Investors want even more specific data post-financial crisis
Institutional investors' use of political intelligence firms to help them navigate Washington's legislative and regulatory ways has changed following the 2008-2009 financial crisis, new regulations, Dodd-Frank and other legislation, and the election of a Democratic president in Barack Obama.
“It's very much a reflection of the financial crisis and, as a result, more regulation of the investment industry,” Sanford Bragg, CEO and president of Integrity Research Associates LLC, New York, said in a telephone interview. “Washington is an arcane place, and that's why (institutional investors) rely on them. They're sort of like translators.”
Mr. Bragg's firm, which specializes in matching political research providers with institutional investors and tracking the investment research industry, has seen significant growth in the use of political intelligence firms in recent years, particularly from hedge funds, and estimates that revenues at firms in this increasingly specialized field will grow to $150 million by 2013 from $120 million in 2009.
“The defining difference is your ability to dig deeper,” said Edward Garlich, founder of one of the longest-running political intelligence firms, Washington Research Group.
WRG, begun in 1974 catering to institutional investors, originally provided big-picture analysis of federal fiscal and monetary policy, but as Washington has been seen by many as becoming more involved in all aspects of American business and finance, requests for information from institutional clients have become much more specific to individual manager and analyst needs, Mr. Garlich said in a telephone interview.
New York-based Guggenheim Partners, which had $125 billion in assets under management as of Nov. 18, found WRG's services so attractive it bought the shop in November after its previous owner, MF Global Holdings Ltd., filed for Chapter 11 bankruptcy protection.
WRG counts among its clients some of the largest mutual funds and hedge funds in the U.S., including Fidelity Investments and Wellington Management Co. LLP, Mr. Garlich said. Clients also include public pension funds in Ohio, Illinois and Michigan. WRG did not identify the plans, and officials at other political intelligence firms contacted for this story declined to identify their clients.
Cypress Group, a Washington-based policy shop with lobbying and real estate divisions, promotes its Cypress Advisory LLC subsidiary as a “bespoke service” that offers “actionable” intelligence and political analysis, customized for principals of investment firms and corporate managers.
One example noted on the Cypress Group's website, is how it gathered intelligence on the Treasury Department's handling in 2009 of new federally mandated bank stress-test procedures that allowed investment management clients to “reweight” their financial sector exposure and market hedges. For some private equity clients interested in distressed and failed assets, Cypress helped navigate an asset resolution process involving half a dozen federal agencies.
Unlike more traditional policy researchers and think tanks, political intelligence firms do less analysis and more direct information gathering to address investors' specific concerns. Their staffs have backgrounds that typically include stints on Capitol Hill or at federal agencies like the Federal Reserve or Treasury Department that give both an insider's perspective and access.
Still, they are careful to distinguish themselves from lobbyists. “We're not advocating anything,” explained WRG's Mr. Garlich. “We just proffer the information and leave it up to the portfolio manager. We do not take the final step.”
He also disputes any question of impropriety. “This industry is extremely well regulated. It's information that people would get if people knew where to go” and had the time to do so. For the more customized information demanded by today's investors, “you talk to a lot of people and sit in on a lot of meetings,” said Mr. Garlich. It also helps that “nobody reads” policy papers. “That's where we come in. They know who to call.”
And, call they do. Two days after Standard & Poor's downgraded the U.S. government's credit rating on Aug. 5, a conference call hosted by WRG had more than 300 participants representing portfolio managers, pension funds and hedge funds. They didn't all care about the same thing, but they all wanted to be kept in the loop, said Mr. Garlich.