship managementSelling and successful closing of deals

Examples of Buy-Side Advisor

When an investment banking firm offers its advisory services to a firm to acquire another company, investment banking is called a buy-side advisor.

The engagement shall include the following:

  • Target Identification – it usually requires significant knowledge or market research to assess the potential firms that match the buyers’ criteria.Target Assessment – This involves mandatory research on the financial performance of the target and the existing management team to determine if it fits into the overall 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 assessing what capital structure suits the buyer best while satisfying the target’s expectations.Letter of Intent (LOI) – This step consists of crafting and presenting the LOI on behalf of the buyer. It generally explains how the Enterprise ValueEnterprise ValueEnterprise value (EV) is the corporate valuation of a company, determined by using market capitalization and total debt.read more (EV) is calculated and the breakdown of the proposed capital structure.Due Diligence – These 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 to ensure all aspects are minutely assessed upon the close of the transaction.

Limitations of Buy-Side

  • Based on their research conducted, these firms cannot involve external investors in trading.Such buyside analysts are prohibited from releasing any private recommendations.They are restricted from any brokerage activity.For investors. Also, they cannot be involved in earning any 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 article has been a guide to what is Buy Side? Here we discuss the role of a buy-side analyst, its job description, requisite skills, examples, and limitations.

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