Sidoti & Co Inc.'s failure to execute its initial public offering could have been a blessing in disguise, according to the company's founder.
Sidoti, an equity research shop that covers small- and micro-cap companies, withdrew its IPO registration statement, according to an April 4 company filing with the SEC. In an interview, Chairman and CEO Peter Sidoti said the equity research industry is facing a number of headwinds, and he believed his company would have disappointed public shareholders.
"It's the best thing to happen to us that we didn't go public," he said.
The company first filed for the IPO in 2014, but there was no new development that led to the official withdrawal. "It's been a reality since September of last year," Sidoti said.
Sidoti is not the only company focused on equity research that has reconsidered its plans. Many in the business are struggling to deal with declines in trading volumes and commissions. Several have cut back their equities exposures or exited the business altogether.
One of the latest reduction announcements came from Avondale Partners LLC, which is discontinuing its cash equities business including research. In a March 31 news release, Avondale CEO Robert Shepherd said the increase in passive asset management, industry regulation and changes in how markets are structured have made the cash equities business model unprofitable and unsustainable.
Sidoti's view on the business is not as grim as Shepherd's, and he said his company has been profitable for 18 years.
"My biggest problem is [that] I compete with people who can run unprofitably," he said.
Many competitors can offset losses from research with profits from other businesses, such as investment banking. Sidoti and others cannot do that because they focus on research and trading to drive revenue. Now, faced with a shrinking revenue pie, research and trading companies need to take market share in order to grow, said Integrity Research Associates Principal Sanford Bragg, whose firm focuses on the investment research industry. Bragg believes market forces will continue to put revenue pressure on research firms.
Given the operating environment, it is not surprising that an equity research company would abandon its IPO plans, Bragg said. "Investing in a research provider is not an appealing prospect," he said.
Bragg noted that Sidoti has tried to grow revenues by innovating. One such effort came in 2015 when Sidoti announced a joint venture with Stifel Financial Corp.
Under the arrangement, Stifel agreed to provide corporate finance solutions to Sidoti's clients. But Sidoti said the joint venture had limited success and expired in January. Now, he is not sure if he will pursue another corporate finance joint venture.
Sidoti's plan to build a money management business also did not go as hoped. The company wanted to use a significant portion of its IPO proceeds to help support its "nascent asset management platform," the company said in its registration statement. It is no longer pursuing that plan.
"The money management business posed regulatory hurdles for us," Sidoti said.
Sidoti added that the increasing competition from passive products made the active management business less attractive. "It's just hard to raise capital in that market," he said.
Instead of asset management, Sidoti believes corporate-sponsored research provides a better growth avenue for his company. With that product, Sidoti initiates coverage of companies that agree to pay fees.
Sidoti still covers the large majority of its research universe for free, but it has launched corporate-sponsored research on five companies, Sidoti said. Sidoti believes companies paying for research could become the norm within the next five years. He added that companies paying for research is similar to them paying for a debt rating.
Getting the corporate-sponsored product off the ground is not easy, but Sidoti realizes the importance of adapting to the current environment.
"If you keep doing the same thing over and over again, you're not going to be around much longer," he said.