Nov 30, 2012

Know your post MBA career: Investment Banking (Part 2)

This is a three part series (courtsey: Part 1 covers Investment Banking in general, requirements and how to break into this field. Part 2 covers job options in this field, salaries and Part 3 covers Life as an associate (for MBA students) and life as an analyst (undergrads) in Investment Banking

By far the most common route into investment banking for someone just finishing an undergraduate degree is to be hired into a bank's analyst program (for more on life as an analyst, see our upcoming Part 3). MBAs are generally hired as associates. Analysts and associates work within specialized groups but they may not always have control over the group to which they get assigned (analysts especially). Some of the most common groups found within investment banks are described below, along with the work they do. If you're a new graduate interested in one of these areas specifically, learn as much as you can about the area that intrigues you so that you're best positioned to be assigned to that group, but understand that you'll most likely be looking for a job as an analyst or associate. 

Industry Coverage

Most large investment banks have an area called investment banking, IBD, IBK, CIBD, "banking" or something that denotes industry-focused investment banking. These organizations are organized into product groups (e.g., private placements) and industry coverage groups (e.g., aerospace). See Credit Suisse's banking page for an example. The group will have a set of senior bankers (Managing Directors - usually called "MD's") who maintain relationships with client companies in the industry (e.g., Boeing, Aerospatiale). These bankers will be backed up by a group of Directors, VPs, Associates, Analysts and Administrative Assistants who help by attending client meetings, coming up with ideas for clients, preparing pitch books, executing transactions, writing commitment committee memo's etc. The two main types of business are M&A (see below) and financings which could be carried out separately by a corporate finance group (see below) or executed within the coverage group. Generally, there will be a client team that comes together for a specific client deal (e.g., issuance of a Boeing Bond). This will include the MD, a VP and an Associate, Analyst or two. This team would interface with the product specialist which might include someone from corporate finance if specialized know-how is needed and also someone from Debt Capital Markets (which manages issuance of bonds into the capital markets).

The analyst on the project will usually be responsible for putting together a Working Group List which lists the persons at the bank involved, at the client, at the law firm handling the deal and at other banks, if there are any in a syndicate. Usually when you start in "banking" that means that you will likely end up in a coverage group. Obviously, it pays to get into a group that is in area that interests you and that is doing good deals.

Corporate Finance
In a corporate finance position you would work to help companies raise capital needed for new projects and ongoing operations. You would work to determine the amount and structure of fund needs of a client through equity, debt, convertibles, preferred, asset-backs, or derivative securities. As a starting analyst in corporate finance you would usually work on a client team and would have responsibilities to prepare registration statements, attend road shows where investors are sold on securities etc. Barclays, Citigroup and JP Morgan are acknowledged powers in corporate finance. Sometimes jobs in corporate finance are referred to as investment banking positions.

Capital Markets
This position can be either in Debt Capital Markets or Equity Capital Markets (ECM). Debt Capital Markets (DCM) is often broken down into high yield bonds and investment grade bonds. Sometimes, there are separate desks for origination of sovereign, supranational or municipal bonds. Capital markets officers help companies originate new issues of debt or equity. They get calls from bankers who have clients who are interested in issuing. They then look at market conditions, perhaps tracking swap spreads across the interest rate curve using a Bloomberg terminal and advise as to the right time and form of issuance. An ECM or DCM officer will interact with the syndicate desk which is the hub of a new issue. Syndicate manages which investors get what portion of a new issue and builds up a "book" of orders. Syndicate interacts heavily with individual equity and bond sales professionals who interact with institutional and retail accounts around the globe. A DCM or ECM officer will often interact with other professionals including financial strategy, derivatives, currency trading, convertibles and equity derivatives. An entry level position in ECM or DCM will be with the title of "Analyst" for a college graduate or "Associate" for a recent masters candidate. 

Mergers and Acquisitions
Setting up deals where one company buys another is an important source of fee income for many investment banks. When this area is hot on Wall Street, it can be hugely profitable. But even when capital markets conditions make it difficult for companies to finance acquisitions, as they did in the 2008/09 recession, strategic mergers continue to happen and banks that specialize in M&A continue to do deals, albeit at a lower volume. If you go to work in this area you would help out with a team which acts as an advisor to a client, values transactions, creatively structures deals and negotiates favorable terms. Worldwide, Goldman Sachs, Lazard and Morgan Stanley are the recognized leaders in M&A advisory. Investment banks have increasingly participated directly in LBOs, spinoffs and bridge loans, often by taking their own investment stake (known as merchant banking). Your duties could involve analyzing the appropriate form of participation. Expect to start running lots of valuation models on spreadsheets and gradually get more client focus as you progress.

Project Finance
Project finance involves funding infrastructure and oil capital projects off of a company or government's main balance sheet. Banks like Credit Suisse and Deutsche Bank are active in this area. Project financed deals have been some of the first significant conduits of foreign capital into countries such as China, Yemen and Indonesia. When other sources of borrowing dry up, project finance is generally still there.

Some of the most desirable jobs in investment banking are in sales and trading. Your responsibilities would involve undertaking transactions in equities, bonds, currencies (referred to as Forex or FX), options or futures with traders at commercial banks, investment banks and large institutional investors. Trading can be tumultuous and requires a thorough knowledge of markets, financial instruments and an intuition for human psychology. Equities trading positions often involve "telling a story" to other traders about why they should purchase your stock. Fixed income trading positions call for strong analytical know-how and the wherewithal to manage large amounts of inventory in an often-thin market. Derivatives traders need very strong analytical know-how (perhaps even an engineering degree). Foreign exchange trading is based more on your instincts about markets, politics and macroeconomics. There are a variety of other types of trading jobs in agency securities, commercial paper, repos etc.

Structured Finance
Positions in structured finance involve the creation of financing vehicles to redirect cash flows to investors (known as asset-backed securities). Typical asset-backs securitize credit card receivables, auto loan receivables or mortgages. This market fell into some disrepute in 2008 as one type of asset-backed security--collateralized mortgage obligations (CMOs)--spread the pain of the burst real estate bubble far and wide, but the use of structured vehicles generally is likely to survive and eventually thrive again. Other growth areas include asset-backed commercial paper, collateralized bond obligations (CBOs), and repackaged asset vehicles. It would be beneficial to have a solid combination of spreadsheet, accounting and legal skills. Most students coming out of school know very little about this area; so you can get an edge by educating yourself by reading articles in the area and picking up lingo like "early-am risk" from talking to market participants on informational interviews. 

Derivatives derive their value from another primitive security. Options, swaps and futures are examples of derivatives. The market for derivatives is gigantic and subject to increasing scrutiny. The derivatives business is highly profitable and the demand on Wall Street for skilled derivatives practitioners has been very high. This market is likely to see further innovation in the forms which swaps take and in the area of exotic options. This will create further specialized job areas. If this area interests you, start studying math (especially stochastic differential equations and derivation of common models like Black-Scholes). Questions about models are likely to come up in interviews. Sales skills are also important in this area. Another related word you will hear is "structured notes." A structured note might be a foreign exchange loan, forward or futures contract with built in options structured to a client's need. So, for example, a client that will no longer be worried about their position once the Yen falls below 85 to the dollar could buy a "knock-out" option on a forward that will not be active once the yen/dollar rate falls below a floor. A related and popular area is credit derivatives which might involve selling an option which pays off when a defaults on one of its debt obligations.

Advisory services are often provided by investment banks to public and private clients involved in M&A and financings. The areas of capital structure advisory, valuation advisory and risk management advisory have been popular at many investment banks. Often work will be done to determine a client's value, options for creating value or on a client's industry conditions.

Equity and Fixed Income Research
Security analysts are usually assigned to an industry or region. You could be responsible for making buy or sell recommendations to investors about a stock or bond. Your duties would involve visiting companies and heavy telephone contact with institutional investors. Investment banks often like to hire people with industry experience into analyst positions (as opposed to fresh MBAs or undergrads). For example, if you were a restaurant executive you could probably get hired as a restaurant industry analyst with a healthy pay raise. Knowing the business, being able to talk to clients well and having good forecasts are key in this position. You want to help your firm avoid the dreaded Worst Analysts list. Analysts are often referred to as either quants or fundamental analysts. Fundamental analysts make recommendations based on what's going on at a company--how's the CEO, what are the earnings etc? In contrast, quants look at computer programs that identify undervalued securities, markets or even whole countries. There are fewer quant jobs, but they often pay more because the required mathematical and technical skills are harder to find.

International Sales/Emerging Markets
An area of continued growth is in international sales. Despite many past disasters like the Asia crisis in 1997, investor demand for securities issued in emerging markets typically comes back strong. Firms are meeting this demand by providing sales personnel and analysts specialized in these markets. Another area of high demand is in emerging markets such as Thailand or Mexico. Firms are looking for people with specific language skills, a willingness to travel and knowledge of these emerging markets. You can often rise very quickly in this area, even if you are quite young. But expect high risk. Events like the Russia default in 1998 have historically triggered extreme volatility in emerging market bonds, and corresponding layoffs among those who help issue and sell them. A great place to track goings on is through Bloomberg's web site.

Public Finance
The market for municipal bonds is very large and calls for analysts, municipal advisors and traders. Positions in public finance are usually difficult to obtain but offer high rewards. Persons with previous experience in public administration would be attractive to investment banks in this capacity. A major growth area in municipals is in the project finance area.

Retail Brokerage / Private Client Coverage / Stockbroker
Private Client Bankers / brokers are in the business of selling stocks, bonds, insurance and other investments to individuals. Some brokers specialize in high net worth individuals while others span a variety of clients. This is a tough business to get started in (especially if you are much younger than your clients), but the rewards to a good people person with great sales skills are high. Many brokers earn upwards of $500,000. Try to start with a firm like Merrill Lynch that has a good training program.

Institutional Sales
In institutional sales you would be responsible for conveying information about particular securities to institutional investors. You would be likely to have heavy contact with portfolio managers and your own firm's analysts and traders. Sales skills and product knowledge are crucial in this area as is the ability to get through to busy institutional investors. Working in sales for an investment bank (on the sell side) is often good preparation to move over to the buy side (insurance companies and mutual funds). Both types of jobs can be brutal and subject you to abuse. A common Wall Street Joke: What's the difference between a sell side and a buy side player? Answer: On the sell side they curse you only after they hang up the telephone. Taking abuse can be lucrative. The average salaries in institutional sales can exceed $750,000 per annum.

IT and Systems
Some of the best jobs in computers and information systems are on Wall Street. A firm with good trading software, pricing software, or back office software can get a strong competitive advantage. Mid six figure salaries are not uncommon for good systems people. A few system architects with skills in particularly high demand, like those that build the big banks' high frequency trading programs, have been known to make in the low seven figures.

Ratings Analyst
One way to break into investment banking is to start as a ratings agency analyst. The pay is relatively low and advancement opportunities aren't great, but the investment banks know it and use the agencies as hunting grounds for new analysts. The two largest agencies are Moodys and Standard and Poor's. As of mid-2009, Moodys had over 1,000 analysts and S&P rated $32 trillion worth of securities. These highly profitable agencies grade the credit quality of companies and sovereign entities accessing the markets. Most of their revenue comes from fees paid by issuers. There is high demand for persons who can rate corporate bonds and structured finance intelligently. "We are not auditors and we don't use lie detectors, so it's up to our analysts to be smart enough to ask the right questions," says Edward Emmer, executive managing director and head of S&P's corporate ratings department. Both agencies have suffered accusations of conflict of interest - and have faced regulatory attention - for giving high ratings to mortgage-backed securities that subsequently unravelled in 2008/09, contributing to the near-implosion of the banking system. Consequently, the big agencies' competitors, including other agencies like Fitch and smaller independent research providers like CreditSights, have consolidated their market gains. Nonetheless, Moodys and S&P have survived similar crises in the past involving securities they rated highly, including the collapses of Enron and Worldcom. As long as third-party ratings are used to at least partially define the risk in major financial institutions' portfolios - and they still are - rating agencies will exist.

Salaries in Investment Banking

(One of themost often asked question is how much do investment bankers make? - BSP)
Going into 2013, starting salaries for investment banking positions with a bachelors degree (assistant or junior analyst position) should range from $100,000 to $150,000 after bonus. Most of the major banks in NYC are offering a starting salary of around $75,000 plus a $15,000 to $20,000 signing bonus. Further bonus can range from $20,000 to $40,000 depending on performance. Starting salaries with an MBA degree (associate position) range after bonus from $120,000 to $220,000. These salaries vary with firms and with the region of the country you are in. Bonuses typically would be 10-50% of salary to start and can move to one to three times salary later. Lately, salaries have increasingly included an equity component which may not be liquid for up to nine years, although as an analyst you would typically be sheltered from this. As we write this in August 2012, banking salaries and bonuses are under pressure as several large banks are reporting poor profits and considering layoffs. The public perception that high banker salaries may have worsened the financial crisis of 2008/9 is not forgotten.
 Generic salary advice: Some firms tend to pay less than others because they can get away with it. You might actually be better off taking less. Obviously don't give yourself away but at the entry level, the quality of experience you get and the strength of the people you will work with are far more important than how much you get paid. You are trying to maximize the present value of your future earnings and enjoyment. This may involve taking lower pay now. Or, if you're lucky, it might not.

Salaries are Flat to Down in 2012 but up from the Financial Crisis Bottoms. All-in compensation took a substantial hit in the financial crisis with many firms paying low to zero bonuses (the dreaded "goose egg"). Starting offers in 2012 and many year end bonus numbers for 2011 were up substantially, although typically down from their pre-crisis peak in 2007 (overall, down 10 to 30% from peak, depending on the firm and position). Bonuses being paid at the beginning of 2013 are likely to be flat to down given recurrent weakness. Bulge firm salaries tend to be similar to those at boutiques but are higher than in regional firms. Forecast salary ranges in the 2012 to 2013 period are as follows:

We are hearing a lot more diversity in compensation levels than usual. The old rules that implied highest comp at the most prestigious firms no longer apply. This is less true at the analyst level where firms try to harmonize compensation with "The Street". Firms will raise starting offers, more or less, in lock step at this level. However, the situation differs at more senior levels - even mid Associate. But the big issue today is the lack of cash in comp. Base cash salaries have gone up but the cash part of bonuses was less than $150,000 in most firms and, in some firms, cash bonus comp was capped at $75,000. Well known firms such as JP Morgan, Bank of America ML and Goldman took cash comp down substantially. This has caused an exodus for other more interesting areas.
A related salary trend involves compensation across areas. Obviously, with the new financial reforms, certain areas like prop trading, institutional equity sales and securitization are under pressure. In contrast, other banking areas like health care M&A/financing and private banking are in growth mode and compensation levels have held up.

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