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Sell Side vs. Buy Side

Breaking down which types of firms are considered "sell side" and which are "buy side"

Buy side vs. sell side

You'll often hear finance professionals describe their role as being either on the "sell side" or on the "buy side." As is the case with a lot of finance jargon, what this exactly means depends on the context.

Sell side refers primarily to the investment banking industry. It refers to a key function of the investment bank — namely to help companies raise debt and equity capital and then sell those securities to investors such as mutual funds, hedge funds, insurance companies, endowments and pension funds.

The buy side naturally refers to those institutional investors. They are the investors who buy the securities.

A related function by the sell side is to facilitate buying and selling between investors of securities already trading on the secondary market.

The sell-side

While we describe the various functions of the investment bank here, we can briefly outline its capital raising and secondary markets roles:

  • Primary capital markets
    Investment banks work with companies to help them raise debt and equity capital. Those bonds and stocks are sold directly to institutional investors and are arranged through the investment bank’s equity capital markets (ECM) and debt capital markets (DCM) teams, who, along with the investment bank’s sales force, market via roadshows (see examples of roadshows) and distribute the securities to institutional clients.
  • Secondary capital markets
    In addition to helping companies raise capital, the investment bank’s sales & trading arm facilitates and executes trades on behalf of institutional investors in the secondary markets, where the bank matches up institutional buyers and sellers.

A picture is worth a thousand words: Buy Side and Sell Side Infographic

Roles on the sell side

The investment bank has several key functions that make its role as a seller of corporate securities to investors possible. Those roles include:

  • Investment banking (M&A and corporate finance)
    The investment banker is the primary relationship manager interfacing with corporations.  The banker's role is to probe and understand its corporate clients' capital raising needs and to identify opportunities for the bank to win business.
  • Equity capital markets
    Once the investment banker has established that a client is considering raising equity capital, ECM begins its work.  ECM's job is to usher corporations through the process.  For IPOs, for example, the ECM teams are the key hub in determining structure, pricing and and reconciling the clients' objectives with current conditions in the capital markets.
  • Debt capital markets
    The DCM team plays the same role that ECM plays but on the debt capital side.  
  • Sales and trading
    Once a decision to raise capital is made, the sales & trading floor begins its job to contact investors and actually sell the securities.  The sales & trading function not only works on helping initial debt and equity offerings get subscribed, they are central to the ivnestment bank's intermediary function in secondary capital markets, buying and selling already trading securities on behalf of clients (and sometimes for the bank's own account "prop trading").
  • Equity research
    Equity research analysts are also known as sell-side research analysts (in contrast to buy side research analysts). The sell side research analyst supports the capital raising process as well as sales and trading in general by providing ratings and other hopefully value-adding insights on the firms they cover. These insights are communicated directly through the investment bank's sales force and through equity research reports. While sell side equity research is supposed to be objective and separated from the investment bank's capital raising activities, questions about the function's inherent conflicts of interest were brought to the fore during the late '90s tech bubble and still linger today.

The buy side

The buy side broadly refers to money managers - also called institutional investors. They raise money from investors and invest that money across various asset classes using a variety of different trading strategies.

Whose money does the buy side invest?

Before getting into the specific types of institutional investors, let's establish whose money these institutional investors are playing with. As of 2014, there were $227 trillion in global assets (cash, equity, debt, etc) owned by investors.

  • Nearly half of that ($112 trillion) is owned by high net worth, affluent individuals and family offices.
  • The rest is owned by banks ($50.6 trillion),  pension funds ($33.9 trillion) and insurance companies ($24.1 trillion).
  • The remainder ($1.4 trillion) is owned by endowments and other foundations.

So how are these assets invested?

  1. 76% of assets are invested directly by owners 1.
  2. The remaining 24% of assets is outsourced to third part managers that act on behalf of the owners as fiduciaries. These money managers constitute the buy side.

The buy side universe

Investment funds

  • Mutual funds and ETFs: Mutual funds are the largest type of investment fund with over $17 trillion in assets.  These are actively managed funds, in other words, there portfolio managers and analysts analyze investment opportunities, as opposed to passive funds like ETFs and index funds. Currently, 59% of mutual funds focus on stocks (equities), 27% are bonds (fixed-income), while 9% are balanced funds and the remaining 5% are money market funds2. Meanwhile, ETF funds are a fast growing competitor to mutual funds.  Unlike mutual funds, ETFs are not actively managed, enabling investors to get the same diversification benefits without the hefty fees.  ETFs now have $4.4 trillion in assets 3.
  • Hedge Funds: Hedge funds are a type of investment fund. While mutual funds that are marketed to the public, hedge funds are private funds and are not allowed to advertise to the public. In addition, in order to be able to invest with a hedge fund, investors must demonstrate high wealth and investment criteria. In exchange, hedge funds are largely free from regulatory restrictions on trading strategies that mutual funds face. Unlike mutual funds, hedge funds can employ more speculative trading strategies, including the use of short selling and taking highly leveraged (risky) positions.   Hedge funds have $3.1 trillion in global assets under management 4.
  • Private equity: Private equity funds pool investor capital and take significant stakes in businesses and focus on achieving returns to investors through altering the capital structure, operational performance and management of the businesses they own. This strategy lies in contrast to hedge funds and mutual funds that focus more on larger public companies and take smaller, passive stakes in a larger group of companies. Private equity now has $4.7 trillion in assets under management 5Read more about the career of a private equity associate.

Other buy side investors: Insurance, pensions and endowments

As we mentioned earlier, life insurance companies, banks, pensions and endowments outsource to the institutional investors described above as well as investing directly.  This group represents the bulk of the rest of the professional investor universe.

Buy side vs sell side in the M&A context (it's a totally different thing)

To complicate matters a bit, sell side/buy side means something completely different in the investment banking M&A context. Specifically, sell-side M&A refers to investment bankers working on an engagement where the investment bank's client is the seller. Working on the buy-side simply means the client is the buyer. This definition has nothing to do with the broader sell side/buy side definition described previously.

As a side note, bankers generally prefer working on sell-side engagements. That's because when a seller has retained an investment bank, they have usually made the decision to sell, increasing the likelihood that a deal will happen and that a bank will collect its fees. Meanwhile, investment banks are often pitching to buy side clients, which doesn't always materialize into deals.

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1 Blackrock. Read the survey.

2 ICI and mutualfunds.com. http://mutualfunds.com/education/how-big-is-the-mutual-fund-industry/.

3 Ernst & Young. Read the report.

4 Prequin. Read the report.

5  McKinsey. Read the report.

 

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