Buy Side

Buy-side refers to the investors or firms advising investors or institutional buyers to buy securities and investments like private equity funds, mutual funds, life insurance companies, unit trusts, hedge funds, and pension funds for them or their clients, as buying sides constitute 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 the “buy-side” are the buyers of the services. On the other hand, the ‘sell-side’ is the seller of the services. They are also known as ‘Prime brokers.’

Key Takeaways                                                               

1. Buy-side refers to investors advising other investors and financial services companies when to buy, what to buy, and how long to hold the investments. 
2. Examples are private equity funds, mutual funds, life insurance companies, unit trusts, hedge funds, etc.
3. The buy-side experts are buy-side analysts, whereas the sell-side is known as sellers or prime brokers. 
4. Buy-side analysts have certain limitations about costs, privacy, etc. For instance, buy-side analysts are forbidden to discuss advisories with anyone outside the organization. 

The buy side, as the name suggests, comprises the parties interested in buying assets and securities to ensure profitable investments. Being from the buy side makes individuals and entities liable for the investment decisions whether it generates profits or leads to losses. In the process of buying securities, interested buyers must analyze the prospects before spending on them. This is where the buy side analysts play a vital role.

Buy Side Analysts

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 excel 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, 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.

To become a better analyst, the buy side participants must possess certain skill sets, 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

Buy Side Advisors

The other set of individuals constitution the buy side are buy side advisors. 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 of the buy side firms involves 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 Value (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.

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.

Some examples of such firms are:

• Fidelity Funds
• T Rowe Funds
• Vanguard Funds

The buy firms make up one of the financial markets, with the sell-side comprising the second half.

• These firms are 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.

• Based on their research conducted, these firms cannot involve external investors in trading.
• Such buy side 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.