Moody's buys stake in Copal

US Ratings agency Moody's has announced it is buying a majority stake in Copal Partners, a provider of outsourced research and alalytics 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. It claims annual revenues just short of $50 million.

Copal chief execution 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 Copal will retain its existing management team while operating with Moody's Analytics, which offers software, advisory and research services.

“We’ve had a very busy time since August closing new clients. Many banks are going through budget cuts and are preparing for bad whether” Rishi Khosla, Copal

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

Ratings agencies such as Moody's have had their own branding issues since the financial crisis - the industry came under fire for the triple-A ratings it gave many subsequently collapsing securities. Revenues are also under pressure as demand for ratings declines. Moody's appears to be diversifying its revenue sources by providing more support services such as research and deal advisory.

This shift in the way ratings agencies make money was reflected in the company's third-quarter results for the year. Revenues at Moody's investors Service, 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 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."