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Capital Markets

Moody’s buys majority stake in research firm Copal Partners

US ratings agency Moody’s announced on Monday it is buying a majority stake in Copal Partners, a provider of outsourced research and analytics to institutional clients.

US ratings agency Moody’s announced on Monday it is buying a majority stake in Copal Partners, a provider of outsourced research and analytics to institutional clients.

Copal, which operates in seven countries worldwide with a focus on India and China, is best known for providing due diligence services and credit and equity research, and claims annual revenues just short of $50 million.

Copal CEO Rishi Khosla tells Euromoney: “It’s a milestone for the research outsourcing industry, in that while we have had major investment banks as partners for a number of years, this kind of majority investment from a top-tier company validates the industry from a branding perspective.”

The terms of the deal were not disclosed, but the move will see Copal retain its existing management team while operating within Moody’s Analytics, which offers software, advisory and research services.

Moody’s said in a press release that it funded the acquisition from cash in hand and did not expect it to alter 2011 earnings per share guidance. Khosla says the two companies have complementary skills in research, in as much as Moody’s has traditionally been stronger in credit while Copal has more focus on equities.

Ratings agencies like Moody’s have had their own branding issues since the financial crisis, with the industry under fire for the AAA ratings it gave many subsequently collapsing securities, and revenues under pressure as demand for ratings declines. Therefore, Moody’s appears to be seeking to diversify its revenue sources by providing more support services such as research and deal advisory – such as due diligence – to its clients.

This shift in the way ratings agencies are making money was reflected in the company’s third quarter results for the year. Revenues at Moody’s Investor Services, the division of the firm that provides credit ratings among other services, fell by 2% year-on-year to $351.4 million, while revenues for Moody’s Analytics increased 16% to $179.9 million.

Among Copal’s clients, investment banks in particular are under pressure to cut their spending as reduced revenues and stringent capital requirements take their toll. In this post-Lehman Brothers-collapse era, Copal’s Khosla says providers of outsourced research have a real opportunity.

“We’ve had a very busy time since August closing new clients,” he says. “Many banks are going through budget cuts and are preparing for bad weather. If they can find a way to maintain efficiency and coverage while reducing costs, that starts to look very attractive.”

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