With the number of emergency / news-related articles on this site lately – two in a row! – it’s starting to feel a lot like 2008.

Before delving in, though, I want to start with the elephant in the room: I was partially wrong ~5 months ago when I wrote about Credit Suisse, UBS, and Deutsche Bank, and whether they would become Lehman Brothers 2.0.

Technically, my assessment in that article was correct:

“The short answer is that it’s very unlikely that any of these firms will go bankrupt.

But a spin-off, divestiture, restructuring, or another major event is likely.”

However, the tone of the article was too optimistic, and I should have recommended looking for “Plan B” options more forcefully.

I made the same mistake the regulators did: ignoring shifts in the Credit Suisse deposit and cash base because its regulatory capital ratios looked “fine.”

So, what happened?

Why did UBS just acquire CS for less than $1.00 per share when it was trading above $8.00 a year ago?

Is the financial system going bust?

And what should you do if you have an internship or full-time offer at CS or UBS?

UBS and Credit Suisse: What Happened?

In case you somehow missed the news, UBS on Sunday (March 19^th) announced plans to acquire Credit Suisse for ~$3.2 billion at a P / BV multiple of 0.1x – exceptionally low for a commercial bank.

It’s so low that UBS is, effectively, paying a negative amount for CS because $17 billion of the bank’s bonds are also being written down.

The deal is backstopped by the Swiss government, which committed ~$10 billion to absorb potential losses (UBS will absorb the first ~$5 billion). If the losses are even higher, UBS and the Swiss government will split them above this $15 billion level.

UBS did not want to acquire Credit Suisse, but the Swiss government made the deal happen via the “offer you can’t refuse” methodology.

One strange aspect of the deal is that about $17 billion of Credit Suisse bonds will be written down, making them junior to the common shareholders.

These are known as “Additional Tier 1 (AT1) Bonds” or “contingent convertible” (CoCo) bonds, and they allow a bank to boost its capital ratios without diluting shareholders via an equity issuance.

Investors panicked and bid down the prices of other AT1 bonds in Europe, which prompted EU regulators to step in and state that this “would not happen to other banks.”

The AT1 bondholders are now banding together to file a lawsuit.

But it seems that the Swiss government designed the AT1 bonds to work this way, at least if you read the fine print for their “bail-in regime” (click the image to view a larger version with legible text):

In another twist, this entire deal took place without shareholder approval from either side – because everyone would have rejected it.

I explained the reasons for Silicon Valley Bank’s failure in last week’s article: incompetent risk management, massive losses on HTM securities, and a run on the bank that created the need to sell securities at a loss and get cash to cover the withdrawals.

By contrast, Credit Suisse barely had any HTM securities.

And while it did have a decent amount of unrealized losses, they were tiny next to its Net Loans balance of nearly $300 billion:

As I pointed out in the previous article, its capital ratios were fine, and its Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) were both above 100%:

It even passed the Federal Reserve’s “stress tests” in the U.S. with flying colors!

The short answer is that none that mattered because depositors didn’t care and began withdrawing all their cash anyway.

Ratios like the LCR are designed for “moderate stress” scenarios, such as a bank losing 20% of its deposits over 30 days.

CS was facing $10 billion in customer deposit withdrawals per day against a cash balance of only ~$130 billion, so it was not going to last long:

Only a few strategies can prevent or mitigate a bank run, and most of these need to be set up far in advance:

• Limit the Allowed Withdrawal Rate – Besides being legally dubious, this one might also make the eventual problem worse by drawing attention to it.
• Insure the Deposits – But this is expensive and is available only up to a certain per-account limit in most countries, such as CHF 100,000 in Switzerland and $250,000 in the U.S.
• Get an Emergency Loan from the Central Bank – The central bank is supposed to be “the lender of last resort,” so this strategy can work – but only up to a certain withdrawal percentage.
• Do Not Use Customer Deposits for Funding – Some financial institutions operate like this, but it’s much more expensive, so they need to make riskier loans and investments to profit (think: mortgage REITs and business development companies).

OK, But What Was the Catalyst for the Run on Credit Suisse?

The “run” on CS started last year if you look at the Balance Sheet above, but it accelerated with the Silicon Valley Bank failure the week before.

Investors and large depositors looked at the market and said, “OK, banks are in trouble. What’s the weakest link now that Silvergate, Signature, and SVB are down?”

And the answer was “U.S. regional banks with high percentages of uninsured deposits and scandal-plagued European banks like Credit Suisse.”

As with SVB, Credit Suisse did not “fail” in a few days.

It had been making horrible moves for years/decades, its risk management was non-existent, and it accrued one of the longest Wikipedia sections I’ve ever seen for “controversies.”

Everyone knew it was in trouble; the main question was whether it would be sold whole or in pieces.

What Happens Next with UBS and Credit Suisse?

First, Credit Suisse is obviously no longer a bulge bracket bank, so I’ll have to update that article.

But that would have happened anyway because of the firm’s plans to spin off its IB group into Michael Klein’s advisory firm, M. Klein & Co.

Before this deal, I had expected that “CS First Boston” would become another elite boutique and a strong competitor to the likes of Evercore, Lazard, and Moelis.

But this spin-off might not even happen now; UBS has said that it plans to continue moving away from investment banking in favor of wealth management (it’s currently ~54% of revenue).

They may keep some CS investment bankers in the U.S. and Asia, especially in sectors like tech and TMT investment banking, but Europe is much more uncertain.

The biggest beneficiaries here are, as usual, the large U.S. banks (GS, MS, JPM, BofA, and Citi).

With the retreat of both CS and UBS, these firms’ market shares in Europe and Asia will continue to grow.

Also, many of the elite boutiques will benefit because they’ll be perceived as “lower risk” after this crisis due to their lack of large Balance Sheets.

What If You Have an Internship or Job Offer at Credit Suisse?

Unfortunately, as of Wednesday (March 22^nd), neither CS nor UBS has said anything about what will happen to incoming interns or those with full-time offers.

In 2008, some banks rescinded internships and full-time jobs, so it’s safest to assume that will happen again.

Even if internships somehow proceed this summer, the chances of getting a full-time offer at these firms are very low (and even if you got one, would you want to accept it?).

Unfortunately, because of the accelerated timing for internship recruiting, you’re probably not going to find another IB internship that starts in a few months.

So, if you’ve accepted an offer at CS, all you can do at this point is network around and look at fields outside of IB (Big 4, corporate banking, valuation, corporate finance, etc.), and see if anything is available at the last minute.

In terms of full-time jobs these firms, the target company’s employees are usually at greater risk than the acquirer’s, and middle and back-office functions are at higher risk than front-office jobs.

But this is an odd scenario because UBS has explicitly stated that it wants to reduce its investment banking footprint.

My guess is that most wealth management jobs will be preserved, IB/markets job cuts will vary by division and region, and there will be painful cuts in various MO and BO roles.

If you’re at UBS or you’ll begin working there soon, you’re probably OK for now, but I wouldn’t recommend staying for long.

They’ll always maintain some presence in investment banking, but you don’t want to spend years and years at a firm that has already shifted away from that market.

The Macro Impact of UBS and Credit Suisse (and SVB)

I expect more bank failures, hurried/forced acquisitions, and “emergency backstops” before this crisis is over.

In a standard bank failure, a larger, healthier bank acquires the troubled bank’s assets and liabilities, and the lenders and common shareholders lose all/most of their money while the depositors preserve theirs.

But with these recent deals involving SVB, CS, and others, the regulators and government officials seem to be making up rules on the spot:

• SVB and Signature Bank got “exceptions” that allowed the government to treat them as systemically important banks (they aren’t).
• UBS and CS got a backstop from the Swiss government and special treatment that allowed the CS AT1 bonds to be wiped out (“legal,” but it will be challenged in court).
• Midsize banks are now lobbying for “exceptions” that allow the government to guarantee all deposits in the U.S.

I would argue that these exceptions and special rules are making these problems worse by drawing so much attention to banks’ problems and implying that any bank without special treatment is at risk.

In the long term, these policies will lead to more centralization and a flight to the larger, “too big to fail” banks (~30 banks worldwide are considered “systemically important”).

This is negative for the financial system because the rescue costs will be even higher in the future if when one of these “systemically important” banks does something stupid.

Effectively, these large banks are becoming quasi-governmental entities, which is the opposite of how a healthy economy should function.

Central banks could also use these events to push even more dystopian ideas, such as central bank digital currencies (CBDCs) and social credit scores.

It will be a repeat of what happened during COVID: the Chinese Communist Party introduces dystopian ideas and promotes them with propaganda, and NPCs in Western countries believe everything and try to copy them.

What Should Banks and Regulators Do?

I’ve seen many proposals about how to “prevent” SVB and CS-style bank failures:

1. Remove the deposit insurance limit or increase it from $250K to $10 million in the U.S.
2. Impose stricter regulations and requirements, even on smaller banks below $250 billion in assets.
3. Don’t create new regulations; just force regulators to do their jobs and take action to wind down or sell a bank when it is approaching insolvency.
4. Create a “free” national bank that offers checking/saving accounts for everyone.
5. Bitcoin! Crypto solves everything.

Insuring all deposits or deposits up to $10 million is a bad idea because it will encourage bank executives to be even more reckless.

Why not gamble everything on subprime mortgages or CDOs if the government will save your customers? You might even get a higher bonus!

Enhancing existing regulations or enforcing them correctly might help to some extent, so suggestions #2 and #3 could be starting points.

But the cold, hard truth is that nothing can “prevent” bank failures unless the government simply takes control of all banks.

Even if banks had to maintain 100% reserve ratios – enough cash to cover all potential deposit withdrawals – they could still fail if everyone withdrew 100% of their deposits simultaneously.

The “answer” is to accept that banks will fail and make sure that their wind-downs and takeovers by healthier banks are as orderly as possible.

This means that in some cases, companies and individuals will not be able to access all their cash immediately – but percentages matter.

If a company with $100 million in the bank fails because it can access only $50 million next week, this company should not exist in the first place.

On the other hand, if it can access only $1 – 2 million of its cash for a week, the bank takeover process needs to be revamped.

Regulators should not cave into threatening tweets from VCs who claim the world is going to end because their portfolio companies cannot “make payroll.”

And there should be no backstops because banks should not be allowed to grow to their current sizes in the first place.

The idea that some banks can be “too big to fail” is ridiculous, which is why there’s a strong case for breaking up these firms into smaller entities.

A healthy economy should have dozens/hundreds of mid-sized and smaller firms competing, and the failure of a single firm should never create systemic risk.

Of course, implementing these policies would represent a complete reversal of the consolidation in the U.S. banking system since ~1930, so don’t hold your breath:

But maybe there is some cause for optimism.

Once ChatGPT-7 is released and your social credit score is linked to your checking account, your deposits might finally be safe – as long as you haven’t offended anyone on Twitter.

The post UBS and Credit Suisse: The Next Shoe to Drop in the Financial Crisis of 2023? appeared first on Mergers & Inquisitions.

If you are currently breathing oxygen, you’ve undoubtedly seen the stories about Silicon Valley Bank’s collapse over the past few days.

In 24 hours, it went from “We’re fine, but we took some losses and need additional capital” to “The FDIC is taking over, the government has guaranteed uninsured deposits, and there might be additional bank runs and a financial crisis or three.”

It’s the second-biggest bank failure in U.S. history and the largest bank to collapse since 2008.

In this “emergency article,” I’ll cover:

• Exactly what happened, including some points I haven’t seen mentioned elsewhere.
• Why bank regulations, including those passed after the 2008 financial crisis, failed to prevent this.
• Who deserves the blame.
• Whether the “bailout” is really a bailout (yes) and whether it’s justified (debatable).
• And the impact on the banking industry, venture capital, and startups.

How Does a $200 Billion Bank “Fail” in 24 Hours?

Silicon Valley Bank did not “fail” in 24 hours.

It’s more accurate to say that the bank was failing for months/years, but a series of catalysts made everyone realize the failure in 24 hours.

To explain this point, we need to step back and explain the business model of commercial banks.

Some sources describe it like this:

1. The bank accepts deposits from customers and pays them interest.
2. Then, the bank lends these funds to companies and individuals and charges interest on these loans.

But this is not how it works in the modern economy and financial system.

The order of operations looks more like this:

1. The bank creates loans based on demand (customers that need to borrow).
2. These loans create matching deposits on the L&E side of the bank’s Balance Sheet, and the bank then finds real deposits or other funding sources to back the loans.

In other words, banks’ lending activities are not constrained by their deposits.

Look at any financial model for a bank, and you’ll see that loans – not deposits – are the key top-line driver.

Banks’ lending activities are constrained by:

1. Regulatory Capital – All banks must maintain a certain amount of common shareholders’ equity to absorb unexpected losses on loans and other assets. So, past a certain point, they need to issue or save up more equity if they want to issue more loans (I’m simplifying; there are dozens of ratios and requirements, but most relate to common equity).
2. Reserve Ratio Requirements – In “normal times,” banks must keep a certain amount of cash on hand to fund possible deposit withdrawals. But the U.S. eliminated these requirements in March 2020, and they’re loose or nonexistent in many other countries, so banks are limited mostly by their regulatory capital.

Even though banks are not “constrained” by their deposits, they still manage to their deposits, and most target a specific loan-to-deposit ratio.

However, the ratios got completely skewed with Silicon Valley Bank (SVB) because it accepted far more deposits than it knew what to do with.

This happened to the entire banking system over the past few years due to the amount of money printing during covid, but it was particularly extreme for SVB.

SVB’s deposits grew from ~$62 billion at the end of 2019 to $173 billion at the end of 2022, and its loan-to-deposit ratio went completely out of whack:

Tech startups were flush with cash due to a ridiculous fundraising environment in 2020 – 2021, and they put the money they raised in the bank.

Remember that, normally, a bank issues loans and then finds the liabilities (deposits, debt, etc.) to back them.

But the process went in reverse here: the bank got too many deposits and didn’t know what to do with the cash proceeds on the Assets side of its Balance Sheet.

They could have just left the funds in cash, but cash yielded ~0% in 2020 – 2021, so SVB put most of these funds in mortgage-backed securities and other U.S. government bonds:

In doing so, however, the bank and its “risk managers” made two key mistakes:

1. Long-Term vs. Short-Term – Rather than putting these funds in shorter-term bonds that are less affected by interest rates, SVB invested mostly in longer-term, 10-year bonds whose prices drop significantly when interest rates rise.
2. Insufficient/No Hedges – Rather than hedging their entire MBS portfolio with interest-rate swaps, the bank had… no swaps at all as of the end of 2022 (oh, and no Chief Risk Officer, either).

So, as the Fed hiked rates in 2022 into 2023, all these securities lost value.

But since they were classified as “Held to Maturity” (HTM) on the Balance Sheet, they were not marked to market value – so this loss in market value did not affect the company’s regulatory capital:

Not all the bank’s investments were in the HTM category; some were in the “Available for Sale” (AFS) category. These are marked to market value and do affect the bank’s common equity and regulatory capital ratios, such as its CET 1 Ratio.

This happens because Unrealized Gains and Losses on AFS securities appear within Accumulated Other Comprehensive Income.

SVB started selling these AFS securities to raise cash, and it revealed that it took a $1.8 billion loss on a $21 billion portfolio.

They needed to do this because depositors started withdrawing their money in larger numbers, and SVB did not have enough cash to meet the expected withdrawals.

But even without these withdrawals, the high burn rates for startups were another factor: too much spending and no new VC funding means “diminishing deposits.”

Immediately after this sale, the bank also announced plans to raise additional equity and convertible preferred stock.

These announcements caused panic among VCs and startups as they realized that the “stable bank” they relied on was not so stable.

The result was a modern bank run, as depositors attempted to withdraw $42 billion in deposits – almost 25% of the bank’s total – in a single day.

This left SVB with a negative cash balance, and the FDIC stepped in on Friday to take over.

Deposits up to $250K are insured in the U.S., but less than 10% of accounts at SVB were in that category (an unusually low percentage).

So, various “libertarian” VCs took to Twitter over the past few days to demand a bank bailout, arguing that there was a systemic risk and that the sky would fall unless the government stepped in.

On Sunday, the government did step in, with the FDIC, Treasury, and Federal Reserve guaranteeing uninsured deposits and creating a “Bank Term Funding Program” (BTFP) that will offer up to 1-year loans to banks that need it.

Wait, Shouldn’t Regulations Have Prevented the Silicon Valley Bank Failure?

If you’re familiar with bank accounting, valuation, and regulatory capital (i.e., from our Bank Modeling course), you might read the description above and have a simple question:

“OK, but what about the Liquidity Coverage Ratio (LCR)? This ratio measures the bank’s liquid assets vs. its cash outflows in a ‘stressed’ 30-day period to ensure they can cover possible withdrawals.”

Yes, it does, and the LCR was created in the aftermath of the 2008 financial crisis specifically to prevent bank runs.

But there are two big issues with it:

1) Calculations – Banks have some discretion over what counts as a “high-quality liquid asset” (HQLA), and they rarely disclose the exact calculations. Also, the assumed “run-off rate” in deposits is discretionary, and you’ll often see numbers such as 10-20% – not the 25% that SVB experienced in a single day.

2) Applicability – In the U.S., the FDIC removed the full LCR requirements for banks with less than $250 billion in assets in 2019.

Conveniently, SVB stayed just under that $250 billion level in its past two fiscal years:

The other regulatory capital ratios and requirements, such as a minimum CET 1, would not have helped unless the bank had classified all its HTM securities as AFS, but there was no “requirement” to do that.

Finally, there is also the Net Stable Funding Ratio (NSFR), but that focuses on longer-term funding, and many smaller U.S. banks are exempt from it.

As SVB so eloquently described these requirements in its filings:

Whose Fault Is the Silicon Valley Bank Collapse?

It was interesting to watch the usual suspects on Twitter – mostly wealthy VCs – blame “the government” for this failure while simultaneously demanding a bailout from the government.

The Federal Reserve does deserve some blame here because it kept interest rates at or near 0% for over a decade and then rapidly reversed course and raised rates quickly in a short period.

Also, regulators were asleep at the wheel and made bad decisions in exempting smaller banks from the LCR, NSFR, and other requirements.

But the root causes of the SVB failure were management’s incompetence and inability to manage risk, combined with the tendency of venture capitalists to act like crazed lemmings on sugar highs.

Yes, rapidly rising rates caused problems in many sectors, but Silicon Valley Bank could have managed the issue better in countless ways.

Here are just three ideas off the top of my head:

1. Hedge with Interest-Rate Swaps – Yes, hedges cost money, but that’s the point: SVB already had too much cash from excess deposits, so why not buy enough swaps to hedge most of the MBS?
2. Set Up a “Bond Ladder” – You know, just like every retail investor does. Buy a mix of short, mid, and long-term bonds rather than betting everything on long-term securities with much higher interest-rate risk.
3. Leave the Proceeds in Cash Temporarily – Some banks, like Fifth Third, did this, with the CFO stating that the bank “could afford to be patient.”

This great report from market strategist Michael Cembalest at JPM makes clear how much of an outlier SVB was:

The argument that “the Fed lied” about raising interest rates, so everything is the Fed’s fault, is ridiculous because it’s not the Fed’s job to provide investor guidance.

Hedging exists because anything could happen, and it’s the bank’s job to understand financial markets and why Treasuries are not, in fact, “risk-free.”

Venture capital firms also deserve some of the blame here.

First, they told all their portfolio companies to bank with SVB, creating a huge industry concentration risk:

They also failed to look at SVB’s business and how its Balance Sheet was changing and kept encouraging startups to work with them – despite the risk this presented.

Second, in the past week, VCs arguably engineered this run on the bank by panicking on social media and telling their portfolio companies to withdraw funds.

For an industry that supposedly funds “innovation” and “disruption,” VCs often act like a herd.

Is This “Bailout” Justified? Is It a Bailout? What Happens Next?

Despite what people like Bill Ackman and Jim Cramer are claiming, the government intervention to save SVB is, in fact, a bailout.

Shareholders and bondholders are being wiped out, so in that sense, it’s different from the 2008 bailouts.

However, the Fed is still offering to accept HTM bonds with significant unrealized losses at par value as collateral for short-term funding.

In other words, banks get to pretend their massive losses on bonds “do not exist.”

And the FDIC insurance fund will extend to all depositors at SVB and Signature Bank (another failure over the weekend).

The government says that this will “not be funded by the taxpayer,” but that’s deceptive because:

1. Higher FDIC fees to pay for these programs will be passed onto the depositors at banks, most of whom are taxpayers.
2. The Fed will almost certainly print more money to fund parts of this, creating more inflation – another tax.

In short, I don’t think this is a great idea, but it’s probably the “least bad” solution they could have come up with on short notice.

Banks are now incentivized to be even more reckless in their “risk management” since they know this backstop exists.

Why bother using hedges if the government will swoop in to save your failing bank whenever rates go up?

Why bother managing your regulatory capital if the government will save you when too many loans default?

Technically, the terms of this bailout limit the rescue to banks’ existing bonds and liquid assets.

But the problem is that it sets the precedent that the government will do this whenever there’s another similar issue.

The Impact on Investment Banking, Commercial Banking, Venture Capital, and Tech Startups

The good news is that nothing here affects investment banking in the U.S. substantially because the biggest banks (JPM, Citi, Wells Fargo, and BofA) are all perceived as “safe” and will benefit from deposits shifting from smaller banks to larger ones.

And the middle-market and boutique investment banks don’t have much presence in commercial lending anyway, so they’re not at risk of bank runs.

If anything, all this activity with asset sales and acquisitions will boost your prospects if you’re in a group like FIG.

But commercial banking is a different story.

The government’s actions over the weekend did not seem to reduce panic in the sector, with regional banks like Western Alliance Bancorp and First Republic down by huge percentages in pre-market trading on Monday.

There will probably be a mix of bailouts, acquisitions, and asset sales for these banks, and depositors will not lose anything due to government intervention.

But these actions set a negative precedent because they’ll encourage even higher concentration and even worse risk management.

It’s also clear that the regulations passed after the 2008 financial crisis have not worked as intended – or that their implementation was unsuccessful.

To me, the entire situation is: “The system wasn’t working, regulations were not implemented correctly, and we made some bad policy decisions – but rather than fixing the root problems, we’ll just apply a band-aid fix.”

The Fed is now stuck between a rock and an even harder hard place: if they increase rates or keep them higher to fight inflation, they get even more bank failures…

…and these bank failures, in turn, mean more money printing and/or higher bank fees to support more bailouts…

…which leads to higher inflation.

It’s a circular reference, but in real life rather than Excel.

I also expect blowback against tech startups and venture capital firms because of their close association with SVB and because bailouts are extremely unpopular.

Many banks will become even more skeptical of startups or impose onerous terms for simple checking/saving services.

Startups were already struggling in the current environment due to higher rates, a slowing economy, much tougher fundraising, and high-profile crypto failures like FTX – and SVB has only added to these troubles.

I expect hiring at VC-backed companies to fall even more, and VCs will struggle with more portfolio companies underperforming.

Even if you’re determined to work at a startup or win a VC-related job, you might want to re-assess your plans for the next 6-12 months.

In early January, I predicted that the markets in 2023 would be “Bad, but not as bad as 2022.”

Two months into the year, that prediction looks questionable.

But at least everyone will get their deposits, right?

The post The Collapse of Silicon Valley Bank: The Start of Great Financial Crisis 2.0? appeared first on Mergers & Inquisitions.

If you want to work in the most cyclical role in the finance industry, it’s hard to beat commodity hedge funds.

But a few related areas, such as commodity desks at banks, commodity trading advisors (CTAs), and physical commodity trading shops could put up a good fight for that “most cyclical” title.

Many of the largest hedge funds put commodity trading within their global macro strategies, but plenty of smaller funds, banks, and desks make it a separate category or focus on commodities within their macro strategies.

And since it’s both specialized and potentially very lucrative, it’s worth discussing separately:

What Are Commodity Hedge Funds, and What is “Commodity Trading”?

Commodity Hedge Fund Definition: A commodity hedge fund buys and sells futures contracts and other derivatives based on mining, energy, power, and agricultural products and earns profits via fundamental and technical analysis; the trading may be systematic, discretionary, or both.

We should also step back and define “commodities” and “commodity trading” since they’re massive areas.

Commodities are physical products that come out of the ground, are delivered in bulk globally, and are exchangeable for other physical products with similar characteristics.

There is no “brand premium,” and they may be stored for long periods, such as months, years, or even decades.

The main categories include agriculture (coffee, cocoa, sugar, corn, wheat, soybeans, etc.), power, energy (oil, gas, NGLs, etc.), and metals and minerals (gold, silver, copper, lithium, etc.).

Commodity trading and investing are appealing for many of the same reasons global macro strategies are appealing: inflation protection, diversification, and potentially higher returns when financial assets perform poorly.

This article from PIMCO and the correlation data sum it up quite well:

Included within commodity trading are the following firms and groups:

1. Commodity trading desks at oil, gas, mining, power, and agricultural companies.
2. Commodity trading desks within sales & trading at the large banks.
3. Commodity trading advisors (CTAs), which are like hedge funds in some ways (see below).
4. Commodity hedge funds, either as independent entities or as part of larger global macro teams.
5. Dedicated commodity trading firms such as Trafigura and Gunvor that buy and sell physical commodities and transport them globally.

There are two broad categories of commodity trading, and each firm above fits within one or the other:

1) Physical – This category is more capital-intensive and requires serious logistics and operations know-how and a wide network.

This type of trading requires you to connect buyers and sellers and ensure, for example, that oil can flow between continents without being stolen by pirates, ninjas, or evil robots.

Regional market dynamics are important here, as are your relationships with the buyers, sellers, and freighters. You focus on fundamental analysis, such as supply and demand curves, and you usually specialize in one commodity.

2) Paper – Here, you focus on trading futures, forwards, options, and swaps rather than the underlying physical commodities.

A future is a contractual agreement to buy or sell a commodity on a listed exchange in a certain quantity and quality and on a certain delivery date. As the delivery date approaches, the underlying commodity’s price and its futures price converge.

In practice, true physical delivery of the underlying commodities rarely happens, so futures trading goes in the “paper” category.

Fundamental analysis around supply and demand is still important, but you also spend time on the technical analysis, data, and everything that derivatives traders would think about.

Natural resource firms and dedicated trading firms tend to focus on physical trading, while bank trading desks, hedge funds, and CTAs focus on paper trading.

The other side might still “exist” at these firms, but it’s often a lower priority.

For example, physical traders at the oil majors often earn more than paper traders because they influence the main energy production business.

The financial traders at these companies might focus on hedging and run a few speculative trades on the side.

Examples of Physical vs. Paper Commodity Trades

To make these concepts concrete, I’ll describe three commodity trades here: a “paper trade,” a “physical trade,” and a mixed paper/physical trade.

In each one, you’ll trade wheat or its derivatives (futures or options linked to the underlying price).

You’ll be based in the U.S., where wheat futures for delivery in 6 months are currently $8.00 per bushel.

A Paper Commodity Trade

If you believe that the price of wheat will increase above $8.00 in 6 months, you could set up a “bull call spread” by purchasing a call option above this price and selling a call option at an even higher price.

Doing so limits your losses if you’re wrong but also caps your gains if you’re correct.

For example, you might buy a $10.00 wheat call option for $0.50 and sell a $12.00 wheat call option for $0.20.

These options use the wheat future itself as the underlying asset.

Each wheat future represents 5,000 bushels, so the premium to set up this trade is ($0.50 – $0.20) * 5,000 = $1,500 (ignoring commissions and other fees).

Your maximum profit is the difference between the exercise prices times the number of bushels, or ($12.00 – $10.00) * 5,000 = $10,000.

If wheat prices remain below $10.00 after 6 months pass, the options expire worthless, and you lose your $1,500 premium.

If wheat prices rise to between $10.00 and $12.00, you will profit based on (Wheat Price – $10.00) * 5,000.

And if wheat prices rise above $12.00, your profits would be capped at $10,000 because of the $12.00 call option you sold.

A Physical Commodity Trade

Now, let’s say that you’re connecting a U.S. wheat seller to a buyer in China.

Futures are currently $8.00 per bushel, the “basis” (the local cash price minus the futures price) in San Francisco is $4.00 / bushel, and it costs $4.00 / bushel to ship wheat from SF to Beijing.

So, it will cost you $16.00 per bushel to deliver this wheat to your buyer in China. You and the buyer agree to a price of $17.00 per bushel.

If you deliver 5,000 bushels, that’s a profit of $5,000.

Your value-add in this trade is that you knew the buyer, seller, and freighter and got the best quotes and delivery times from everyone involved.

Someone without your network might have been able to make this trade, but they would have gotten worse prices and earned less profit.

A Mixed Physical and Paper Trade

You could earn a higher profit from this same trade if you bet on market prices first.

Maybe you believe that wheat prices will fall by the time of this delivery in 6 months, so you decide to hold off on purchasing the wheat.

But you could be wrong, so you also decide to hedge your risk by buying futures.

You review your forward price curve and purchase some futures at $9.00 to lock in the price if it goes even higher.

A few months pass, the wheat harvest is good, and the basis in SF falls to $3.00 / bushel.

Now, you decide to lock in your profits by buying the wheat and paying for the shipping.

You also sell the $9.00 futures you previously bought; you’ll take a loss on these since wheat prices have fallen.

It now costs you a total of $8.00 (futures price) + $3.00 (basis in SF) + $4.00 (freight) = $15.00 per bushel to ship your wheat to China.

You earn $2.00 per bushel rather than $1.00, so your profit is $2.00 * 5,000 = $10,000 minus the amount you lost on the futures.

Commodity Hedge Funds vs. Commodity Trading Advisors vs. Global Macro Hedge Funds

There’s a ton of overlap in these areas since all these firms focus on paper trading.

The main difference is that global macro hedge funds pursue the broadest range of strategies since they can invest in almost anything.

Commodity hedge funds are a subset of the global macro category and focus on derivatives of the main commodity types above.

And commodity trading advisors (CTAs) are in the smallest category (theoretically) because they only trade in the futures markets, and they mostly use momentum or “trend-following” strategies.

But this description of CTAs is no longer correct because many trade futures and options on products outside of pure commodities, which raises the question of why “commodity” is still in the name.

The real difference is that the licensing, registration, and legal structure differ, and unlike hedge funds, CTAs can advise a broader group than just high-net-worth investors and institutions.

The Skills Required for Commodity Trading

You do not use traditional financial statement analysis or valuation in commodity trading because the underlying asset is a futures contract, not a stock.

The fundamentals do not relate to EBITDA, Free Cash Flow, or valuation multiples but to factors like the weather, human behavior, geopolitics, and supply and demand.

You think about these issues and commodity-specific factors, such as pipeline/plant capacity, outages, and new drilling activity for oil, to predict how prices might change.

One of the key tasks is creating a forward price curve based on your view of supply and demand. The U.S. Energy Information Administration has a few simple examples here:

Your discussions with customers, competitors, and other commodity brokers will also inform this curve.

If you get completely different views about pricing from these different sources, you’ve either made a mistake or discovered an arbitrage opportunity.

Given the amount of data analysis required, you might be wondering if it’s essential to have computer science skills for commodity trading.

CS and programming skills help but are not necessarily “essential” for all roles.

For example, on the physical trading side, most of the job consists of simple arithmetic, geopolitical/market knowledge, and sales/relationship/networking skills.

You must also consolidate information from various sources and present it effectively to build relationships and execute deals.

Coding skills are more useful for paper trading because you’ll trade based on trends, numbers, and correlations.

The Top Commodity Hedge Funds, Trading Firms, and Trading Desks

All the large, multi-manager hedge funds use global macro strategies, and some have dedicated commodity groups.

So, expect to see commodity traders at the likes of Citadel, Millennium, Balyasny, Squarepoint (quant focus), DRW (quant), and DE Shaw (quant).

If you include family offices, names like Soros, Duquesne, and BlueCrest could also be on this list.

If you consider newer commodity hedge funds with strong performance, the names might include Quantix Commodities, East Alpha (quant), Statar Capital (natural gas), Valent (renewables), Drakewood (metals), Orion (discretionary), and PIMCO’s Commodity Alpha Fund (PIMCO is not “new” and is not even a hedge fund, this specific fund launched in 2013).

The top CTA funds are harder to pinpoint because there’s so much overlap with the hedge funds, but a few larger names include Transtrend (Netherlands), Crabel Capital, Quest Partners, DUNN Capital, Quantica Capital, and Aspect Capital.

On the physical trading side are firms like Glencore, Vitol, Trafigura, Mercuria, and Gunvor in energy and metals and Cargill, Archer Daniels Midland (ADM), Louis Dreyfus Company (LDC), Bunge, and Wilmar International in agriculture.

Finally, on the investment banking side, the “top 3” banks (GS, MS, and JPM) all have a good presence in commodities, as do BofA and Citi.

Among smaller firms, Macquarie is quite strong, probably because it is based in commodity world-leader Australia.

How to Recruit for Commodity Hedge Funds and Other Trading Roles

If you want to be a commodity trader, there are three main paths into the industry:

1. Start at a large bank in a commodity-related group within sales & trading. Some IB natural resource groups could potentially work, but if you want to be a trader, you’re still much better off starting in S&T.
2. Join a physical trading shop or natural resource company in an operations, “scheduling,” or middle-office role with a pathway to becoming a trader. These roles are less competitive, but they also pay less than S&T at a bank, and even if you perform well, it usually takes 3-7 years to gain P&L responsibility.
3. Start in trading and pivot into commodities. For example, you could start trading a slightly more accessible product (equities, options, etc.) at a hedge fund, prop trading firm, or asset management firm and then move into a commodity role once you prove yourself.

I did a quick LinkedIn survey of a few dozen people with “commodity trading” in their profiles, but it wasn’t too interesting: 80%+ had started in trading and stayed in it.

I noted the following points:

• A few people (~5-10%) had a political, legal, or compliance background, probably for the same reason that people use experience at central banks or in economics/strategy roles to get into global macro.
• Almost no one (< 5%) had management consulting or investment banking backgrounds, and the ones that did also had something closely related to commodities.
• Around 10% had wealth management experience. This one probably falls within the “pivot into commodities” category.
• Many people started out trading something else, such as fixed income or equity derivatives, and then moved into commodities.

We’ve covered sales & trading interview questions and how to get a job at a hedge fund in previous articles, so I’ll refer you to those for the process details.

Practical experience is king with commodities.

If you don’t know where to get that experience, start trading. Write your own scripts, create automated strategies, and develop tools to help traders.

No, it’s not the same as managing a P&L at a large firm, but it’s much better than applying without relevant experience.

You’re unlikely to get case studies in interviews, but you will have to discuss your trade ideas and explain your thoughts about supply/demand and forward price curves.

If you’re interviewing for a physical trading position, expect it to be more like a sales interview, where they test your presentation and networking skills.

And if you’re applying for operations or scheduling roles at companies like Glencore, expect mostly “fit” questions because they don’t expect you to walk in knowing how to connect European lithium buyers with Australian producers.

Careers, Hours, and Compensation

These points differ based on your role (Analyst vs. Trader vs. Originator) and firm type, but at a high level:

• At physical trading firms, you’ll usually start in a middle office, operations, or scheduling role. If you do well, you’ll get promoted to a front-office Analyst and then a Trader. You could stay and earn a lot if you’re good at trading or move into a management role with lower incentive compensation but more stable pay.
• Base salaries for entry-level positions here will probably be under $100K, rising to ~$150K plus a discretionary bonus once you’re an Analyst. As a Trader, you might get another base salary bump and a small percentage of your P&L.
• Traders at the largest firms could easily earn over $1 million per year, and the top traders at the oil supermajors could even earn in the 8-figure range.
• The downside is that it takes a long time to get your own book, which creates a lot of market/cyclical risk.
• On the hedge fund side, expect base salaries in the $100K – $200K range at the entry level, with a huge bonus variance based on overall and individual performance. If you do well, you could reach the high-six-figure-to-low-seven-figure range once you have some P&L responsibility. The hierarchy follows the one in the hedge fund career path article.

The hours are like other public-markets roles: expect to wake up early and arrive 1-2 hours before your market/exchange opens and leave 1-2 hours after it closes.

You’ll be busy most of the day placing trades, speaking with buyers/sellers/counterparties, following the news, and updating your positions, so there is almost no downtime.

Commodity Trading Exit Opportunities

Like the exit opportunities from global macro funds, you don’t have many options coming from commodity trading because the skill set is so specialized.

If you’re at a hedge fund or CTA, your main options are:

• Move to a different or broader strategy, such as global macro rather than just commodities. Or, if you’ve traded futures for indices or something other than commodities, join a fund that uses them as part of its strategy.
• Join a normal company in the agriculture/natural resource space that needs price hedging for its production.
• Take a trading role at a place like Trafigura or Vitol – if you can find one that’s more on the “paper trading” side since your skill set is less relevant for physical.

And there are other options, such as joining or re-joining an S&T team at a bank, moving into a risk management role, or taking a macro research role at a global organization like the IMF (see the list of sales & trading exit opportunities for more ideas).

But the bottom line is that if you want to make a dramatic change after gaining experience in commodity trading, you’ll probably need an MBA.

For Further Learning About Commodity Hedge Funds

Many of the resources in the global macro article are also relevant here, but I’ll add a few that are specific to commodities:

• A Trader’s First Book on Commodities (Garner)
• Higher Probability Commodity Trading (Garner)
• Options, Futures, and Other Derivatives (Hull)
• The World for Sale: Money, Power, and the Traders Who Barter the Earth’s Resources – More narrative than technical analysis, but great for an industry overview.
• Out of the Shadows: The New Merchants of Grain – Similar but with an agricultural focus.
• The King of Oil – Biography of an infamous billionaire oil trader.
• Trafigura White Papers – Free reports on all commodities from one of the top firms.
• CME Group Educational Materials – Market updates and overviews on all commodities.
• Trafigura – Commodities Demystified – Great overview
• Trafigura – The Economics of Commodity Trading Firms

You can find various “commodity training programs” online, but they have little value because practical experience is king.

No one will hire you as a trader because you took a course; you must show them your P&L or relevant work that supports trading (scripts, data analysis, automated strategies, etc.).

There is the Series 3 exam, which is required to be a licensed commodity broker in the U.S.

Passing this one might help on the margins, but you should still prioritize real trading experience.

Final Thoughts on Commodity Hedge Funds and Commodity Trading

For the right person, commodity trading could be an incredible opportunity.

But this “right person” has a much narrower profile than in fields like investment banking or generalist hedge funds.

The good news is that you don’t need an Ivy League or Oxbridge degree to get in or advance; if you can make money, you will move up.

You will gain a highly specialized skill set, and if you’re on the physical trading side, you’ll also gain a solid network and relationships with buyers, sellers, and transportation/storage companies.

If you leverage that correctly, you could earn just as much or more than other traders and hedge fund PMs.

And if you have no interest in networking/relationships and are more quant-oriented, you could go the paper route and do well there.

But this specialized skill set is a double-edged sword because if you spend enough time in commodity trading, you won’t have a great shot at “generalist” trading, investing, or corporate finance roles.

The other downside is that commodity strategies are far more cyclical than ones like long/short equity, credit, and even global macro.

So, if you start in a middle-office role and get promoted right as volatility falls and the market cools off, you could be in for a long stretch of difficult years for your P&L.

But if you can wait it out and make some huge trades as the next commodity super-cycle begins, you might not even remember the bad times – as large chunks of gold move from the ground to your bank account.

The post Commodity Hedge Funds: The Most Lucrative “Hidden Gem” in Finance? appeared first on Mergers & Inquisitions.

The buy-side vs. sell-side distinction/debate is interesting because it happens on the internet and in real life.

With other topics – such as “target schools” or “elite boutiques” – few people use the terms in-person.

In fact, it would be quite weird if you spoke one of these terms aloud in an interview.

But everyone from headhunters to bankers to interviewers uses the terms “buy-side” and “sell-side,” and most people put themselves in one category or the other.

Unfortunately, the ubiquity of these terms has also made them more confusing.

The definitions are a bit murky, and they get even murkier the more you dig into them.

But before explaining the problems, let’s start with the basic definitions:

The Buy-Side vs. Sell-Side Definitions

Buy-Side vs. Sell-Side Definition: In the finance industry, “buy-side firms” raise money from institutions and wealthy individuals and invest on their behalf, profiting from management fees, performance fees, or both; “sell-side firms” earn money from commissions charged to facilitate deals and to sell, market, and trade equity, debt, and other securities.

The best examples of buy-side firms are private equity firms, hedge funds, and venture capital firms.

They all raise money from Limited Partners (LPs), such as pension funds, sovereign wealth funds, endowments, and insurers, and invest in companies and securities.

They earn money from a management fee charged on their assets under management (AUM) and a performance fee, often 20% of the profits above a certain hurdle rate.

The best example of a sell-side firm is an investment bank across most industry and product groups, such as healthcare, technology, and M&A.

Equity research and sales & trading are also in the “sell-side” category since they mostly earn money from fees paid for their services (research and market-making).

Within an industry like commercial real estate, a real estate brokerage is a sell-side firm since it charges a commission on the property sales it facilitates.

But real estate private equity firms and real estate debt funds are both buy-side firms since they earn money based on management fees and investment performance.

The Problems with the Buy-Side vs. Sell-Side Distinction

These categories are helpful for simple examples, but once you go beyond them, you’ll quickly find there are two big issues:

1. The Grey Zone – Many buy-side firms do not charge performance fees, so the link between performance, profits, and compensation is less direct.
2. Misfits – Many finance roles do not fit into either category; the classic examples are corporate finance and corporate development at normal companies.

With the first point, mutual funds, Canadian pension funds, and sovereign wealth funds fall into this category of “raise capital and invest it, but charge no performance fees or much lower fees than PE/HF firms.”

Something like private banking is also in this “Grey Zone” because private bankers invest on their clients’ behalf, but they typically charge fees based on AUM – and most people do not consider PB a traditional buy-side role.

On the markets side, prop trading firms are another “Grey Zone” example because most act as market-makers rather than directional traders (i.e., they don’t profit from investing in stocks and betting that prices will go up or down).

But the compensation ceiling is higher than in sell-side roles because prop traders can use strategies that traders at banks cannot and are more lightly regulated.

On the second point – “misfits” – corporate finance professionals at normal companies do not raise or invest money and do not charge commissions.

Their compensation is relatively fixed, based on internal company budgets – but most people still consider corporate finance an alternative to banking or an exit opportunity.

Corporate development is even tougher to classify because you analyze deals and acquire companies, but you’re not investing outside capital raised from LPs, and you don’t benefit directly from the performance of acquired companies.

The Alternative Categories: Deals vs. Public Markets vs. Support

Because of these issues, it might be more useful to put finance jobs into three main categories:

1. “Deal” Roles: Investment banking, private equity, venture capital, and… maybe corporate development (?? – see below).
2. “Public Markets” Roles: Equity research, sales & trading, hedge funds, prop trading, and asset management.
3. “Support” Roles: Corporate finance, corporate strategy, investor relations, risk management, treasury, and… arguably some back-office jobs (??).

The key differences are:

1. Revenue Generation – In “Deal” and “Public Markets” roles, your work generates revenue directly or has the potential to do so in the future (e.g., from a successful investment). In “Support” roles, you do not generate revenue directly but support the employees who do.
2. Process vs. Analysis/Execution – “Deal” and “Support” roles involve a lot more “process work” (documents, presentations, due diligence, etc.), while “Public Markets” roles are more about thinking and acting quickly and getting the timing correct.

If I were a management consultant, I would create the following 2×2 matrix to illustrate the issues with the normal buy-side vs. sell-side categories:

My 2×2 matrix for the Deal vs. Public Markets vs. Support categories would look more like this:

This doesn’t solve everything because corporate development’s category is still unclear, but the others are easier to classify.

In the rest of this article, I’ll focus on the buy-side vs. sell-side and deals vs. public markets differences, but I’ll add a few references to the support roles where appropriate.

The Buy-Side vs. Sell-Side: The Work and Skills Required

At the junior level, the Deals vs. Public Markets vs. Support distinction is more relevant for the work and skill set.

In “Deal” roles, skills such as financial modeling, creating presentations and memos, and reviewing documents to conduct due diligence are very important.

In “Public Markets” roles, there is still some financial modeling or technical analysis, but it tends to be more ad hoc and dependent on timing and making quick decisions.

So, you’ll still value companies in a role like equity research or at a long/short equity hedge fund, but these will often be “quick valuations” to take advantage of a certain market move or company update.

(But hedge funds vary widely, and some firms do thorough analyses based on deep, months-long research processes.)

In “Support” roles, the work is driven by monthly processes in areas like corporate finance, and it’s more about projects, research, and long-term planning in something like strategy.

All that said, the buy-side vs. sell-side categories do create differences in the work and skill sets.

The main one is that you’ll have to use far more critical thinking in buy-side roles because your job is to generate new investment ideas, think through the risks, and develop growth opportunities – even as a junior employee.

By contrast, much of the work in sell-side roles consists of following management or consensus estimates and making your model match up.

You learn the mechanics but not necessarily the thought process.

And while some buy-side funds have bureaucracy and annoying rules, sell-side roles care far more about points like the proper font sizes, alignment, and color-coding in Excel models.

Buy-side roles care more about the results (i.e., money made) than the cosmetics.

Buy-Side vs. Sell-Side: Hours, Lifestyle, and Stress

If you look at this in terms of Deals vs. Public Markets vs. Support, “Deal” roles have less predictable hours, with plenty of spikes up and down based on what different buyers, sellers, and target companies are requesting.

Public Markets roles have more predictable hours each day, but the intensity of that day is quite high, with little downtime (see: sales & trading vs. investment banking).

You will be busy following companies, updating your models and analysis, reading the news, and generating new ideas constantly.

Support roles are somewhere in between, depending on the exact job and company type.

On average, you will work the longest hours in “Deal” roles because more work, documents, and deliverables are required to close large deals involving entire companies.

The buy-side vs. sell-side categories also make a difference here.

In sell-side roles, most of the stress comes from responding to clients and other bankers and juggling the pitches, ongoing deals, and “random requests” that come in.

In buy-side roles, the stress is more about making the correct investment decisions and second-guessing yourself as the prices go up… and down… and then up again.

In roles like private equity and corporate development, there’s less market-related stress, but there’s longer-term anxiety because it takes years to determine if an acquisition performed as planned.

In short, the stress in sell-side roles has a higher frequency, but the stress in buy-side roles has a higher amplitude.

Buy-Side vs. Sell-Side: Salaries and Bonuses

People always focus on the fact that the ceiling is much higher in buy-side roles since you may capture some of the upside in deals or investments that perform well.

Then, they look at famous hedge fund managers who earn $100 million+ per year and use that to argue that “the buy-side pays more.”

They are correct that the most senior, top-performing buy-side professionals earn far more than Managing Directors in areas like investment banking and sales & trading.

But they’re also cherry-picking data and ignoring the ~99% of professionals in the industry who earn an order of magnitude less – and the various buy-side roles with no performance fees or much lower fees.

If you consider these issues and use compensation data from real surveys, you’ll find that the average pay depends more on your specific job, performance, and seniority than it does on the buy-side vs. sell-side distinction.

For example, bankers out-earn most VCs even though IB is a sell-side role.

But the compensation ceiling for global macro traders at large hedge funds is much higher than it is for sell-side traders at banks, and the average pay is also higher.

If you stay in the industry for, say, 15-20 years, and you get promoted into a senior position at a firm that performs well, you’ll almost certainly earn more in many buy-side roles.

This happens due to the performance fees and carried interest in private equity and hedge funds; in other areas, it’s a closer call because of low/no performance fees.

The Deals vs. Public Markets vs. Support distinction makes little difference in this category other than the fact that “Support” roles tend to pay much less because they’re not directly linked to revenue generated.

Buy-Side vs. Sell-Side: Advancement

Once again, this point depends more on the specific industry and firm type and less on the buy-side vs. sell-side distinction.

For example, advancement at a multi-manager hedge fund is a structured, predictable process based on performance, while advancement at a small, single-manager fund is more random and subject to the whims of the Founder.

On average, though, it is a bit more “straightforward” to advance in sell-side roles.

If you do the job decently and avoid mistakes, you will probably get promoted up to some level.

Also, turnover tends to be quite high, with many MDs lasting only a few years, so new spots always open.

By contrast, buy-side advancement is often trickier because senior people never want to leave.

You see this especially with the large, multi-manager hedge funds and private equity mega-funds, but it happens even at smaller/newer places.

Also, the standards for advancing are higher because you must make money or have the potential to do so.

By contrast, you could get promoted to the mid-levels in banking if you’re a good “project manager” and haven’t necessarily proven your ability to win clients or deals.

Buy-Side vs. Sell-Side: Exit Opportunities

The buy-side vs. sell-side categories are less relevant here because the exit opportunities depend mostly on your skill set and track record.

Put simply, it is extremely difficult to go from a “Deal” role into a “Public Markets” role or vice versa, regardless of whether that role is buy-side or sell-side.

You could move from either one into a “Support” role, but going from a “Support” role into one of these categories is also difficult.

If you look at the articles on this site about IB and PE exit opportunities, you’ll see they’re similar because the work and skill sets are similar.

By contrast, most “Public Markets” roles require a sharper but narrower skill set, so the exit opportunities are also more specific.

Many equity research professionals can win other research roles or join long/short equity hedge funds, but it’s much rarer to go into IB or PE roles.

And many traders can join global macro funds or groups that use trading-like strategies such as convertible bond arbitrage – but you won’t see them joining PE firms.

The bottom line is that if the exit opportunities are your top concern, you should try to start in a “Deals” role.

If you already know what you want to do and have no interest in keeping your options open, “Public Markets” roles are fine if you can win a good offer at a reputable firm.

The Buy-Side vs. Sell-Side: Final Thoughts

People casually toss these terms around online and in real-life discussions, but they’re a bit deceptive once you go below the surface.

Summing up everything above, the three most important points are:

1. Your specific job matters more than whether it’s “buy-side” or “sell-side” – Similar to the investment banking vs. private equity question, don’t assume that one offer is better than another just because it’s a “buy-side job.”
2. At the junior levels, the “Deals” vs. “Public Markets” vs. “Support” categories may be more relevant – This isn’t true for all aspects of the job, but it applies to the exit opportunities, skill set, and hours/lifestyle.
3. The buy-side compensation ceiling is higher, but it takes a long time to reach that ceiling – You won’t necessarily see a huge difference on a 3-5-year timeline, but if you stay in the industry for 10-15+ years and your firm performs well, you should earn significantly more at a PE firm or hedge fund.

If you understand these points, you should be well-prepared the next time someone starts using the buy-side vs. sell-side talking points – whether in real life or an online comment thread filled with angry rants and insults.

The post The Buy-Side vs. Sell-Side: Useful Categories in the Finance Industry, or Marketing Hype? appeared first on Mergers & Inquisitions.

When it comes to investment banking in Australia, it’s easy to find complaints online.

These complaints center on a few aspects of the banking industry there:

1. Recruiting – People often claim that it’s much more difficult to win interviews and job offers, that nepotism is widespread, and that there aren’t many “side doors” into finance.
2. Compensation – As with most other regions outside the U.S., you will typically earn less than in New York.
3. Exit Opportunities – Finally, there appear to be fewer traditional exit opportunities than in regions such as the U.S., U.K., and Canada.

There is some truth to these complaints, but they also miss the country’s positive aspects, which we’ll cover below.

Personally, I’ve spent about a year living/nomading in Australia.

When people ask me what it’s like, my answer is always the same: “It’s a mix of the U.S. and the U.K., with some added quirks.”

And that description also applies to the investment banking industry there:

Investment Banking in Australia: Top Banks

If you look at the Australian league tables, you’ll see many of the “usual suspects” at or near the top: Goldman Sachs, JP Morgan, Morgan Stanley, Citi, and Bank of America.

The big difference is that UBS is unusually strong in Australia, often ranking #1 or in the top 3-5 by advisory fees.

Also, “large domestic investment bank” Macquarie tends to rank well, often above the international bulge brackets.

The Big 4 Australian banks – ANZ, Commonwealth, NAB, and Westpac – are also very active, but primarily in debt capital markets, where they do more volume than the international banks mentioned above.

However, these banks have minimal involvement in M&A, equity, and other non-debt deals, so they’re perceived as less desirable in terms of careers, compensation, and exit opportunities.

Many “In-Between-a-Banks,” such as RBC and HSBC, also have a presence in Australia, but more on the capital markets side than M&A.

Most U.S.-based middle-market banks have little presence in Australia; you’ll see Jefferies but not many others.

Similarly, the U.S. and European elite boutiques do not have a huge presence in the country.

Of the EBs, Rothschild is the strongest if you go by deal volume, but you’ll see the likes of Moelis, Lazard, Qatalyst, and Greenhill as well.

Taking the place of many EB and MM banks in Australia are domestic boutique banks that are quite strong, surpassing some of the bulge brackets in terms of M&A deal volume.

The two best-known firms are Barrenjoey and Jarden, both of which were formed by former UBS bankers (among others).

Other names include Gresham, Luminis (affiliated with Evercore), Record Point, Clairfield, Allier Capital, Highbury Partnership, Grant Samuel, and J.B. North & Co.

Some of these act as “small Big 4 firms,” so they work on more than just M&A and capital markets deals.

Locations, Industries, and Deals

As you might expect, Sydney is the center of the finance industry in Australia, so most deal activity takes place there.

Many banks also have smaller Melbourne offices, and the few offices that exist in Perth are dedicated to the natural resources / mining sector there.

Traditional investment banks do not have much of a presence in other cities, such as Brisbane, Adelaide, Canberra, etc.

In terms of industries, materials, mining, and natural resources represent a significant percentage of all deals, and power & utilities companies are common M&A targets and equity issuers.

Refinitiv has a good breakout of the top “targeted industries” in M&A deals:

Outside of M&A, the industries are a bit more diversified.

Materials is still significant, and financials represents the highest percentage of total deal activity due to its high volume of debt deals.

No single deal type dominates the market if you look at the fee data:

Investment Banking in Australia: Recruiting and Interviews

While the top banks and industries differ in Australia, the recruiting process really is a mix of the ones in the U.S. and the U.K.

As in these other regions, you still need previous finance-related internships to have a good shot, and you should intern at a large bank and convert it into a full-time role for the best chance of breaking in.

If we use the U.S. recruiting process as a baseline, the key differences in Australia are:

1. Very Small, Fiercely Competitive Market – In the entire country, investment banks might hire fewer than 100 interns each year (~5-10 students at each bulge bracket bank and fewer at the boutiques). And thousands of students apply for these jobs, so your odds are not great – they’re worse than in the U.S., U.K., and even Canada.
2. Widespread Nepotism – The dearth of positions in Australia also means that nepotism is an even bigger problem than in other markets. In other words, expect a good percentage of the interns and full-time hires to have a family or other connection with the senior bankers, clients/prospective clients, etc.
3. Online Tests – Similar to the U.K., various psychometric tests are common in the first round of the recruiting process. You will still go through a HireVue or phone/in-person interview and multiple interviews after that, but the first step may be a bit closer to the U.K. process.
4. Superdays or Assessment Centers – Banks in Australia do not necessarily label the final step of the recruiting process a “Superday” or an “assessment center,” but it usually includes elements of both, such as back-to-back interviews, case studies, group presentations, and some evaluation in a social setting, such as a dinner or cocktails.
5. Types of Candidates – Most successful candidates come from the “Group of 8” universities (see below) and complete Commerce/Law degrees with top grades. Unfortunately, MBA and Master’s-level recruiting is almost non-existent, and if you’re an international student, your chances are low because it’s extremely rare for banks to sponsor international students.

If I had to put a number on it, I’d say it’s at least 2-3x more difficult to get into IB in Australia than in the U.S. or the U.K.

Is It Impossible to Break into IB in Australia as a “Career Changer”?

The biggest issue here is that MBA-level recruiting is not well-developed, so career changers lose a major pathway into the industry.

There is occasionally lateral hiring, but mostly for people who already have similar jobs: accountants, corporate lawyers, and management consultants.

Therefore, if you’re working in a completely unrelated field, Australia is probably one of the worst places to move into finance.

Your best option, in this case, is to move abroad to the U.S. or the U.K. and do a top MBA or Master’s degree there.

If you can’t do that, do not even bother with an advanced degree in Australia if you have no corporate finance experience because your chances of getting hired are close to 0%.

Instead, think about related options that might be a bit easier, such as working at one of the Big 4 firms, entering commercial real estate, or joining a sovereign wealth fund.

Investment Banking Target Schools in Australia and the Top Degrees

The “target schools” in Australia consist primarily of the Go8 universities:

• University of Sydney
• University of New South Wales
• University of Melbourne
• Monash University
• Australian National University
• University of Queensland
• University of Adelaide
• University of Western Australia

If you’re not going to one of these, getting into IB will be even more difficult.

Traditionally, banks have preferred the Commerce/Law dual degree, but you’ll also find bankers with just Commerce, Commerce/Engineering, Science/Commerce, and other combinations.

“Commerce” is a mix of Finance and Accounting, with options for actuarial studies, economics, marketing, and related areas.

Banks also prefer candidates who complete an “Honours” year in undergrad, which is nice since it gives you more time to win internships.

Universities in Australia use a grading system based on the “Weighted Average Mark” (WAM), which differs from the scales in the U.S. and the U.K.

In most cases, banks want candidates with WAMs above 75 – 80%, which is roughly comparable to a 3.7 GPA in the U.S.

Finally, extracurricular activities, such as business/investing societies, case competitions, and sports, also matter, and you’ll usually need 1-2 solid ones to win interviews.

UBS runs a famous case competition each year in Australia (the “Investment Banking Challenge”), which many successful candidates participate in.

Investment Banking in Australia: Salaries and Bonuses

In the interest of full disclosure, I have never found comprehensive, reliable data for IB salaries and bonuses in Australia across all levels.

I’ve found one site that does Australian corporate salary surveys, but it’s missing bonus data and numbers for senior bankers.

On average, though, you should expect a 10-20% discount to U.S. compensation because of a few factors:

1. AUD/USD Exchange Rate and a Weaker AUD – There have been periods where the AUD was trading at parity to the USD or even above it, but it has been at a 10-30% discount for most of the past decade.
2. Similar/Higher Base Salaries (But paid in AUD) – Similar to regions such as Canada, base salaries are close to ones in the U.S. but paid in AUD instead. In some cases, they may be slightly higher, which offsets some of the weaker exchange rate.
3. Superannuation Oddities – In Australia, all employers must pay ~10-12% of each employee’s earnings into a “superannuation” (pension) fund. You may benefit from this money far in the future, but you cannot access any of it today, and some compensation reports include it, while others ignore it.

Using the U.S. salary/bonus levels as a guide, you might expect something like the following ranges in Australia (converted to USD for comparative purposes):

• Analyst: $130K – $170K
• Associate: $200K – $400K
• VP: $425K – $600K
• Director: $500K – $700K
• MD: $600K – $1.3M

But, again, I have low confidence in these numbers, so if you have better data, feel free to share it in the comments.

IB Lifestyle and Hours in Australia

The overall culture varies widely from bank to bank, with some resembling sweatshops and others offering better work/life balance.

On average, you will probably work less than in New York or Hong Kong (London is debatable because the hours there are also better).

So, a “busy week” at the junior level might be 80+ hours, while a “less busy week” might mean 60-70 hours.

A few factors account for the slightly better hours/lifestyle:

1. Smaller Industry with Smaller Deals and Less Deal Flow – Smaller deals tend to be less stressful because there’s less urgency to close, and fewer stakeholders are involved.
2. Less Financial Sponsor Activity – Deals involving private equity firms tend to be more stressful because PE professionals work a lot and expect everyone else to work long hours as well. But there’s less domestic PE activity in Australia, and much of it is focused on asset-level deals in real estate and infrastructure (see below).
3. Less of an “Up or Out” Culture – It’s more common for bankers to start as Analysts and advance up through the ranks in Australia, so senior bankers don’t necessarily want to kill their junior staff with impossible workloads.

Investment Banking in Australia: Exit Opportunities

The bad news is that traditional exit opportunities such as private equity and hedge funds are scarce in Australia because there aren’t too many of these firms.

To quantify this statement, Capital IQ searches produce the following numbers of PE firms and hedge funds in the U.S., U.K., and Australia:

• Private Equity: U.S: ~7,200 | U.K.: ~1,000 | Australia: ~250
• Hedge Funds: U.S: ~3,200 | U.K.: ~500 | Australia: ~50

The private equity mega-funds all operate in Australia, but private equity recruiting is ad hoc and follows the off-cycle process; people also tend to move over a bit later, sometimes as Associates (like the London process).

There are also some larger domestic private equity funds, such as Pacific Equity Partners (PEP), BGH Capital, Quadrant, CPE, Crescent (more for credit), Archer, Allegro, and Advent.

By U.S. standards, most of these would be considered middle-market or upper-middle-market funds based on their AUMs and typical deal sizes.

However, the #1 point is that Australia is more of a center for private equity activity in real estate and infrastructure.

For example, Blackstone in Australia focuses on real estate, and many traditional funds, such as Brookfield and MIRA (Macquarie’s PE fund), also focus on asset-level investing.

There are even domestic PE funds dedicated to these sectors, such as CP2 in infrastructure and RF Corval in real estate.

And then there are the “superannuation funds,” such as Australian Super, that often focus on RE and infrastructure to aim for lower-but-theoretically-more-stable returns.

So, exit opportunities exist, but corporate-level private equity roles are much rarer than in the U.S. or Europe.

The most common paths for bankers in Australia include:

1. Stay in IB and move up the ladder.
2. Transfer overseas to work in IB or use it to win a PE/HF/other role.
3. Move into corporate development or corporate finance at a normal company.
4. Move to a real estate or infrastructure fund.
5. Complete an MBA or Master’s degree abroad to access more opportunities.
6. Win one of the few corporate-level PE roles or an even-more-elusive hedge fund role.

Investment Banking in Australia: Final Thoughts

So, considering everything above, is investment banking in Australia worth it?

Is there any reason to prefer it to other countries/regions?

And if you’re in another country right now, is there any reason to push for a transfer so you can work in Australia?

My answer to all three questions is the same: “Probably not – unless it is your only option.”

Australia’s main advantage over other regions is that it may be better for a long-term career in banking since the pace is a bit slower, advancement up the ladder is more common, and compensation is still good (though lower than in the U.S.).

These are nice benefits, but they mean nothing unless you can break into the industry in the first place – and breaking in far more difficult than in the U.S. or Europe.

If you’re currently in Australia and want to work in investment banking there, but you’re a non-traditional candidate, go overseas or forget about IB for now and aim for finance-adjacent roles.

And if you’re in another country but have your heart set on working in Australia, get a few years of experience at a large bank elsewhere and request a transfer – and hope that a spot is available, and your bank can sponsor you.

I have nothing “against” Australia and enjoyed my time there as a nomad / tourist / remote worker.

But visiting a place is quite different from working at a company there.

And if you can work in the U.S., Europe, Hong Kong, or even Canada, I recommend all of them as better starting points for an IB career.

But if you enjoy fighting uphill battles, feel free to ignore this advice and continue toiling away on your IB applications in Australia.

If you have enough family connections, you might even succeed!

The post Investment Banking in Australia: Impossible Barriers to Entry, or the Best Place for a Long-Term Finance Career? appeared first on Mergers & Inquisitions.

If you want to know how investment banker salaries and bonuses are trending, look at the discussion and news stories about compensation.

When you see stories about “outrageous bonuses” or “Wall Street greed,” you know it has been a good year for bankers.

And when most stories are about layoffs or people pushing back their planned retirements, you know things are bad.

That leads us to this salary and bonus update for 2023, which you can find below:

NOTE: All numbers are pre-tax for New York-based front-office roles and include base salaries and year-end bonuses but not signing/relocation bonuses, stub bonuses, benefits, etc.

As expected, these numbers are substantially worse than the 2021 numbers across all levels.

Base salaries mostly stayed the same, but total compensation fell by ~15% to ~50%, depending on your level.

Before you leave an angry comment, here are two quick notes:

1. Yes, the elite boutiques pay above these ranges. I am summarizing the data across most banks, which means that some firms pay above and below these numbers.
2. Yes, the compensation in other regions – anywhere outside the U.S. – is lower. We have a survey estimate this year for Asia-Pacific (see below).

OK, So What Happened to Investment Banker Salaries and Bonuses Last Year?

As I predicted in my last update, banks used COVID and the resulting disruptions, inflation, and panic as an excuse to raise base salaries while cutting bonuses.

Many people go into investment banking jobs thinking, “My base salary doesn’t matter much; I’ll earn another base salary with my year-end bonus!”

But this is wrong because banks base total compensation on a percentage of revenue, and revenue last year plummeted due to weaker deal activity:

It’s easy to interpret the much lower bonuses and deal activity as terrible news, but I would point out the following:

1) Return to Normal – M&A activity in 2022 mostly represented a return to “2016 – 2019 normal” after a very inflated 2021. Refinitiv has a good chart:

2) Hours / Lifestyle – Yes, deal activity was much lower… but the average hours were also down. Of course, bankers always exaggerate their hours, but quite a few at the Associate level and above were working 50-60 hours per week for $300-$400K in total compensation.

3) Bonus Distributions – While bonuses at all levels were down, Managing Directors took the brunt of the damage. Their compensation is always the most tightly linked to deal activity, so it’s no surprise that it fell by nearly 50% this year.

These developments raise many questions, such as:

• What will happen to bonuses in the future? Should you expect this level, or will 2021 ever return?
• Given these lower bonuses, are private equity and hedge fund roles now even more attractive?
• Is a plan like “stay in IB, grind your way up, and retire at age 40 with $10+ million” still plausible/realistic?

But let’s do a refresher on compensation and go level-by-level first:

Investment Banker Salary and Bonus Levels: The Main Components

For most bankers, there are five main components to “compensation”:

1. Base Salary: This is what you earn via paycheck or direct deposit every two weeks. These numbers tend to stay the same for years at a time and then move up substantially in a short period, as they did in 2021.
2. Stub Bonus: Since Associates graduate from MBA programs and start working in the middle of the calendar year, they receive “stub bonuses” for their first ~6 months on the job. These are typically low percentages of Year 1 base salaries, such as ~20-30%. Banks started doing this for Analysts, but most reverted to mid-year bonus payments in the summer (OK, “Northern Hemisphere summer”).
3. End-of-Year Bonus: You earn this after your first full year of work. Analyst bonuses are almost always 100% cash, but a percentage will shift to stock and deferred compensation as you move up. For example, Associates might get 10-20% deferred, VPs and Directors might get 20-30% deferred, and MDs might get 30-50% deferred.
4. Signing/Relocation Bonus: This applies to Analysts and Associates who graduate and accept full-time offers. This signing bonus might be around $10-$15K at the Analyst level and $50-$60K as an Associate.
5. Benefits: Finally, you’ll get health insurance, vacation days, and participation in the firm’s profit-sharing or 401(k) retirement plans. In places like Europe, this one mostly takes the form of “more vacation days” since healthcare is either “free” or much cheaper than in the U.S.

Investment Banker Salary and Bonus Levels: Analysts

IMPORTANT NOTE: The estimates above for Analysts are guesswork because most banks have reverted to paying Analyst bonuses in the middle of the calendar year.

So, I’m extrapolating from the 2022 mid-year numbers and the remaining few banks that pay Analysts at the end of the year.

The overall drop in total Analyst compensation wasn’t terrible – ~15% by my estimates – but the base salary increases in 2021 contributed to this not-so-bad drop.

Year-end bonuses for the few banks that still pay Analysts at year-end seemed to be 30-50% of base salaries.

The exceptions were the elite boutiques, which, again, often pay higher base salaries and higher bonuses.

We’ll see the full numbers in the middle of this year, but I wouldn’t be surprised to see some of these firms paying bonuses well above 50% of base salary.

But if you’re at a middle market or bulge bracket bank, I don’t see total compensation going too far above $200K unless there’s a huge increase in deal activity in the next few months.

Put simply, expect lower bonuses now that base salaries are higher.

Investment Banker Salary and Bonus Levels: Associates

Associate total compensation was down by 15-20%.

Base salaries still progress from $175K to $225K at most firms, so lower bonuses explain most of this.

To give you a rough idea of the total compensation numbers across levels at the large banks, factoring in deal flow and ranking/performance differences:

• Associate 1: ~$235K to $350K
• Associate 2: ~$285K to $400K
• Associate 3: ~$350K to $450K

There were some outliers, with a few elite boutiques paying Associates over $500K for the year.

Interestingly, some of the EB banks got to those numbers with higher-than-normal base salaries, and others did it with higher-than-normal bonuses.

Investment Banker Salary and Bonus Levels: Vice Presidents

VPs were also down by 15-20%, as base salaries stayed the same and bonuses tumbled.

Elite boutiques paid above the bulge brackets, with many BBs in the $500 – $600K total range and some EBs closer to $700K.

Some VPs almost certainly earned less than $500K as well, especially if they were in underperforming groups.

Investment Banker Salary and Bonus Levels: Directors

I have almost no data on this one, but if many MDs were down 50%, Directors were likely down by at least ~30%.

That still adds up to a lot of money (mid-to-high six figures), but it’s also a substantial drop from the previous year, when some Directors were above $1 million.

Investment Banker Salary and Bonus Levels: Managing Directors

As mentioned above, MDs “took one for the team” this year and experienced the biggest compensation drop of all bankers.

In previous years, I quoted ranges such as $1 – 2 million or even $1 – 3 million for MD total compensation, but this year, a fair number of MDs earned less than $1 million.

You can read that as: “Very few closed deals or much smaller closed deals.”

In short, they earned their high base salaries but often earned bonuses well below 100% of base.

Bloomberg reported it like this (admittedly, for Asia ex-Japan):

“On average, managing directors at banks including Goldman Sachs Group Inc., Morgan Stanley, and Bank of America Corp. have seen their total compensation drop by 40% to 50%, with payouts for senior MDs falling to between $800,000 to $1.5 million and for first-year MDs to $600,000 to $1 million, the people said, asking not to be named discussing internal matters.”

Regional Differences

The Arkesden and Dartmouth compensation reports are good sources for the numbers in London; unfortunately, I could not find anything updated for this year’s numbers.

However, I assume the standard 30% discount in London still applies, so you can reduce the levels above by 30% and convert them into GBP to get the numbers.

If you’re wondering about Asia, here’s a report from Executive Access that quotes the following numbers:

These numbers are on the low side – as Associates in the U.S. can clearly earn more than $350K.

So, I’m not sure how seriously you should take this one.

It seems well-researched, but it also implies that pay is much lower in Asia (possible) or that bankers in the U.S. are simply lying about their bonuses (also possible).

So, Is Investment Banking Worth It? Is It the Best Path a $10+ Million Net Worth?

These results are a good reminder that bonuses are far less predictable than most people think, especially in an unstable macro environment.

Many people now in the finance industry joined in the 2010 – 2019 period, which was comparatively quiet.

Deal activity and compensation rose modestly in most years, and supposedly “shocking events” like Trump and Brexit were quite mild compared to the events of 2020 – 2022.

In the future, I expect compensation to continue to fluctuate significantly from year to year, so you should expect less of a “straight line” in your career and earnings.

If you can perform well, these changes make buy-side roles more appealing.

The pay ceiling has always been higher, but with lower IB bonuses, there’s also more of a difference in average compensation.

I want to close by discussing one specific goal/dream: Many people plan to grind their way up in the finance industry and “retire early” at age 40 with a net worth of $10+ million.

If you consider the total compensation numbers above, taxes, and the cost of living, you’ll see that this is quite difficult to achieve in places like New York and London.

Just for fun, let’s go through the math of after-tax savings as an MD:

• Anywhere from 30% to 50% of your bonus will be deferred or paid in stock, so even if you earn a $500K base + $700K bonus ($1.2 million) as an MD, that’s more like $900K in cash, assuming a 40% bonus deferral.
• You’ll lose ~45% to taxes in a place like New York, bringing you down to about $500K.
• The cost of living is quite high, and you will no longer want to live in a studio apartment and eat ramen to save money. Of course, everyone has different spending patterns, but you should expect to spend at least $100 – $200K per year on rent/housing, food, activities, vacations, etc. In addition, many MDs are married and have kids, which also increases their expenses (look at the cost of private schools in NY).
• The bottom line is that even if you earn over $1 million as an MD, you will not save anywhere close to that in cash each year. A more realistic estimate might be $300K per year in savings +/- $100 to $200K depending on bonus/stock payouts, lifestyle, spending habits, etc.

If you also assume that you’ve saved up $1 million before becoming an MD and that you earn 5% per year on your savings, you could reach around $5 million after 10 years.

At a 10% rate of return, that changes to just above $7 million, and if you save closer to $500K per year, it’s more like $8 million, even at 5% annual returns.

Obviously, this is still a lot of money and would make you wealthy by most standards.

But my point is that reaching $10 million (or beyond) is less of a “sure thing” than you might think, especially since MD turnover is quite high.

Few people start at age 22 and work in the industry non-stop for 18 years; they might do an MBA, quit, or take other jobs in between.

If you want to reach this level more quickly or amass a lot more wealth than this, you’ll need some combination of:

• A lower cost of living or lower taxes (e.g., Hong Kong as a non-U.S. citizen).
• A side business or other investments that perform very well (difficult when you’re working 60 hours per week and traveling a lot).
• The ability to earn more than $1 – 2 million per year, such as in buy-side roles with higher pay ceilings or at certain boutique banks that pay you higher percentages for your closed deals.
• Or the willingness to quit finance, start your own company, and either sell it or earn a high income from it for a long time.

On the other hand, it is possible to become a multimillionaire if you stay in the industry for a moderate amount of time, which could be good enough for you.

It might not be “retire forever” money, but it could easily be “quit and do something more interesting” money.

The post Investment Banker Salary and Bonus Report: 2023 Update appeared first on Mergers & Inquisitions.

If you want to stimulate the urge to poke out your eyes and jump into a pool of lava, try searching for “Is Finance a Good Career Path?” or asking ChatGPT about it.

Most articles present generic details everyone already knows, such as “finance jobs pay higher salaries, on average.”

The missing point is that a “good career path” implies something about the industry’s prospects over the next 10-20 years.

If finance jobs pay a 50-100% premium to normal jobs today, but that falls to 20-30% in 10 years – as your career advances – that’s an important little detail.

I’m going to take a broader view than in previous versions of this article and focus on one big question:

Finance careers became highly desirable from 1980 through 2020. Will they continue to be as desirable or more desirable over the next 10-20 years (through 2040)?

Definitions: What is “Finance,” and What is a “Good Career”?

“Finance” could refer to dozens of careers: corporate finance at normal companies, credit analysis, commercial or corporate banking, private wealth management, investment banking, private equity, equity research, hedge funds, venture capital, and even roles like commercial real estate and risk management in the middle office.

But I will focus on roles where you advise companies on large deals or invest in companies (IB, PE, HFs, and VC) because that’s this site’s focus; addressing every possible finance career would turn this article into a novella.

A “good career” is harder to pin down, but I would define it as one where the benefits significantly outweigh the costs and where the benefit vs. cost profile stays favorable for the next 10-20 years.

• “Benefits” could refer to high compensation, good exit opportunities, networking potential, skill set development, or the rewarding nature of the work itself.
• “Costs” refer to the difficulty and time/effort required to recruit for and advance in the career.

Most people have traditionally viewed finance careers as high-cost but high-reward.

It’s extremely difficult to break in, but once you’re in, the compensation and exit opportunities make the initial effort worth it.

And yes, it’s difficult to advance, but the rapid growth in compensation as you move up more than offsets that difficulty.

Top performers can earn $1 million+ per year (or more), and even if you “get stuck,” your firm doesn’t do well, or you end up in a bad group/role, you could still earn in the mid-six-figure+ range.

Yes, these numbers are (much) lower outside the U.S., but no matter where you live, you could earn multiples of the median household income in your country.

But will this continue going forward?

To answer that, we need to consider the costs and benefits and how they might change.

The “Costs” of a Good Career: Recruiting and Advancement

At a high level, recruiting into finance roles hasn’t necessarily become “more difficult,” but it has become more annoying and error-prone due to:

• Much earlier start dates, especially for summer internships in the U.S. and on-cycle private equity recruiting once you’re in banking.
• The need for a sequence of internships/jobs, which heavily penalizes students who start late and professionals who want to change careers.
• The increasingly automated process, ranging from HireVue interviews to other online tests and recruiters being used to screen candidates.

Interviews have allegedly become more technical, but I think this change may be slightly overstated.

For example, I spoke with a senior banker involved with the recruiting process at a large bank a few months ago, and he mentioned that candidates’ technical skills have been getting worse – despite the plethora of courses, guides, and resources out there.

You need to be better prepared than in 2005 or 2010, so don’t think our now-quite-bad “400 question guide” from 2009 will save you.

You don’t necessarily need advanced technical training; it’s more about understanding the fundamentals well rather than just memorizing answers.

The advancement side is a mixed bag.

It’s probably a bit easier to move up from the Analyst level to mid-level roles at banks, but it’s more difficult and random to move into many desirable buy-side roles, such as private equity.

Factoring in everything, I don’t think recruiting and advancement have worsened too much, but they have become less favorable for non-traditional candidates.

Bankers are creatures of habit, so I’m not sure these areas will change significantly over the next 10-20 years.

If anything, recruiting might become less automated and switch to more in-person/on-site evaluations due to AI tools that could trivialize remote testing.

The more interesting parts of the “Is Finance a Good Career Path?” question are the benefits.

In other words, will the high compensation and exit opportunities continue?

What Happened to the Finance Career Path Between 1980 and 2020?

Finance jobs have always paid more than ones at normal companies, but this premium was much lower in the 1930 – 1970 period (source: “Since You’re So Rich, You Must Be Really Smart”: Talent, Rent Sharing, and the Finance Wage Premium):

This data is not great because the “financial sector” includes dozens of careers, but on average, the pay premium in the U.S. went from ~5-10% in 1978 to ~70%+ in 2018.

If you consider just investment banking jobs, it might be more like a ~50% to ~200% increase.

Finance careers were still desirable, but people were not killing themselves to win entry-level positions in quite the same way.

Everything started changing in the 1980s, and by the end of the decade, many students at top universities had “become interested” in finance

That accelerated through the 1990s and 2000s, survived the 2008 financial crisis, and has held up until today (the early 2020s).

A few major trends explain this shift:

1) Falling Interest Rates – Falling interest rates boost all asset prices (stocks, bonds, real estate, etc.) and make it easier to do deals because money is cheaper. Visual Capitalist has a great diagram illustrating this dramatic shift.

2) Deregulation and a Decline in Antitrust – With less regulation and antitrust scrutiny, dealmakers could put together huge mergers more easily, resulting in higher fees for bankers, more potential exits for investors, and more demand for entry-level workers.

3) Emerging Market Growth – As places like China grew rapidly and became manufacturing hubs, the West outsourced much of its manufacturing capacity, heavily favoring the managerial/professional class.

4) Favorable Demographic Trends – The world population grew from 4.4 billion in 1980 to 7.9 billion in 2020, which meant more consumers, companies, and markets. Some countries aged considerably (Japan), but huge emerging markets, such as India, remained quite young.

5) Technology and Automation – Automation in this period mostly affected jobs in industries like manufacturing that did not require university degrees. White-collar work was spared because tools like AI had not yet advanced enough to “replace” office workers.

6) Low/Stable Inflation and Energy Prices – After inflation surged in the 1970s, it relented over the next few decades and remained relatively low/stable, at least up until 2021, which led to more visibility for businesses and significant growth enabled by cheap energy (see: Germany and Russia).

Bankers today would still earn a good amount if they time-traveled back to 1970, but they would earn a lower premium over the median household income because these macro trends had not yet played out in full.

Why the Macro Environment is Now Much Less Favorable for Finance

Over the next few decades, I believe that most of these factors will reverse or diminish, which means that the “finance wage premium” will decrease by some percentage.

Interest rates are now higher than they were in the 2010s, but they’re still low by historical standards, and they cannot possibly fall from 15%+ to almost 0% once again.

Interest in regulation and antitrust is increasing in Europe and the U.S., which we’re seeing with the FTC’s more aggressive approach toward Big Tech and its blocking of mega-deals.

Demographic trends will be much less favorable in the future, with China’s population now declining for the first time in decades and rock-bottom birth rates in many developed countries.

Yes, Africa is still growing, but I don’t think that will offset the declines everywhere else.

And automation is now at the level where it can threaten white-collar jobs; even if it doesn’t “kill” jobs, it could reduce their future growth potential.

Finally, energy prices and inflation will be much more volatile going forward, partly due to the ESG craze and partly because traditional fossil fuels are also getting more expensive to extract.

And as demand for minerals to power the “energy transition” picks up, expect more geopolitical conflicts and controversies in mineral-rich regions.

All these factors mean less business visibility, lower growth potential worldwide, and more difficulty investing and executing deals.

And before you say, “OK, no problem, I’ll just go into tech instead!” remember that all these factors also negatively impact tech companies.

Everything on this list helped Big Tech just as much as it helped the finance industry, so expect tech to be negatively affected as well.

The Counterarguments and Why I Might Be Wrong

You might look at these factors and say, “OK, but central banks will cut interest rates eventually… and maybe regulation and antitrust will die down again… and inflation will eventually fall back to 2%.”

And who knows, maybe automation and AI tools will go the way of Napster and run into legal problems that delay their progress.

So, I might be wrong on some of these, but other trends cannot “go back to normal” anytime soon.

For example, the demographics of China and Western countries cannot change overnight; birth rates might increase eventually, but it will take a generation or more to see the results.

And even if a new technological breakthrough makes energy much cheaper and more reliable (e.g., nuclear fusion), it will take decades to see the full realization.

The bottom line is that I don’t think the finance industry will “crash,” but I also don’t think its prospects will improve over the next 10-20 years.

It could fare better than I expect, but I don’t think we will see a repeat of its growth in the 1980 – 2020 period.

My “2020 to 2040” Predictions

My far-in-the-future-and-likely-to-be-wrong predictions include the following:

• There will still be a finance wage premium, but it will fall to the ~40-50% level. It will still be higher than in the 1930 – 1970 period, but lower than its current level.
• The job market, deals, and bonuses will become even more cyclical, like what happened in 2020 – 2022, but repeated over different intervals.
• Smaller deals and asset-level acquisitions will continue, but larger deals ($1 billion+) will be blocked, delayed, or modified more frequently.
• Automation is hard to predict, but fields like IB/PE will be somewhat insulated due to their client/human-facing nature; it will probably act as more of a growth constraint.
• Real assets (real estate, infrastructure, and commodities) could outperform financial assets (stocks and bonds), as has been the case historically in inflationary environments.
• Firms that invest in or advise these types of companies could benefit, and the same goes for hedge funds that trade based on volatility, rates, global macro, or special situations.
• Although the average pay may decrease, the other benefits of finance careers, such as the exit opportunities, will continue to beat other alternatives.

OK, So What Does All This Mean for You? Is Finance a Good Career Path?

The short, simple answer is:

Yes, finance is still a good career path, but it will probably not be as good relative to other careers as it has been over the past few decades.

If you are at a top university or business school, have the qualifications, and start early, that’s fine.

The industry may not deliver what you expect, but you can always take the skills and move into a different role.

On the other hand, if you’re a non-traditional candidate, you probably don’t want to put all your eggs in the IB/PE/HF/VC basket.

The benefits may not outweigh the costs if you’re in this position, especially if you start recruiting at the wrong time.

Unfortunately, I’m not sure there’s a clear “better” alternative.

People may point to tech, renewables, biotech, space exploration, or various other fields, and they all have some advantages and disadvantages vs. finance, but I don’t think any one “wins” in all categories.

If you’re a non-traditional candidate and you still want to do something related to finance, I strongly recommend considering the “side door” and “back door” options – commercial real estate, corporate banking, corporate finance, etc. – rather than fixating 100% on IB roles.

Your end goal should still be to become “financially independent” via high income from a job, a side business, or your own company.

So, I’d still recommend the same steps as in previous years: get 1-2 finance internships early in university, see if the industry is for you, and if not, test other options.

Focus on gaining useful skills that are difficult to automate, such as human-to-human sales, and decide within a few years if you’re on the “career ladder” path or if you’d rather develop a side project, business, or another income source.

The main difference now is that it’s more important to diversify because the finance career path will be less predictable in the future.

I expect that “average compensation” figures will span increasingly wide ranges and fluctuate significantly from year to year, so you won’t know you’ll earn $A at Level X or $Z at Level Y.

And no matter how committed you are, you don’t want to depend on a single income source in a much more volatile environment.

So, start early – in your 20s – so that by the time you’re 30, 40, or beyond, you don’t find yourself “trapped” in one area without other options.

Even if you pick a single career, you want to be financially secure enough to feel comfortable quitting, taking a break, and doing something different.

Fortunately, finance is still a good career path for building up that nest egg.

The post Is Finance a Good Career Path? The 2023 Update appeared first on Mergers & Inquisitions.

Unless you’ve been hiding under a rock, you probably noticed the excitement, hype, and borderline panic when ChatGPT from OpenAI was released in November 2022.

If you haven’t yet created an account or tried it, you should – because it is quite impressive.

You can ask the tool almost any question, and it will generate text or computer code in response (with some restrictions).

The technology behind it is too complex to explain fully here, but it uses supervised/reinforcement learning and all the data on the Internet (as of 2021) to generate text based on statistical probabilities (Wikipedia has a good summary).

Some people have predicted that ChatGPT and similar artificial intelligence technologies will destroy all white-collar jobs, others have predicted massive changes but no job destruction, and others are still unconvinced by the technology.

This leads us to the possible impact on investment banking and other finance-related roles.

I’ve used ChatGPT over the past few weeks as I’ve been working on a macro package for a new version of our PowerPoint course (coming very soon).

I’ve also tested it for industry research and financial model outlines.

In some ways, it has been very impressive; but it has also wasted time and led me down rabbit holes.

So, I’ll take a “centrist” approach here and explain my findings and predict how it might affect recruiting, the job itself, and even education at all levels:

My Take on ChatGPT and Other AI Tools: The Short Version

If you ran this article through ChatGPT and asked it to write a summary, here’s what it might produce:

• Yes, it’s very significant, and it might make the same impact the Internet and mobile have made over the past few decades. But there are also many risks and ways it could go awry.
• AI will affect almost every industry that involves sitting at a computer and writing, designing, or coding; it may not “replace” humans, but it might limit job growth in certain areas.
• The more “client-facing” or “physical reality-facing” your job is, the less will change because ChatGPT cannot get drinks with potential clients or build a house.
• The more “precision” required by your work, the less you’ll be affected because AI tools are useful mostly in cases where 90% correct answers are fine. This is why human pilots still fly planes and why self-driving cars are… “more difficult” than many imagined (to be polite).
• Finance recruiting may shift away from automated tools like HireVue and online tests and move back toward in-person assessments or online tests where you need to share your screen with another human watching the whole time.
• AI will change the nature of the IB job to some extent, but its impact may be less than in fields like programming/marketing/design because of the job’s client-facing/emergency/meticulous nature.
• I predict many legal/regulatory/compliance battles as people argue about what is human vs. machine-written and whether AI tools can take their content from humans without citing their sources or referring people to the originals. Expect the amount of junk on the Internet to skyrocket.
• The real threat is the trajectory, i.e., the levels these tools might reach one day. For example, I don’t think any AI tool could write even a mediocre 1,000-page novel anytime soon. But a short story? A 10-page sales letter? An equity research report? Who knows?

I’ll expand on these points below, but I want to start with the results of my own testing:

My Results from Using ChatGPT for Finance and Coding-Related Questions

While I was working on various VBA macros in PowerPoint, I tried using ChatGPT to write and explain existing code.

It was useful to create a “rough draft,” but it kept making obvious errors that a human could detect in a second.

It functioned as a refined/faster version of Google search because I could type in natural questions and get the answers directly in text rather than poring through search results.

I found ChatGPT more useful for explaining code than for writing it.

Let’s start with a quick example of simple VBA code that it explained fairly well:

It also performed decently when I asked it to write simple functions:

This code is incorrect because it doesn’t check for various errors, such as the user not having 2 shapes selected, but it’s a decent start.

On the other hand, ChatGPT also led me down rabbit holes that went nowhere.

I won’t paste in the full dialogue and code here, but, in short: I was having some trouble with a “Copy and Paste Table Formatting” macro and asked ChatGPT for help.

It wrote code that seemed reasonable but which was based on functions that did not exist in VBA, so it solved nothing.

I pointed this out, and it kept suggesting alternatives that also didn’t work. So, it cost me time, and I eventually resolved it by writing code to copy and paste specific formats on a per-cell basis.

I also asked ChatGPT about the revenue drivers for a steel manufacturing company:

It’s missing a few things, such as CapEx to determine the production capacity, but it’s a decent response.

I then asked it to build a full Excel model, which it could not do, but it did offer a simple outline:

Again, it misses some critical factors, such as the relationship between CapEx, cash flow, and production capacity, but it’s decent if you have no idea where to start.

On the other hand, it cannot scan an investor presentation and 10-K and tell you what to do, and it cannot produce anything outside of text/code.

The Limitations of ChatGPT and Other AI Tools

Many people have pointed out that ChatGPT often generates coherent, impressive-sounding answers that are completely wrong.

As they’ve rightly observed, ChatGPT does not “understand” concepts in the symbolic/abstract way humans do; it simply predicts the next word in the sentence.

These are both problems, but another issue is that it cannot do the work.

In other words, even if you ask it to write code for you, it can’t insert the code into a production environment, run it, test it, find bugs, and tell you what needs to change.

It also can’t interview customers, find sources on the ground, or call a friend who knows the obscure details of a specific technical problem you’re facing.

Future versions of these tools might improve these integration issues, but I don’t think AI will be capable of “interviewing” humans in real life anytime soon.

How Will AI Change Investment Banking Recruiting?

First, it may become harder to contact people and get responses because they’ll be even more inundated with email spam generated by these tools.

Many finance professionals already get a lot of requests for informational interviews and advice, but most of these requests are poorly written and impersonal.

With ChatGPT, students will put in even less effort, but now their emails will appear coherent.

We’ve recommended email and even LinkedIn messages over cold calling, but that might change as the signal-to-noise ratio worsens.

If that happens, in-person networking via information sessions and weekend trips could become more important and effective.

Second, many methods banks have used to “automate” the recruiting process might backfire.

What’s the value of an online verbal or math test if people can type the questions into ChatGPT and get answers?

Even something like HireVue may become less useful as fake videos generated in real time become plausible.

I predict that banks and PE firms will move to more in-person, on-site tests and evaluations where Internet and phone use is disallowed.

So, expect more 60-minute LBO modeling tests and fewer “take-home” private equity case studies.

We’ll probably see the same thing happen in education, from elementary school to university.

The irony is that banks pushed to “automate” everything and make recruiting impersonal, but due to the advancement of technology itself, recruiting will become more personal.

Of course, I assume that banks care about recruiting high-quality candidates, which is debatable.

What About the Investment Banking Job Itself?

I tried to get ChatGPT to generate an actual Excel model, but it kept refusing:

But if Microsoft ends up investing $10 billion in OpenAI, you can bet that Office integration will be on its way soon.

That said, I’m not sure it matters because almost everything in banking is already based on templates and existing slides and models.

In other words, these AI tools do the same thing your VP or Associate does when outlining a presentation: combine content from other sources.

But in IB roles, most time is consumed not by the “outline” or “rough draft” but by the 78 revisions your presentation goes through as different people make changes.

And the current tools are bad at these types of refinements and small changes; it’s often faster to make the changes yourself than to explain what you want.

Even if they get to the level where they can cross-check every single detail and footnote in a 100-slide presentation, you can bet that bankers will still make humans review it manually.

In terms of IB work products, these tools will probably be the most useful for the confidential information memorandums (CIMs) and “teasers” used to market companies to potential buyers.

Most of these documents have long, boring passages that humans copy and paste from other sources.

AI tools could reduce drudgery by setting up the basic document and letting the human bankers focus on how to “sell” the company rather than finding all the boring parts.

If you’re wondering about higher-level roles in banking, such as Managing Directors, I don’t see these tools changing much anytime soon.

At the senior levels, it’s still a relationship-driven, client-facing business in which the clients pay banks millions of dollars for their full attention.

I don’t think the CEO of a $50 billion company would be satisfied if he asked for advice on an acquisition and the MD brought in a chatbot to answer his questions.

Some serious legal/regulatory/compliance issues might also prevent these tools from being widely adopted in banking.

For example, if the content in a CIM or teaser is generated based on leaked documents or random comments on Reddit, can banks be held liable if the information is wrong? Would OpenAI be subject to a lawsuit?

What would compliance departments say? And will they have to start scanning documents to find AI-generated text?

The bottom line is that AI and language models will impact IB and other finance roles, but I expect less immediate impact than in areas like the news, marketing/copywriting, digital art, and even routine programming.

I don’t necessarily think the technology will “kill jobs,” but it may constrain their growth.

The bigger threat for finance is an unfavorable macro environment, like the one we’re currently in.

Final Thoughts on ChatGPT, AI, and Finance Careers

I was listening to a podcast last week where the hosts predicted that ChatGPT would change the world more in the next 5 years than the Internet has in the past 30 years.

I agree this is possible, but there’s also a huge range of outcomes and, therefore, significant uncertainty.

If you work in an office doing “knowledge work,” all these tools must be on your radar ASAP.

But I don’t think you should avoid industries or careers due to AI because there’s no telling how everything will play out.

If you want to reduce your risk, aim for jobs with significant client interaction and tasks that require precision.

No job is “safe” from AI, and all industries will be affected by ChatGPT and its successors, but it’s premature to conclude that The Matrix will be the result.

On the bright side, these tools might reduce investment banking hours and let you handle those 3 AM emergency requests more easily…

…but they could also do the same thing Excel did decades ago: allow senior bankers to request more work in the same amount of time.

Either way, I’ll be eager to accept the new AI overlords if they can format Excel files more efficiently than my current macro.

The post Will ChatGPT and AI Kill the Investment Banking Industry and Other “Knowledge Worker” Jobs? appeared first on Mergers & Inquisitions.

Any discussion of the financial markets in 2022 needs to acknowledge one important fact upfront: it was the worst year for stocks and bonds since at least 1871.

Just look at the handy chart the Financial Times put together to see the horrifically bad numbers:

In January 2022, everything seemed quite frothy, with mega-deals happening left and right and crypto and equity prices still at high levels.

But then February came, Russia invaded Ukraine, and everything went downhill from there.

In March, the Fed finally started hiking rates, and in May and June, the pace accelerated; the federal funds rate ended the year in the 4.25% – 4.50% range, the highest level since 2007.

Inflation proved not-so-transitory, and it persisted in the high-single-digit range despite interest-rate increases in almost every major country.

Inflation is now decreasing, allegedly, but the percentage is still much higher than it has been at any time since the early 1980s (and that’s not factoring in the “methodology changes”).

Meanwhile, disasters kept emerging in the riskiest parts of the market, such as crypto (see: FTX, Celsius, etc.), SPACs, and growth/speculative stocks.

This year was so bad that it’s pointless to talk about “performance.”

A better question might be: “So, how much were you down by?”

My Answer: 11%, which was bad but considerably less bad than the S&P 500 or Nasdaq.

I’ll address several topics in this year’s update, starting with my current portfolio and performance stats and ending with some predictions that will probably be wrong:

My Current Portfolio and Performance Stats

Here it is as of January 3^rd, with differences vs. the start of 2022 in brackets:

• Equities: 31% [Down 7%]
• Short-Term U.S. Treasuries: 19% [Up 19%]
• Real Estate (Equity Funds + Owned Properties): 15% [Up 5%]
• Cash & Savings: 11% [Down 3%]
• Gold: 10% [Unchanged]
• Natural Resources & Commodities: 5% [Up 4%]
• Angel Investments: 5% [Up 1% – recording these at historical cost – see below]
• Silver: 3% [Unchanged]
• Real Estate – Senior Secured Loans: 1% [Down 2%]
• Crypto: 0.01% [Down 15.63%]

And my performance stats are as follows:

• 2019: +36%
• 2020: +38%
• 2021: +25%
• 2022: –11%
• Total Gain Over Pre-Covid Market Levels: +54%

On the one hand, I beat the S&P 500 and Nasdaq in 2022 and the S&P in two of the other three years.

On the other hand, I fell far short of my goal: being up by 10% in the “downside case.”

Also, as deal activity and hiring fell at banks, this business performed poorly for the year.

My plan to focus on the market or my “full-time job” didn’t work well because they were closely correlated over the past 12 months.

The main reasons I outperformed the S&P and Nasdaq in 2022 were:

1. Good-But-Not-Perfect Timing with Crypto – I sold most of my position in Q4 of 2021 into Q1 of 2022, missing the peak but still selling at a high enough level to earn a ~4x overall gain, mostly on purchases made in 2020 and some as far back as 2017 and 2013.
2. Real Estate and Precious Metals – Many of these assets stayed the same or even increased in 2022. For example, look at the rally in silver prices in the last two months of the year.
3. (Some) Value Orientation in Equities – I had very little allocated to growth/speculative stocks, which were hammered this past year. I was not as value-oriented as I should have been, but modest exposure still helped.
4. No Exposure to Bonds – As I predicted last year, bonds performed horribly in 2022 due to rising inflation and rising rates. I sold my U.S. Treasuries in March 2020, when rates fell to 0%, and didn’t buy in again until the end of 2022.

Overall, I consider my performance disappointing because I could have been closer to breakeven or positive for the year if I had done a few things differently (see below).

What I Changed Since Last Year

The smartest move I made in the entire year was selling most of my remaining crypto in Q1.

Unfortunately, I stupidly put the proceeds into a mix of equities and precious metals rather than keeping them in cash or just precious metals.

The article about the FTX bankruptcy summarizes my views on crypto, and I don’t have much to add here.

In short, it is not an inflation hedge, it’s not a store of value, and it’s not a real “currency.”

It’s a speculative risk asset that rises when monetary policy loosens and falls when policy tightens.

I currently have almost nothing in it – just a few coins I couldn’t sell via Coinbase – but I might start buying again if central banks revert to easy money.

Toward the end of the year, I also sold ~20% of my publicly traded assets and put the proceeds in short-term U.S. Treasuries (maturities of 1-3 years).

My logic here was:

1. With an inverted yield curve and interest rates that are still set to rise, there’s no point buying longer-term UST, such as 10-20-year bonds, when I earn more on shorter-term ones and assume far less interest-rate risk.
2. TIPS (Treasury Inflation-Protected Securities) were not an option because of the low purchase limits and other restrictions. And this is very much a short-term trade, so I don’t care much about 4-5% vs. 6-7% over a year or less.
3. If the markets continue to fall or stagnate, I’d rather earn a 4-5% yield on UST than nothing or a negative amount on equities.

So far, this change is in the “neutral” category.

Right after I moved ~20% to Treasuries, equities rose and then fell again, so I can’t say how this will play out.

Finally, the S&P 500 put options I purchased in 2020 expired worthless in December 2022.

This happened mostly because I got the timing very wrong.

I was expecting a 15-20% market correction to the S&P in 2020 or early 2021 due to a new covid variant, war, or some other disaster.

We did get a new variant, a war, and other disasters, but they all happened toward the end of 2021 into 2022, and by that time, the S&P had risen to much higher levels.

Meanwhile, the exercise prices on my put options were around 3,000 or less.

I don’t think it was “wrong” to buy put options as a hedge; my mistake was not doing it incrementally over time, always staying just below the current S&P price.

Options purchased in 2020 still would have expired worthless, but I would have earned something on most of the 2021 purchases.

Are Private Market Numbers Real?

One final note here: there seems to be a huge divergence between the public and private markets, and I’m not sure I buy it.

For example, Fundrise, which offers private real estate funds, claims these performance stats for 2022 Q1 – Q3 vs. public REITs:

Meanwhile, AngelList claims that the value of my angel investments increased so much in 2021 – 2022 that I’ve earned a multiple of just over 4x.

I think the actual multiple is probably closer to 2-3x, and I find it odd that they did not adjust down the market values, given what happened everywhere else in 2022.

With Fundrise, properties in some regions have held up better than others, but I’m not sure I believe their private funds outperformed public REITs by ~34%.

In many cases, these funds are delaying their mark-downs of private assets, so their values still seem inflated vs. the public markets.

My Not Great, Not Horrible Performance

I mentioned above that while I did outperform a few major indices for 2022, I also made some mistakes that explain my 11% drop.

Here’s my list of excuses explanations:

1. Lack of a “Fed Pivot” – I thought they would back off once the S&P had fallen by 10-15%, but they dug in their heels, surprising me and most others.
2. Emerging Markets and the Strong USD – Although I’m overweight value stocks, I also put ~1/3 into U.S. stocks, ~1/3 into non-U.S. developed markets, and ~1/3 into emerging markets. These other indices fell by about as much as the S&P 500 for the year, and the strong U.S. dollar further depressed gains.
3. Suboptimal Indices/ETFs – While I had a tilt toward value, many of the indices and funds I used were not as fully in the “value” category as they could have been.

As an example of this last problem, consider two “value” funds: the Vanguard International High Dividend Yield Index Fund and the International Value Fund.

They both invest in large-cap foreign stocks, but the “High Dividend Yield” fund was down by 7% for the year, while the value one was down by 12%.

This 5% difference might seem small, but these types of differences add up over a large portfolio (and no, the difference in dividend yields cannot explain the entire difference.)

Even if a fund is labeled “value,” you cannot assume it belongs there.

My biggest mistake was doing only cursory research on different funds, partially because I am spread out over many different accounts.

It would have been smarter to stick to a smaller group of funds – 5-10 total – and thoroughly learn the holdings and strategies of each one.

And when it became clear in May that the Fed would increase rates more aggressively, I should have immediately sold my public equities and put the proceeds in cash or dividend-focused funds.

Plans for My Future Portfolio and Thoughts on Everything Since 2020

There are “Glass Half Full” and “Glass Half Full” versions of my performance over these past few years:

• Glass Half Full: I’m still up over 50% over pre-covid market levels, despite spending almost no time managing my portfolio and making only occasional, targeted trades.
• Glass Half Empty: If I had been more aggressive in 2020 – 2021, I could have been up 100% or more.

These observations also bring up a broader issue.

Over the past 5-10 years, I’ve taken a “mostly passive” approach to investing by putting money into indices and automated solutions like Wealthfront, assuming that my time would be better spent growing this business.

Unfortunately, that assumption is no longer true, so I’ll need to change my approach.

These days, a ~10% change in my assets would dwarf a 10% change in my business income (order-of-magnitude difference).

And that assumes that I could even increase my income by 10% – which is difficult when the “finance careers / financial modeling” market is saturated, with dozens of copycat sites, plagiarized articles, AI-produced courses, etc.

After ~15 years of this, there are diminishing returns to spending 60-70 hours per week creating content.

I’m not going to shut anything down, stop writing, or sell the site, but I also can’t justify spending 99% of my working hours on this business.

So, my new approach will be:

1. Move most of my equity holdings to dividend funds. I expect these to outperform while interest rates are high(er) and the economic outlook is weak.
2. Research and invest in individual stocks and move some of my cash and UST into specific stocks over time (I may turn some of this into new articles as well).

My stock picks, such as Avalon Bay and Jazz Pharmaceuticals, have done well over their selected time frames.

But I didn’t put in enough money to see huge gains from these picks.

I aim to earn at least 5-10% for the year, even if the S&P and Nasdaq are down again.

If you locked me in a dungeon right now and forced me to predict the markets for 2023, I would probably say, “Still bad, but not as bad as 2022.”

I don’t see how interest rates could go up by another 4-5%, and even if there is a recession, that might be good news for the markets.

The Fed and other central banks will probably “pivot” eventually, but this could be further away than expected since the labor market is still relatively tight.

And when it does arrive, I don’t think it will be a reenactment of the March 2020 “pivot” or anything close to it.

Most likely, it will just be a modest reduction of interest rates over time.

In short, I’m not too optimistic, but I’m hoping that 2023 will be better than both 2022 and 1871.

The post 2023 Investment and Market Updates: A Review of the Worst Year Since 1871 appeared first on Mergers & Inquisitions.

We’re at the end of another year, and, in many ways, 2022 was quite disastrous.

Just look at the financial markets, the crypto meltdown, deal volume at banks, inflation, energy prices, Russia/Ukraine, supply chains, and the hiring environment in tech and finance.

All these factors resulted in one of my worst years in terms of both business performance and portfolio performance…

…but I found myself not caring that much.

Part of it is that I no longer obsess over the numbers like I used to.

But the other factor is that everything outside of work improved as countries re-opened and life approached “normal” once again.

I traveled more than I had since 2018, which was a welcome break from staring at screens for 14 hours per day.

So, although 2022 looked bad on paper, it was better than 2020 or 2021 in real life.

But let’s start with my favorite topic: “ranking” banks, schools, and maybe a TV series or three.

Bank, School, Dragon, and TV Rankings

Q: Now that the Credit Suisse investment banking division is being spun off, will CS no longer be considered a bulge bracket? What about the other European banks?

A: Once the spin-off is complete, I expect that Credit Suisse (or “First Boston”) will be classified as an elite boutique rather than a bulge bracket bank.

And since Michael Klein is taking over, I expect that M. Klein & Co. will move off the “up-and-coming elite boutique” list as it merges with CS/FB.

Despite its performance and risk management issues, CS still generates higher fees from deal advisory than UBS and DB (see below).

If CS is no longer a BB bank, I’m tempted to remove DB and UBS, but I’m not sure where they should go – which means they’ll probably stay for now.

And there are no doubts about Barclays, easily the strongest of the European banks, so it will remain.

Q: Based on banks’ 2022 performance, will any other rankings change?

A: I hesitate to change any rankings because 2022 was a strange year, as deal volumes fell by 50%+, and different banks reacted differently.

Looking at the data, the biggest Chinese banks, such as CITIC, have moved up, and some of the “In-Between-a-Banks,” like Wells Fargo and BNP Paribas, are now approaching bulge-bracket territory:

But I want to see what happens over the next 1-2 years before changing much.

Q: You finally gave in and “ranked” universities and business schools.

How do the non-business schools at the undergraduate target schools fit in? For example, what about NYU CAS or non-Wharton options at UPenn?

A: I would put most of these in the “low-target-to-semi-target” range, depending on the school and alumni network.

You can get into IB from outside the business school at places like NYU and UPenn, but you need to be more proactive and have a slightly better profile.

Q: What about the target schools outside of investment banking? Does the list vary for private equity and hedge funds?

A: First, note that “target schools” do not apply quite as readily to PE/HF jobs because these firms focus on hiring people with full-time work experience (though some firms have been moving into undergrad recruiting).

The list would be nearly the same for private equity, but you might see more variability for hedge funds.

Larger/established firms still care about brand names, but smaller/newer firms care more about performance than pedigree, similar to prop trading firms.

And in fields like corporate finance, much of the recruiting happens at schools that are “semi-targets” for investment banking, such as ones in the #30 – #50 range in the U.S.

Q: Forget ranking banks and schools. What about House of the Dragon vs. Rings of Power?

A: Did ChatGPT write this question?

If you watched both shows and have a functional brain, I don’t understand how you could think they’re even close to comparable.

To me, House of the Dragon was a 6 or 7 out of 10, while Rings of Power was more like a 3 or 4. It wasn’t the worst show I’ve ever seen, but it was a huge disappointment considering the franchise and the budget.

Putting aside all the controversy over the casting and other “woke” elements, the characters in RoP were bland and terrible, and most of the narrative, such as the “origin story” of Mordor, made no sense.

House of the Dragon had issues, such as jarring time skips and some actions lacking logical consequences (e.g., everything Criston Cole does), but I still cared about what was happening and wanted to see the next episode each week.

Q: Other TV recommendations/rankings?

A: Of the new shows/seasons this year, my favorite was the final season of Better Call Saul. The show was a bit slow in the early seasons, but it picked up over time, and the last few seasons are just as good as Breaking Bad.

Andor was also a pleasant surprise and easily the best series on Disney+, with the best writing in the Star Wars franchise since 1980.

I also continued to like Cobra Kai, despite the many contrivances and ridiculous plots, but the show needs to end before it gets even more ridiculous.

Internships and Jobs in the New, Terrible Macro Environment

Interest rates and inflation are up, and deals and bank hiring are way down. What could possibly go wrong?

Q: I’m set to start a BB summer internship next year. With news of hiring freezes, layoffs, and declining deal activity, how can I prepare to win an offer?

Should I learn programming in addition to Excel, PowerPoint, and accounting/finance?

A: All you can do is assume that banks will award fewer full-time offers to interns and plan accordingly (i.e., do some networking for “Plan B” options afterward).

Unfortunately, doubling down on technical skills is unlikely to help much.

You need some proficiency in Excel, PowerPoint, and accounting/finance to do the job, but learning real programming languages such as Python or R is overkill for an IB internship.

Save the technical prep until close to your internship start date (within 1-2 months), and focus on getting to know your group.

Knowing about the Associates and VPs to avoid and the ones to work with will be far more useful than knowing several extra Excel tricks.

Remember that you usually need at least one strong advocate and 0 “no” votes to win a return offer, and plan your time around that.

Q: I’m in a Big 4 Transaction Services group in London, and I want to move into IB.

But all my contacts at banks are saying that they’ve frozen hiring or are preparing to make cuts. How should I change my networking approach? Should I switch to our internal M&A advisory team?

A: This one depends mostly on how long you’ve been there.

If it’s 1-2 years or less, you could stay and see if things improve next year and start networking more aggressively then.

If you’ve been there longer than that, I recommend switching to the M&A group sooner rather than later so you get more relevant experience and don’t get “stuck” in TS.

Having “too much experience” is less of an issue in London because lateral and off-cycle hiring are more common, but there are still some limits, and it always helps to have experience that looks closer on paper.

Q: How will this new environment affect private equity?

On the one hand, fewer deals hurt their returns, but on the other hand, they also have a lot of “dry powder” (committed, unallocated capital).

A: My prediction is that it will be like what happened to many PE firms after 2008.

Yes, they still had plenty of capital, but the funds they raised in 2006 – 2008 performed poorly, and it took years for fundraising and large deals to recover.

Many PE firms bought companies at inflated valuations in 2020 – 2021, which will come back to haunt them over the next few years.

I don’t think PE firms will “fire” many Associates or Analysts, but hiring for new Associates will probably be down for a while.

Q: Does this new environment benefit anyone?

A: The simple answer is that it helps certain hedge funds that trade based on volatility, inflation, or commodities, such as global macro funds. And yes, we will cover commodity trading advisors (CTAs) soon.

I could also see some distressed PE firms and hedge funds benefiting, along with certain infrastructure and real estate funds because of their perception as “inflation hedges.”

Q: What about an updated “Is Finance a Good Career Path?” article?

A: It’s set for January. The short version is that finance is still a fine career, but I expect the outsized pay premium to fall over the next few decades.

The 2020 – 2060 period will be very different than the 1980 – 2020 period, as many of the key trends that boosted tech and finance will diminish or reverse (demographics, interest rates, energy, urbanization, anti-trust, emerging markets, etc.).

Twitter and Other Questionable Leveraged Buyouts

Q: You wrote a skeptical article about the Twitter buyout earlier in the year. Now that the deal has closed, what do you think? Is Elon Musk crazy/unstable?

A: My views haven’t changed much since April – it’s a tough deal because he paid a very high price for a company that will be difficult to turn around:

I was surprised that he fired almost everyone so quickly, but realistically, Twitter didn’t need anywhere close to 7,500 employees to operate.

But the problem is that revenue will also fall if advertisers flee, so even if the company’s margins improve, cash flow, EBITDA, etc., will all decrease in dollar terms.

The biggest problem, though, is that Elon Musk may not be the right person to turn Twitter around.

He’s great at building companies to tackle engineering challenges, such as producing EVs or launching rockets, but Twitter’s challenges are mostly social/legal/ethical.

There’s also something of a contradiction between “free speech” and “advertising revenue,” and I’m not sure how that gets resolved.

Q: Which other large LBOs done in 2022 will turn out poorly?

A: All of them?

Any of the ones on that list with “hung debt” (debt that could not be sold initially and had to stay on banks’ Balance Sheets), such as Citrix, will probably not do well.

But even deals struck before 2022, such as Athenahealth, may not turn out well because PE firms paid insane prices for mediocre assets.

I don’t have the EBITDA multiple for Athenahealth, but it appears to be in the 30-40x+ range for a company growing at 10% (or even declining), which makes the math quite difficult.

Q: Will Microsoft’s acquisition of Activision Blizzard go through? Should It?

A: I think the FTC will probably succeed in blocking it on anti-trust grounds, or it may win concessions that result in much different deal terms (such as guaranteed cross-platform games).

Whether it “should” go through is interesting because Activision Blizzard is a broken company, as anyone who plays games knows.

The culture is terrible, and some of its key franchises are not doing well, so Microsoft could improve the core business.

But Microsoft’s claim that it’s “#3” in games after Sony and Nintendo is also deceptive. While that is true based on market share, MSFT is also around 20-40x bigger by market cap and financial resources.

Unlike its competitors, Microsoft can afford to pour money into unprofitable ventures for years/decades, so most governments will be opposed to these huge deals.

Plans for Next Year

Finally, back to those questions that never go away…

Q: Will you write an updated article on IB in Singapore? What about Australia? India? China? Dubai?

A: There will be updated articles on IB in Singapore and Australia. I am aware of the issues with the current versions.

With other countries and cities, it depends on the overall traffic and interest level. I’m not going to update the old articles for smaller countries, but some larger regions might get new versions.

Q: What about new courses? Venture capital? Project finance / infrastructure? Distressed / restructuring?

A: We added an entire module on venture capital, early-stage companies, and SaaS modeling to the Financial Modeling Mastery (FMM) course earlier this year (see some early feedback below):

It has two full case studies to get you up to speed on the key topics (cap tables, valuation differences, pre/post-money, earn-outs, etc.).

I may also turn it into a separate course in the future, as the current FMM course feels too long and detailed, and these specialized topics should probably be separate.

Other plans for next year include:

1. New PowerPoint Course – This will arrive in January. It focuses heavily on VBA and macros (10+ hours of training) and will include a custom macro package for PowerPoint, an updated presentation database, 50+ editable templates recreated based on bank presentations, and more.
2. Insurance / FIG Additions – I plan to update the Bank Modeling course and add insurance models/valuations and case studies on fintech and asset management.
3. Project Finance / Infrastructure – This will initially be a $100 course based on short case studies, and the price will increase as the content expands.

Q: How long do you plan to write articles for this site? Is there anything new to say?

A: I started this site 15 years ago, so, yes, I am tired of certain topics by now (low GPAs, the CFA, etc.). And most of the core topics have been covered to death.

There is value in updating the articles and covering new areas, such as specific HF/PE strategies, but it is difficult to justify spending 10+ hours per week on it (and some articles take more like 30 hours to research and write).

Also, there’s quite a disconnect between this site’s readership and customers of the courses; in a recent promotion, hardly any sales came from emails sent to tens of thousands of newsletter subscribers.

With all that said, I would like to keep the site going, but the format and frequency are likely to change in the future.

So, I don’t expect to be writing everything for another 15 years, but the site should still exist in some form.

The post 2022 End-of-Year Reader Q&A: Bank and School Rankings, the “New Normal” Environment, Twitter and Other Bad Deals, and Plans for Next Year appeared first on Mergers & Inquisitions.

One topic that I’ve never fully explained on this site is the investment banking target school.

There are countless references to “target schools” in the articles and interviews, and we assume everyone understands the term.

But that’s not always the case, and it gets confusing because target schools differ by region (U.S. vs. Europe vs. Asia) and level (undergraduate vs. Master’s vs. MBA).

Also, there are “semi-target” schools sitting in between non-target and target schools, and no one ever explains the precise difference.

I will provide a few lists and guidelines here, but I want to take a slightly different angle and explain the “why” and the “what next” parts.

In other words, what do you do differently in the recruiting process if you’re not at a target school?

And why do banks focus so heavily on a few schools?

Will they continue doing this, or will recruiting change in the future?

Definitions: What are “Investment Banking Target Schools”?

Investment Banking Target Schools Definition: “Target schools” send significant numbers of their students into investment banking each year and have broad alumni networks in the industry; large banks focus their recruiting efforts on these schools and often reserve spots for a fixed number of students at each target school.

There are no exact numerical criteria because this definition is based on relative numbers and banks’ recruiting efforts more than absolute numbers.

For example, if University A has sent 500 students into investment banking roles over the past 5 years, accounting for 10% of total IB hires in the country, and University B has only sent 50, University A is a “target school,” while University B is more of a “semi-target.”

And if University C has sent 1-10 students into IB roles over this same time frame, it’s in the “non-target” category.

Banks may also visit target schools in-person to hold events and information sessions (though less frequently than they used to).

Until the late 2010s, banks also conducted first-round interviews on campus at target schools; these are now done mostly via HireVue.

People have counted the number of working bankers by school and created lists based on that; you can find one from College Transitions here.

But there are a few problems with lists based strictly on the raw numbers:

• They don’t account for student interest and demand. For example, universities like Stanford and MIT are clearly targets in the U.S., and many students from these schools could get into IB if they wanted to. But they tend to be more interested in tech, startups, consulting, and other non-finance roles.
• They don’t differentiate between undergraduate, Master’s, and MBA-level recruiting, and the numbers differ at each level.
• They may not be adjusted for class size. But, on the other hand, you may not want to adjust 100% for class size because that leads to results like Washington and Lee outranking NYU in the list above.
• They don’t account for recent vs. longer-term trends. For example, if a school hasn’t placed well in the past 2-3 years but still has thousands of alumni in the finance industry, should it be a “target”? I would say, “yes,” but some would disagree.

It’s still useful to look at the numbers, but they should only be a starting point.

And any ranking should be viewed as an approximate guideline because of all these issues.

Investment Banking Target Schools by Region and Level

Here are my rough lists for the three main regions by level:

• United States (NY and regional offices):
  • Undergrad: The Ivy League schools (HYP and UPenn (Wharton) more than the others), NYU (Stern), U Michigan (Ross), UC Berkeley (Haas), Notre Dame (Mendoza), Georgetown (McDonough), Northwestern, Duke, UVA (McIntire), Stanford, MIT, UChicago, and arguably the top liberal arts colleges (Williams, Amherst, etc.).
  • Undergrad Semi-Targets: WashU (Olin), CMU (Tepper), UNC (Kenan-Flagler), USC (Marshall), UT Austin (McCombs), Vanderbilt, UCLA, Emory (Goizueta), Rice, IU (Kelley), Boston College (Carroll), and some liberal arts colleges like Middlebury and Claremont-McKenna.
  • Master’s in Finance: MIT, Princeton (more of a quant program), UT Austin, UVA, Vanderbilt, WashU, Notre Dame, USC, Claremont-McKenna, and maybe a few others (best to look at employment reports here).
  • MBA: The M7 schools, Yale, Stern, Haas, Ross, Tuck, Fuqua, and possibly a few others in the top ~20.
• London / Europe (MBA recruiting is far less developed):
  • Undergrad: Oxford, Cambridge, LSE, UCL, Warwick, and Imperial (U.K.); names like HEC, ESSEC, ESCP, ICADE, ESADE, IE, Bocconi, St. Gallen, WHU, and Mannheim in the rest of Europe. See the London IB article for more.
  • Master’s in Finance: LSE, LBS, Imperial, Oxford, Cambridge, Bocconi, HEC, SSE, WHU, RSM, IE, CBS, ESCP, St. Gallen, ESADE, and a few others if you count S&T/AM recruiting (EDHEC, ESSEC, Dauphine, etc.).
  • MBA: LBS, HEC, INSEAD, Oxford, Cambridge, IESE, Imperial, IE, ESADE, Bocconi, and possibly a few others in the list above.
• Hong Kong / Asia (MBA recruiting is far less developed):
  • Undergrad: Everything on the U.S. and European lists, plus HKU, CUHK, HKUST, and Chinese universities like Peking University, Tsinghua, Fudan, Shanghai Jiaotong, Nankai, Nanjing, and Zhejiang.
  • Master’s in Finance: Many of these names will be from the U.S. and European lists, but you can add any HK/Chinese ones from above with programs.
  • MBA: Everything on the U.S. and European lists, plus HKU, CUHK, and HKUST.

Look at the investment banking in Canada article for a discussion of schools there.

In the U.S., many schools are in the “grey zone.”

For example, where do liberal arts colleges such as Williams, Claremont McKenna, Amherst, and Bowdoin fit in?

Or what about universities like Vanderbilt and Emory that are not “the top of the top” but still in the top 20-30 nationwide?

Some of these could go in the “target” category (e.g., Williams and Amherst), but I’ve placed most of the others in the “semi-target” list.

In some cases, they are targets for locations such as Houston but not for NY-based roles (many Texas schools fall into this category).

If a school is a target for one or two locations but not the “main hub,” it is more of a semi-target because these regional offices hire many fewer Analysts and Associates.

Finally, note that there are also schools in the “non-target but still recognizable” category, such as Rutgers, Fordham, and UW Madison.

If you go to a school in this category, you won’t get “I’ve never heard of your school”-type rejections from bankers.

But you’ll still have to be more proactive and network more aggressively than students at target and semi-target schools.

We could argue endlessly about the exact lists, but the key point is that you must approach recruiting differently based on your current or planned school.

You might not know if you’re at a “lower-tier target” or “semi-target,” but you should always know if you’re at a school that is unknown to bankers or one they’ve heard of.

How Do Investment Banking Target Schools Affect Recruiting?

First, you will have a very tough time recruiting for IB roles from a non-target MBA program.

There are many fewer Associate positions, and most of these spots are reserved for students from the top MBA programs.

You can still network aggressively and win Associate roles at boutiques and smaller/regional firms, but these roles tend to pay highly variable compensation, and your daily routine might be quite different (“sales” more than “execute deals”).

It may be slightly easier from a non-target Master’s in Finance, but it’s still an uphill battle.

The bottom line is that if you cannot get into a top MSF or MBA program, it’s not worth enrolling in a lower-tier program if your main goal is investment banking.

If you’re interested in other careers, such as corporate finance at a normal company or quant finance roles, these lists differ, and “non-target” programs might be fine.

At the undergraduate level, the main differences if you’re at a non-target include:

• GPA – To be competitive, you need perfect or near-perfect grades (3.8+ GPA). If this means taking easier classes or picking an easier major, do it!
• Major / Classes – A student at Harvard could major in Literature, History, or Gender Studies and still win an IB role, but you cannot. You need an accounting/finance major or something very close to it – or bankers might dismiss you.
• Work Experience – You need to have solid internships from early in university (ideally, Year 1 or the summer after Year 1) because recruiting starts so early. It starts a bit later in Europe and Asia, so the dates might be slightly delayed there.
• Networking – You’ll have to be more proactive in contacting alumni, setting up informational interviews, and conducting weekend trips.
• Targeted Firms – You will have a higher chance of breaking in if you target middle-market banks, “In-Between-a-Banks,” and boutiques.

Let’s say that Student A is at an Ivy League university but decides on investment banking late in the process (in the middle of Year 2).

Student A has a 3.5 GPA in a challenging degree program, and she has one previous finance-related internship at a tech company.

If she is motivated enough, Student A could put a good effort into networking and interview prep and walk away with an IB summer internship offer for the next year.

On the other hand, if Student B has similar stats but is at a non-target university, such as something outside the top 100 in the U.S., she would have a much harder time winning an internship offer.

To be more competitive, Student B would have to:

1. Start Much Earlier – This means internships starting in Year 1 or the summer after and networking from around the same time (the start of Year 2).
2. Earn a Higher GPA – Bankers might be skeptical of a 3.5 GPA from a lesser-known school, even in a challenging major such as math or engineering.
3. Get Better Work Experience – Ideally, this means 1-2 internships directly in finance, such as at a boutique bank or venture capital firm. You don’t want to rely on “loosely related experience” if you’re at a non-target.

You might look at this list and say, “OK, but how could anyone know their plans so early in university? Should I transfer to a better school if I get a late start?”

Unfortunately, transferring to a better university has become less feasible because recruiting starts so early.

If you’re already in Year 2 at a non-target, it’s probably not worth it.

But if you figure out your plans early, and you can transfer right after Year 1, it’s worthwhile because you can immediately tap into a better alumni network at the start of Year 2.

Do Investment Banking Target Schools Matter in Real Life?

The best answer I can give is “yes, but less than bankers think they do.”

There is a difference between the average student at Harvard or Oxford and the average student at Unknown Community College X.

The student at the elite university is more likely to burn the midnight oil, pay attention to small details, and understand the required accounting/finance/technical skills.

That said, there’s a much smaller difference, if any, between the average student at an elite university and one at a good state school or “semi-target.”

Like organic chemistry for medical school admissions, target schools function as a filtering mechanism for banks.

It lets them reduce 50,000 applicants to 500 interviews rather than 5,000 interviews.

Will banks continue to recruit so heavily from target schools in the future?

Students at the top schools have become more interested in fields like consulting and tech over time, so banks might change their focus a bit.

Also, newer elements of the recruiting process, such as HireVues, online tests, etc., allegedly level the playing field since everyone must complete them, regardless of their university.

But let’s be real: At places like Wharton, a plurality of the students, if not an outright majority, still wants to work in finance.

As long as that’s true, banks have no reason to spend time and money recruiting at lower-tier schools.

For this system to change, something dramatic would have to happen, such as:

• Banks go from hiring ~2,000 IB Analysts per year in the U.S. to ~4,000, so they need to go beyond the top schools to find enough candidates.
• Interest in finance at the top schools wanes, and a new industry rises to take its place (Biotech? Space exploration? I don’t know). So, banks need to expand their set of target schools.
• The university system is displaced by another credentialing mechanism, online training/certificates, or trade schools.

These changes are possible, but I don’t think they’ll happen anytime soon.

And the current system is engrained with the “lock-in” effect from all the bankers who attended target schools.

Target School Takeaways

You most likely found this article and skipped to the lists of investment banking target schools to check if yours appeared there.

I get it; it’s fun to look up rankings and debate the S tier vs. A tier vs. B tier vs. C tier.

But the main takeaway is that you need to consider your school in relation to your region and career goals.

For example, if you attend a university like Texas A&M or Rice, and you want to stay in Texas and work in IB in Houston, you’re completely fine.

And if you’re more interested in other careers, such as corporate finance, the Big 4 firms, or even business valuation, you don’t “need” an elite university.

Attending a target school makes the biggest difference if you want to work in investment banking or private equity at one of the largest firms (bulge bracket banks or PE mega-funds) in a major financial center.

Outside of that, a better university still helps, but more so for your first job and less for future jobs.

If you’re at a non-target school, transferring to a target or semi-target could work, but only if you do so early (after Year 1).

If it’s too late to do that, and you’re also late for the normal recruiting cycle, a more realistic path is to win roles in related industries, such as commercial/corporate banking, valuation, corporate finance, etc., and use those to move into IB via lateral hiring.

It’s a more roundabout path, but it might also let you hit your target.

The post Investment Banking Target Schools: Lists by Region and What to Do If You’re Not at One appeared first on Mergers & Inquisitions.

The first thing to understand about investment banking in Hong Kong is that it’s unlikely you’ll ever be able to work in investment banking in Hong Kong.

In the 1990s and 2000s, bankers from other regions could transfer to HK or start their first jobs there without a strong connection to the region or Asian language skills.

You could find senior finance professionals who had lived in HK for decades and never bothered to learn Mandarin (or Cantonese).

But since HK’s handover to China in 1997 and the ascent of Xi Jinping in China in 2012, things have changed dramatically.

Hong Kong is still an important financial center, but banks there now focus almost exclusively on mainland China in terms of deals, clients, and new hires.

If you are from China and want to earn a lot, HK is the place to be.

But if you don’t fit this profile, you probably want to re-think your plans:

Investment Banking in Hong Kong: Top Banks, Industries, and Deals

As in London, the “top 3” bulge bracket banks – Goldman Sachs, Morgan Stanley, and JP Morgan – have traditionally advised on the greatest volume of deals in HK.

Others, such as Citi, Credit Suisse (or whatever it is spun off into…), and Bank of America, also perform well but tend to rank below GS/MS/JPM in terms of pure deal volume.

The main difference with these large Western banks is that the European banks tend to be relatively stronger.

For example, UBS is still quite strong in Hong Kong and greater Asia, while it has faded elsewhere; the same applies to firms like CS and HSBC.

If you look at deal activity specifically in China, the clear leaders are the big Chinese banks, which advise on a far greater volume of deals than Western banks.

Important names here include:

• China International Capital Corporation (CICC)
• CITIC (formerly “China International Trust Investment Corporation”)
• Huatai Securities
• Industrial & Commercial Bank of China (ICBC) (Strongest in DCM)
• Bank of China (mostly DCM)
• China Securities
• Guotai Junan
• Haitong Securities

And if you look at just the DCM league table, you’ll find many more Chinese banks.

Among these firms, the top two across all products and industries are CITIC and CICC, which are effectively the “Goldman Sachs and Morgan Stanley of China.”

The elite boutiques tend to have a small presence in HK; names like Evercore and Rothschild occasionally show up in the league tables, but they’re even less of a factor than in London.

The same applies to the U.S.-based middle-market banks: some have offices and operations in Hong Kong, but it’s usually not their core focus.

Most Asian regional boutiques are headquartered in China, but a few names specifically based in HK include Somerley Capital and The Anglo Chinese Group.

Larger, diversified banks tend to be more prominent in Hong Kong because it’s more of a center for capital markets deals than for M&A.

Traditionally, Hong Kong was viewed as an “IPO hub,” with firms from mainland China and other emerging markets going public there due to favorable taxes and regulations.

The breadth of deals has widened over time, but you are still more likely to get equity and debt experience than in-depth M&A experience.

Many of these countries have grown faster than the rest of the world, making capital markets activity more essential.

But it’s also because there’s often more overlap between different bank divisions in Asia.

For example, many private banking clients might be interested in buying shares in an upcoming IPO, which leads to cross-referrals; these wealthy clients could not participate in a standard M&A deal in the same way.

There isn’t a particular industry focus in HK since China and other Asian economies are diversified, but a few prominent groups include tech / TMT, consumer retail, and real estate.

Investment Banking in Hong Kong: Recruiting and Interviews

The recruiting process in Hong Kong is closer to the one in London than the one in the U.S. or Canada.

Expect internship applications that open the summer before the internship, online tests, a HireVue or first-round phone interview, and an assessment center if you pass these screens.

Assessment centers are similar to the ones in London, with a mix of individual interviews, group exercises, presentations, and in-tray/e-tray (to prioritize and respond to emails).

The biggest difference is that they almost always give you a translation exercise, where you must translate a news article from Chinese to English or do the reverse.

A typical set of tasks for an assessment center in HK might look like this:

• Math Test (30 Minutes) – The calculations are basic (high-school math); this is usually a “speed test.”
• Language Test (30 Minutes) – The idea here is to filter out people who cannot read and write Chinese.
• Case Study (1 Hour and 15 Minutes) – They might present a simple M&A or financing scenario (“Should Company A acquire Company B, C, or D?” or “Should Company A raise Debt or Equity?”) and give you 30 minutes to prepare, 30 minutes to present, and 15 minutes of Q&A afterward.
• Three Back-to-Back Interviews (30 Minutes Each) – Interviews tend to be “moderately technical.” You need better technical skills than in London, but the questions are far less intense than those in Germany.

A top university, good grades, and previous internship experience still matter, but most junior bankers are Chinese citizens who studied abroad.

There are occasionally also candidates from Hong Kong, but most interviewees are now from China with education in the U.S., Canada, Europe, Australia, or HK.

Anyone not from China or HK almost always covers companies in Southeast Asia, Korea, or other emerging markets that have clients looking to go public in Hong Kong.

The Mandarin Language “Requirement” in Hong Kong

In ~90% of cases, you need to be a native speaker of Mandarin if you want to work in investment banking in Hong Kong.

Pitches to Chinese companies are presented in Chinese, documents and memos are written in Chinese, and most client companies have no English speakers, so it’s impossible to do the job without knowing the language.

Note, however, that even if you’re a Mandarin speaker from somewhere like Singapore or Taiwan, you still don’t necessarily have a great chance of winning HK-based roles.

Yes, the language is “similar,” but the culture is quite different, and companies based in mainland China almost always want to deal with bankers from their country.

Occasionally, roles appear for speakers of other Asian languages, and sometimes they don’t even care about your language abilities if you have some other sought-after skill.

But you shouldn’t bet your future on finding such a role because it’s unpredictable, and demand varies wildly.

If you want to work in Asia but you’re not Chinese, better options include:

1. Apply to Singapore – Language skills still help, but due to the Southeast Asian focus, you don’t necessarily need to know Chinese. And you’re more likely to find a job without any knowledge of SE Asian languages.
2. Apply to Non-IB Roles – For example, you don’t need Mandarin to do sales & trading, and you might be able to work at certain hedge funds without it.

Investment Banking Target Schools for Hong Kong-Based Roles

Since most junior bankers in HK come from China and study abroad for university, the list of “target schools” includes the top ones in the U.S., U.K., HK, and China:

• U.S.: The Ivy League schools + others at the same level, such as MIT, Stanford, Berkeley, etc.
• U.K.: Oxford, Cambridge, LSE, UCL, Warwick, and Imperial (see the IB in London article for a broader European list).
• HK: Hong Kong University (HKU), Chinese University of Hong Kong (CUHK), and Hong Kong University of Science and Technology (HKUST).
• China: Peking University, Tsinghua, Fudan, Shanghai Jiaotong, Nankai, Nanjing, and Zhejiang.

You can still get into IB in Hong Kong without attending one of these schools, but you’ll need to start earlier and network much more aggressively.

For HK-based roles, it helps to be on the ground so you can meet people directly rather than doing everything online.

Doing an exchange program in the city or spending a semester abroad validates your interest and lets you network more effectively.

Investment Banking in Hong Kong: Salaries, Bonuses, and Taxes

Investment banking salaries and bonuses in Hong Kong are similar to the levels in New York, perhaps with a small discount depending on the bank and group.

This makes Hong Kong unique because it doesn’t have the same compensation discounts seen in regions like Canada, the U.K., and Germany.

But the true allure of Hong Kong for many foreigners is the low tax rate: the top rate is only ~15% vs. ~45%+ in NY, London, and mainland China.

Yes, the city is expensive, and rents are ridiculous for the space you get, but it’s no different from NY.

But the much lower tax rate means you’ll save significantly more when you work in Hong Kong, especially as you move beyond the junior levels of banking.

This lower tax rate is less beneficial for U.S. citizens and green-card holders since they must still file and pay U.S. taxes on worldwide income.

However, U.S. citizens can list HK taxes as a foreign tax credit and not pay anything on the first ~$120K of foreign income, so they still end up paying less.

So, you won’t get the same 15% top rate if you’re a U.S. citizen, but you’ll still reduce your taxes and owe far less than you would in NY or California.

Historically, some banks have also provided a housing allowance if you’re interning in Hong Kong or you’ve transferred there from another office, but it’s not clear how common this is.

If your firm offers this allowance, it’s a nice bonus that makes the compensation picture even more lucrative.

The Lifestyle and Hours as an Investment Banker in Hong Kong

And now we arrive at a major downside of investment banking in Hong Kong: the hours are terrible.

Bankers always exaggerate their hours, but it’s safe to say that HK is at least as bad as NY, if not worse: expect regular 85-90-hour workweeks as a junior banker.

A few factors explain the hours:

1. Face Time – While banks in Western countries have tried to move away from “face time” (i.e., being in the office to show you’re in the office), it’s still a major issue in HK and at many Asian companies (China is even worse).
2. Marketing and Pitching – You will be doing a lot more pitching than in NY because bankers in Asia tend to chase many random clients without necessarily having a long history or existing relationships, as they would in other regions.
3. “Random Client Work” – It’s not unusual for clients to make requests that have nothing to do with financial analysis. For example, they can ask for random personal favors, see if one banker can go on-site for a while, etc.

People sometimes counter by saying, “Sure, the hours are bad, but it’s easy to travel to other parts of Asia! Since weekend trips are so convenient, HK is a great place to work.”

This might be true at higher levels or for non-IB roles, but as an Analyst, you’re unlikely to have enough consistent free time to take advantage of these travel possibilities.

Investment Banking in Hong Kong: Exit Opportunities

As a major financial center, Hong Kong has plenty of private equity firms and hedge funds.

All the mega-funds have a presence, so you’ll see the likes of KKR, Blackstone, Carlyle, and more; most also have offices in mainland China.

Some upper-middle-market or “large but not mega” funds also operate in HK, but once you go below this size range, you’ll see fewer Western PE firms and far more China/Asia-specific ones.

Similarly, all the largest multi-manager hedge funds operate in HK, but you’ll see fewer HFs from other countries as fund sizes decrease.

A few Asia-specific PE firms in Hong Kong include Baring Private Equity Asia (now owned by EQT and known as BPEA EQT), China Renaissance Capital, ChinaVest Private Equity, CITIC Capital, Hillhouse Capital, LionRock Capital, and PAG.

Key differences include:

1. Growth Equity / Venture Capital Focus – Many of these firms operate more like growth equity firms or VCs due to the high growth rates in many Asian countries.
2. China Focus – Most private equity and venture capital funds in Asia are in China, with HK at a distant #2. So, even if you are physically in HK, you’ll be working on mostly Chinese deals.
3. Slower / Unstructured Recruiting – Similar to the process in London, buy-side recruiting in HK is less structured, and hiring happens on an “as-needed” basis.
4. Smaller Market – A Capital IQ search produces a few hundred PE firms and 100-200 hedge funds in Hong Kong, but there are thousands of PE firms and hedge funds in the U.S. and U.K. The numbers change if you include firms in mainland China, but it’s still an order-of-magnitude difference.

Outside the traditional IB exit opportunities, you could always go the corporate route or transfer to another office.

However, many of these corporate development/finance roles are based in the company’s home country, which means you won’t necessarily stay in HK.

I would rate Hong Kong below New York and London for exit opportunities but ahead of places like Canada and other European countries.

How the CCP Takeover of Hong Kong Affects the Finance Industry

Finally, we need to address the elephant in the room: how China and the Chinese Communist Party (CCP) have taken over Hong Kong and asserted their authority there, despite promises of “one country, two systems.”

The National Security Law passed in 2020 has allowed China to crack down on free speech, free press, and free association (i.e., protests) and has also driven many foreigners and foreign investors out of the region.

The net effect is that Hong Kong is an increasingly unpleasant place to live in unless you’re a hardcore CCP loyalist.

On a practical level, these rules and restrictions do not affect you much if you’re a junior banker working all the time.

It’s not as if you’ll work in IB and stage protests or launch a newspaper in your free time.

And if you’re only in the city for 1-2 years, you can ignore politics, keep a low profile, and leave when your time is up.

But in the long term, the CCP takeover will hurt the city significantly:

1. Hong Kong Will Become Less Appealing for Long-Term Careers – For example, if you’re from a Western country, do you want to have a family or raise kids in such an authoritarian place? And if you’re from China, do you want to return to this type of environment?
2. Hong Kong Will Become Even Less of an Asian Gateway and More “China Central” – There will be fewer opportunities to work on deals in the rest of Asia, and even more deal activity will shift to places like Singapore.

Investment Banking in Hong Kong: Final Thoughts

So, if you have the chance, should you work in investment banking in Hong Kong?

As with any other regional decision, it depends on your background and goals.

It’s best for Chinese citizens educated abroad who want to maximize their earnings.

If you know the culture and language and want to work and earn a lot, HK is great.

But for everyone else, I would say, “Look before you leap.”

Considering the disadvantages, such as the longer hours, the equity/debt focus of many deals, and the reduced exit opportunities, it’s tough to rank HK above London or NY for the average Westerner.

Sure, the after-tax compensation is higher, but that makes a bigger difference as you progress to much higher salary/bonus levels as a senior banker.

If you’re not from China, it might still be worth working in Hong Kong for ~1 year if you start in another city and you get the opportunity to transfer (i.e., no language requirements).

You will learn something, get different deal experience, and make your resume more attractive.

But I’m not sure it’s worth staying beyond that unless you have a really good reason to do so.

If the CCP loosens its leash or HK becomes more of an Asian hub, that might change – but I’m not holding my breath.

The post Investment Banking in Hong Kong: The Financial Center of the Future World Order? appeared first on Mergers & Inquisitions.

Your first thoughts reading this article might be, “Wait a minute, why are ‘private equity exit opportunities’ a topic? Who would ever leave this industry? And what could be better?”

Good questions.

But despite the hype, people do leave private equity all the time, whether it’s voluntary or forced.

So, as with every other career, it’s important to understand your exit options.

Note that this article refers to exits after full-time roles at the Associate level or beyond.

If you’re doing a PE internship or a PE Analyst program, you already know the most likely path: work at a bank and then move back into PE.

Why Leave Private Equity?

The short, simple answer is that you might work in the field for a few years and find out it’s not for you.

For example, maybe you have to do a lot of “sourcing” (cold calling), which you dislike.

Or you find it boring to look at deals constantly but reject 99% of them.

Or you don’t like the required documents, memos, and process work.

Or you like doing deals but not monitoring companies for years and solving their problems.

Yes, the work is more interesting than banking in ~99% of cases, but if you do not like analyzing companies and working with numbers, you will still not like it.

And while the salary + bonus + carried interest levels are high, you probably don’t want to stay in a job you dislike for 10+ years just to make money.

But even if you like the work, you might also be forced out, either formally or informally.

For example, you might get a bad performance review, and the firm might state that you will not be able to advance because you lack qualities X and Y (e.g., communication skills).

Or they might drop hints that you won’t be able to advance and suggest going to business school or joining a portfolio company.

Most people who join at the Associate level do not advance to the top, so an exit is more likely than not.

Private Equity Exit Opportunity #1 (Sort Of): Do an MBA and Return to Private Equity

If you leave for an MBA program voluntarily, it’s not a real “exit opportunity” because you’re taking a break, networking, and returning to the same industry.

This is more of an exit if you get forced out and you want to use the MBA to switch industries or firms (e.g., a smaller firm or one with a different industry/deal focus).

If you already have PE experience, you don’t “need” an MBA to switch to another firm, but sometimes it helps tell your story more effectively.

For example, you may not have to spend as much time explaining why you quit your first firm; you can just say that you wanted to go to business school for reasons A, B, and C, and you were open to different options afterward.

The main downside is that this is a very expensive exit if you’re paying for the degree, and the benefits are questionable if you stay in the same industry.

An MBA “exit” usually makes sense only if you use the degree to move into a different career.

Private Equity Exit Opportunity #2: Join a Hedge Fund

The logic here is simple: you like investing, but you don’t like all the process work, documents, coordination, and monitoring that comes with PE.

You want to spend your time finding mispriced companies and assets, betting on them, and seeing your results in real time rather than waiting 5-7 years to sell.

You still get paid well, but you use a different skill set.

As discussed in the hedge funds vs. private equity article, this path is surprisingly common because many people fall into this category.

But there are some downsides:

1. You’re not the best fit for all fund types – For example, you’d be a good candidate for long/short equity, merger arbitrage, and activist hedge funds, and possibly also credit and distressed funds. But you wouldn’t be competitive for global macro or trading-oriented strategies like convertible arbitrage.
2. You become more specialized – Working at a hedge fund makes you “sharper but narrower.” You get good at making money from mispriced assets, but you lose some of the soft skills required in PE, which means pursuing the other exit options on this list can be difficult.
3. Compensation is highly variable – Yes, the ceiling at the top levels is similar, but there’s far more variability at hedge funds. Even if you perform well as an individual, you might earn less if your fund has a bad year.

Finally, joining a hedge fund won’t necessarily fix what you didn’t like about private equity.

For example, if you disliked working solo, you might work by yourself even more at a hedge fund, depending on the environment and fund type.

Private Equity Exit Opportunity #3: Join a Growth Equity or Venture Capital Firm

These are good options if you want to go in more of a qualitative direction while still working on deals.

For example, instead of poring through financial statements and contracts in a data room, you want to do deals based on market research and the qualities of the company founders.

You’ll also focus on technology, healthcare, and other growth industries.

I can’t say whether this is more or less “interesting,” as it depends on your personality and skill set.

The main downsides include:

1. Lower compensation – especially in VC – but better and less stressful hours.
2. Advancement is tricky (more so in venture capital careers), and you usually don’t want to stay in VC long-term until you are more senior.
3.  Certain exits become more difficult because you do relatively little quantitative work in VC, so it skews you more toward operational roles.

Growth equity sits halfway between PE and VC and is a good compromise if you’re unsure which one is best for you or which trade-offs you can accept.

Private Equity Exit Opportunity #4: Move Into Credit, Such As a Mezzanine or Direct Lending Fund

These options are good if you want to work on many deals but go into less depth on each one.

For example, you might review a memo, build a quick model, analyze a few different loan structures, and make a quick yes/no decision.

There’s far less “process” work required than in PE, but credit investing is still more structured than most hedge fund roles since most opportunities will come to you.

Coming from PE, you’ll be a good candidate for these roles because a high percentage of mezzanine and direct loans backs leveraged buyouts.

The main downsides are:

1. Pay also tends to be discounted – This is truer on the direct lending side, but compensation is lower than in PE because the returns expectations are lower, and funds are often smaller.
2. You become more specialized – Yes, you avoid some of the “boring” work in PE, such as digging through data rooms and helping companies optimize their operations, but it also gets harder to move into opportunities at normal companies or to recruit for more qualitative fields, like VC.

Private Equity Exit Opportunity #5: Join a Family Office or Fund of Funds

These depend completely on how much direct investing you do.

Traditionally, family offices approached PE by investing in entire funds, but that has changed over time, and many now have direct investment arms.

Funds of funds vary more, and some participate in co-investments more than others (i.e., analyze a single deal a PE firm is doing and contribute extra capital for that specific deal).

The biggest benefits are that you’ll get a lot of exposure to senior people in private equity, and you get paid quite well for the reduced hours and stress.

And if you’re more interested in the qualitative/market/networking side, funds of funds can be a great opportunity.

The main downsides are:

1. Reduced exit opportunities – Even if you work on co-investments, you’ll still have less direct investing experience than PE Associates. So, the most likely exits include related funds such as endowments, pensions, and sovereign wealth funds.
2. “Mixed” industry outlook – Opinions about this one vary, but direct PE firms have grown their capital faster than funds of funds. On the other hand, as the macro environment shifts, funds of funds might also hold up better than direct firms.

Private Equity Exit Opportunity #6: Join a Portfolio Company in a Corporate Development or Strategy Role

These options represent a total change of pace.

You still work on deals in corporate development, but they’re internal to your company, and it’s sort of like “PE lite” due to the reduced compensation, lower hours/stress, and cozier environment.

Also, you arguably get more varied work since CD teams also work on joint ventures, partnerships, and even the integrations of acquired companies.

There is still some “process work” because you need to sell deals internally and conduct due diligence, but it may not be with the same rigor seen at many PE firms.

Corporate strategy is very different from PE and CD because you do not work on deals; you do market research, create long-term plans, and make execution recommendations (e.g., launch Product X in Geography Y).

It’s like being an internal management consultant, and it requires a similar skill set.

This role is best if you want to become even more qualitative and accept much lower pay.

The exit opportunities are also more limited; you could move around at your company, go into consulting, or maybe return to PE, but you would be less competitive for most deal-based roles afterward.

Private Equity Exit Opportunity #7: Start a Company

Yes, some PE professionals do leave to start their own companies.

But it’s not super-common because few people want to quit a job that pays $300K – $500K+ to start a business from scratch.

On a risk-adjusted basis, it’s a worse financial decision than staying in PE, even if you leave before reaching the top of the ladder.

This one is most viable if you already know an industry well and have a built-in advantage, such as a valuable asset or a technical co-founder who needs help with finance, fundraising, and sales.

Besides the huge variability in outcomes, the biggest problem here is that the PE skill set doesn’t necessarily lend itself to starting a company.

Yes, you learn about company operations, and sometimes you even change or improve companies, but you’re typically working with larger, established businesses.

And starting a new company is completely different from optimizing an existing one.

The best background for starting a company is sales, but you don’t get much exposure to traditional sales in most junior-level PE roles.

Private Equity Exit Opportunity #8: Go Back to Investment Banking or Consulting

I can already see your eyes rolling, but people definitely do this.

The reasons vary, but it’s usually a combination of wanting to earn a lot + having a more structured path + tolerating grunt work for long periods.

Also, some people are better at banking or consulting than investing: in one, you’re advising clients, and in the other, you’re using a much more critical eye and putting your own money on the line.

If that’s you, it’s better to be a great banker than a mediocre or bad PE professional.

The downsides are the more boring work (before the senior levels) and the lower compensation ceiling.

Wait, How Are These Different from Investment Banking Exit Opportunities?

You might now be thinking, “Wait a minute. It sounds like most of these are also investment banking exit opportunities. So, what’s the difference?”

You’re correct: they’re not that different, which is one of the big advantages of PE.

The main differences are:

1. Coming from private equity, you have easier access to a few of these, such as joining a portfolio company or a mezzanine fund.
2. Exits into other groups at banks are more difficult. For example, you could go from IB to sales & trading or equity research, but it would be more difficult to do either one if you’re currently in private equity.
3. These exits are less “prestige-driven” because you don’t need to be at a mega-fund to have a good chance of winning these roles.

So, the exit opportunities for investment banking vs. private equity are similar, but IB still gives you broader options – PE gives you an advantage for some specific options.

Which Private Equity Exit Opportunity is the Best?

This depends on why you left, your long-term goals, and your desired compensation and lifestyle.

For example, if you’re tired of deal processes, documents, and data rooms, but you still like analyzing companies and still want high compensation, something like a single manager long/short equity hedge fund might be best.

On the other hand, if you never want to look at a company’s financial statements again, maybe you should join a startup or tech company in a sales, strategy, or business development role.

And if you like working on many deals and making quick decisions without extended due diligence, think about a credit role.

Corporate development might be best if you like deal processes and extended projects but want more of a life and are willing to accept lower pay.

Pay always factors into this decision because most of these exits have lower ceilings and average compensation than PE.

So, you need to review the figures and decide what you’re willing to accept.

Private equity gives you plenty of other career options, so the problem isn’t that you can “never check out.”

The problem is that the pay is so high that you may never want to leave – unless something forces you to.

The post Private Equity Exit Opportunities: How to Check Out of Hotel California appeared first on Mergers & Inquisitions.

I thought about writing an article on the 2022 U.S. midterm elections, but it’s a boring story with a low direct impact on the finance industry.

In the days after the elections, a much more interesting story emerged with the bankruptcy of FTX following massive fraud and a “liquidity crisis” at the company.

It’s the biggest financial scandal since Bernie Madoff in 2008, and if you haven’t been living under a rock, you’ve read about it by now.

And if you have been living under a rock, here’s a good 99-second summary.

Mainstream news sources have already covered the story extensively, so I want to take a different angle and comment on how “the smart money” fell for this scam and what it could mean for careers in finance.

The direct impact on fields like investment banking and private equity is limited-to-nonexistent, but if you’re interested in industries like sales & trading or venture capital, there will be some spillover:

The FTX Bankruptcy: What Happened?

FTX was founded as a cryptocurrency exchange in 2019 and gained over 1 million users by 2021, becoming the 3^rd largest exchange by volume and earning over $1 billion in revenue.

It raised over $1.8 billion in these few short years, and one of its founders, Sam Bankman-Fried (“SBF”), became highly influential in political circles as “the adult face of crypto.”

He even appeared on the cover of Fortune, joining other business luminaries such as Elizabeth Holmes:

When crypto prices were skyrocketing in 2020 and 2021, FTX, like all crypto companies, seemed to be doing well.

But as crypto prices began crashing in 2022, FTX claimed it was still doing well, even as other platforms failed (see: Celsius and Voyager and the fall of the Terra network).

FTX went around buying up other distressed and bankrupt crypto platforms, prompting Jim Cramer to proclaim that SBF was “the new JP Morgan”:

As recently as September, the company attempted to raise $1 billion at a $32 billion valuation, defying the massive drop in the rest of the sector.

Sam Bankman-Fried’s net worth grew to ~$26 billion earlier in 2022 but had fallen to only “only” $16 billion by October.

And then everything came crashing down in a few days of November 2022, with FTX filing for bankruptcy and SBF’s net worth falling to ~$0 almost overnight.

But these statements are misleading because, in reality, SBF and FTX were never worth that much – it was a giant fraud.

A normal exchange accepts customer funds, earns commissions on trades, and keeps all customer funds available 1:1 to meet withdrawals.

FTX, on the other hand, had taken customer funds and used them to prop up its failing hedge fund, Alameda Research, and make speculative bets on tokens and companies that are now worthless.

It’s a bit like if you deposited money into a Vanguard account to buy stocks, and then Vanguard took your money, bought penny stocks without your authorization, lost everything, and said, “Oops, sorry.”

It sounds like an insane conspiracy theory, but it happened at FTX.

The specific catalyst was that the CEO of a rival exchange, Binance, announced that his firm would sell all its “FTT” tokens, which led to FTX customers panicking and attempting to withdraw more money than FTX had available.

The FTT token was FTX’s creation, most of which belonged to FTX and its hedge fund Alameda Research.

FTX propped up the token’s value and claimed it was worth far more than it was, which fell apart as soon as Binance tried to sell its holdings.

As Matt Levine wrote, the FTX Balance Sheet contained mostly junk, including $5.5 billion of illiquid crypto tokens, $3.2 billion of VC/PE investments, and only $900 million of liquid assets… against $9 billion of liabilities.

Visual Capitalist also has a good summary.

Based on these numbers, it seems highly unlikely that FTX customers will recover much of their money.

One distressed asset management firm, Cherokee Acquisition, published these estimates:

And even this ~10% recovery is questionable because we need to see a “real” Balance Sheet from FTX, not the leaked one that has been circulating.

What’s the Next Shoe to Drop?

Since the FTX news broke, various other exchanges and lenders have failed or “suspended withdrawals,” including AAX, BlockFi, and now Genesis.

It appears that many of these exchanges were transferring crypto back and forth to each other to make themselves look healthier than they are, so I assume that more failures are looming.

The big one is Binance, which already has many regulatory problems, but another candidate is Bitfinex / Tether, as it might just be a giant scam behind all these other scams.

I hesitate to give “investment advice,” but if you still own any crypto after all this, you need to move it off exchanges and into your own wallet ASAP.

Since the entire crypto ecosystem is intertwined, with miners, lenders, and exchanges all propping up each other’s tokens and revenue, this contagion could spread far and wide.

The more interesting question is how much this scandal will hurt the venture capitalists and other institutions that invested in FTX and similar platforms.

My answer is “a lot.”

They’re all going to be hit with lawsuits from their Limited Partners, and a class-action lawsuit has already been filed against celebrity FTX backers like Tom Brady and Steph Curry.

I’ll also boldly predict that this may greatly diminish top VC firms like Sequoia and a16z (no direct exposure but tons of other crypto investments).

They won’t “die” because they still have active funds and portfolio companies, but they’re also not going to do much in crypto anymore and might have difficulty raising future funds.

VC firms that didn’t go all-in on crypto might fare better, but there will still be some spillover.

FTX Bankruptcy: How Did the “Smart Money” Fall for This Scam?

The FTX investor list is impressive: Sequoia, SoftBank, the Ontario Teachers’ Pension Plan, New Enterprise Associates (NEA), Tiger Global, Third Point, BlackRock, Thoma Bravo, and dozens of others.

If you read the ridiculous, now-deleted company profile by Sequoia, you can get a sense of how “taken” they were:

There are a few factors, but FOMO (“fear of missing out”) and groupthink are at the top of the list.

This is surprisingly common in finance, where people often assume that if Reputable Investor X puts money into a company, it must be a good company.

Who cares about due diligence when you have to decide on an investment within the next 12 hours or be cut out?

When money is easy, and there are manias in crypto, equities, and startups simultaneously, this gets even worse.

Another issue is that FTX did not necessarily start as a fraud.

We don’t know the exact timeline, but the company might have been quasi-legitimate in 2021 when these firms invested.

Sure, VCs need to monitor their portfolio companies, but they don’t always do so in much depth.

The real red flag is that no outside investors put independent directors on FTX’s Board.

That’s just inexcusable, and I’m not sure how firms like Sequoia could justify it; these independent directors specifically act as checks and balances on the company.

Finally, wealthy people such as venture capital Partners are often quite disconnected from reality, and it’s even worse when everyone works remotely.

In their world, new technologies like crypto, AR, VR, the Metaverse, etc., are always poised to take over – even when normal people think they’re a joke.

FTX Bankruptcy: Takeaways, Industry Outlook, and Predictions

I’ll start with the good news:

1) The Direct Impact on IB/PE/HF Careers is Low-to-Nonexistent

There are a few hedge funds with crypto holdings on FTX, such as Ikigai, but for most mid-sized-to-large funds, crypto assets are rounding errors.

Similarly, a few PE firms, such as Pantera, focus on “blockchain technology,” but they’re tiny, and the larger players do nothing or almost nothing in the space.

Some banks, such as Moelis, have made noise about crypto advisory, but there hasn’t been much IB-scale deal activity yet.

2) Institutional Interest in Crypto is Dead or Will Die Soon

After this scandal, institutions like asset management firms and large banks will be very reluctant to touch crypto for a long time.

Existing teams might stay in place while these companies figure out what to do, but don’t count on much new hiring.

If you were thinking about crypto as a sales & trading exit opportunity, you should cross it off the list for now.

Governments will almost certainly step in and attempt to regulate or shut down the sector, so the range of outcomes here is wide – but none of it looks good.

3) FinTech and VC Firms Will Also Take a Big Hit

The problem here isn’t that FTX “failed”; startups fail all the time, and Limited Partners in VC firms expect many investments to become worthless.

The problem is that this failure directly damaged 1 million consumers, and most will lose 90%+ of their money.

FinTech and venture capital were already having a bad year, and this incident takes it from bad to worse.

Some VC firms did nothing in crypto, and most FinTech firms have nothing to do with crypto – but that’s not how human psychology works.

Anything involving “tech” and “finance” will get more scrutiny from now on.

VC will survive as an IB exit opportunity, but its growth will be limited, and there will be fewer spots at the top firms.

4) (Some) Crypto Will Survive, But It’s Back to Square One in Proving Itself

Many crypto enthusiasts say that Bitcoin is “different” from altcoins, NFTs, etc., and that the FTX disaster happened because it was a centralized exchange with terrible governance.

They are partially correct: decentralized exchanges/platforms have held up better than centralized ones, and Bitcoin and Ethereum have been less disastrous than altcoins and NFTs.

But let’s be honest: crypto – including Bitcoin – is mostly used for speculation or illegal activity.

It has effectively been a levered version of the S&P 500 or NASDAQ for the past few years.

There’s nothing inherently wrong with speculation, but digital tokens built for gambling will never take over economies or displace fiat currencies.

The biggest problems with crypto as a whole are:

1. Most Transactions Do Not End Up on the Blockchain – Even if you think you are trading something decentralized, you’re probably not. To see this, look at the Bitcoin blockchain transactions since 2017 vs. the trading volume on Coinbase over the same time frame. Transactions are recorded on the exchange but not necessarily on the blockchain.
2. There’s No Floor or “Buffer” – With fiat currencies, central banks can take specific actions to defend the value if someone tries to crash the currency. And with precious metals like gold and silver, there’s industrial demand, so even if no one used them as “value stores,” they would still be worth something.
3. It Doesn’t Scale for Payments – Again, see the transaction chart above. There is an inherent tradeoff between security and speed, so solutions that make Bitcoin more efficient also make it less secure. Visa can process 24,000 transactions per second, while Bitcoin does… 7. And yes, the Lightning Network “fixes it” – but only by moving transactions off the blockchain! (see point #1)

These issues don’t mean that crypto is doomed, just that it will keep going through speculative boom-and-bust cycles without much real-world adoption outside of niche use cases.

Things might change if the underlying technology advances significantly, but I don’t see it happening anytime soon.

I’ve been wrong about other topics, and maybe I’m wrong about this one – so  if you disagree with my assessment, feel free to keep hodling.

But no matter what you do, avoid the exchanges, and keep everything in your own wallet.

Losing money is bad, but ending up as one of the 1 million creditors in a large bankruptcy case is even worse.

The post Did the FTX Bankruptcy Kill the Crypto Star? appeared first on Mergers & Inquisitions.

As everyone debates whether sales & trading is “dying,” they often lose sight of sales & trading exit opportunities.

But even if these rumors are exaggerated, you still probably want to know what happens if you join a sales or trading desk and decide to leave.

And if the industry is dying, ironically, the exit opportunities are even more important because you’ll need an escape route ASAP.

People usually start this discussion by comparing S&T exits to investment banking exit opportunities and saying that S&T exit options are “worse.”

But that’s not quite accurate.

It’s more accurate to say that the exit opportunities are different and require more time, experience, and real-world results to win:

What Are Sales & Trading Exit Opportunities?

Sales & Trading Exit Opportunities Definition: An S&T “exit opportunity” is a different field that you enter after working in sales & trading for a few years; common examples are hedge funds, proprietary trading, middle office roles, and investor relations.

Most S&T exit opportunities fall into one of four categories:

1. Discretionary Trading – You devise and execute your own trading ideas using the capital you manage.
2. Execution Trading – You take your team’s investment ideas and execute them at the best price and terms to maximize profits on the trade.
3. Non-Trading – This could include anything from risk management to fintech/startups to regulatory agency work to other groups at your current firm.
4. Sales – If you’re in sales rather than trading, you’re more likely to win roles such as investor relations at hedge funds or sales at a normal company.

Traditional investment banking exit opportunities such as private equity, venture capital, and corporate development are highly unlikely, with a few exceptions for certain desks.

The problem is that you won’t develop the deal analysis, valuation, financial modeling, and market analysis skills these firms usually seek.

If you’re interested in any of these, you should transfer into investment banking ASAP.

What Makes Sales & Trading Exit Opportunities So Different?

The main differences are:

1. Track Record – You’ll need 3-4 years of real-world results (i.e., your P&L) to win the most desirable buy-side trading roles at hedge funds.
2. Entry Points – There isn’t quite as much of a “hard cap” on when you can move to the buy-side; some people do it after a few years, but it is also possible at the senior levels.
3. Timing and Process – The entire process is unstructured, similar to off-cycle private equity recruiting, so you’ll have to reach out to firms and recruiters to get results. And it could take 3-6 months (or more).

Note that these differences apply mostly to trading exit opportunities.

If you’re aiming for non-trading roles (risk management, startups, regulatory agency, etc.), the process is still unstructured, but it’s much more about fit and skill set rather than P&L results.

Since most trading activity at banks now focuses on market-making, not discretionary trading, it’s more difficult to point to “your own” trade ideas.

I don’t think there’s a great solution; you’ll have to review your results and spin your execution of trades into sounding more like independent ideas.

Sales & Trading Exit Opportunity #1: Hedge Funds (Discretionary Trading)

Hedge funds are usually viewed as the most desirable exit opportunity because the pay ceiling is the highest.

If you perform well, you can earn in the mid-to-high six figures and eventually the low seven figures at a more senior level (e.g., Portfolio Manager at a multi-manager hedge fund).

But these roles are also the most competitive, they require a good track record, and you will not be a good candidate for all types of hedge funds.

Of all the hedge fund strategies, global macro is the best fit for most traders because:

1. It matches up directly with popular desks like rates trading, FX, and commodities.
2. You will not be competing with investment bankers or equity research analysts because they do not have the skill sets required for global macro.

Besides that, relative value strategies such as convertible arbitrage could work well, and so could certain credit hedge funds.

But you wouldn’t be the best candidate for most equity or event-driven strategies, such as merger arbitrage, since the skill sets are quite different.

Sales & Trading Exit Opportunity #2: Prop Trading Firm

If you can win an offer at a legitimate firm that pays a base salary and benefits and not just commissions, a proprietary trading career can also be lucrative.

The main differences vs. hedge funds are:

1. Capital and P&L Percentages – You work with much smaller capital bases at prop trading firms, but you also keep much higher percentages of your P&L.
2. Trading Style – Hedge fund trading is directional (betting on a security’s price going up or down), while most prop trading is market-making (selling/buying from one party and then buying/selling to another).
3. Advancement and Culture/Lifestyle – If you perform well, you can advance more rapidly at a good prop trading firm. Teams are also smaller, and the environment is less hierarchical than a typical multi-manager hedge fund.

Prop trading firms are like “high beta” versions of sales & trading desks and traditional hedge funds.

The main downside is that the pay ceiling is lower than at large hedge funds because the capital base is so much smaller (but the average compensation may not differ much).

Sales & Trading Exit Opportunity #3: Execution Trading at a Hedge Fund or Asset Management Firm

The difference is that you’re not making investment decisions; you’re taking your team’s ideas and translating them into profitable trades.

It’s similar to the challenge of sales & trading at large banks: you need to split up orders and find buyers and sellers to minimize price disturbances and maximize profits.

The nice thing about this option is that you don’t necessarily need to find a hedge fund whose strategy matches your experience.

For example, if you’ve traded equity derivatives, you could potentially join any hedge fund that uses derivatives to hedge their positions.

Even if you know nothing about their investment strategy or rationale, you can work there as long as you can execute the derivative trades profitably.

The disadvantages are that the compensation ceiling is lower, and there may not be a path to the Portfolio Manager position or any discretionary trading role.

Some Execution Traders can earn into the 7 figures, but it generally caps out in the mid-6-figure range because firms sometimes view it as “support.”

On the other hand, it’s also less stressful than discretionary trading, with better work-life balance and little need to follow the markets outside the normal hours.

Sales & Trading Exit Opportunity #4: Another Front-Office Group or Another Bank

Joining another bank in a sales & trading role isn’t a true “exit opportunity,” but I’m listing it here because it is common to move around – and these jumps usually come with pay increases.

But joining another front-office group, such as investment banking or equity research, is an exit opportunity.

And if you’re in sales, IB groups such as equity capital markets and debt capital markets are solid potential targets.

You have a recruiting advantage because people leave unexpectedly all the time, and banks prefer to fill spots via internal transfers from current employees.

The only problem is that you must act quickly (within 1-2 years) or risk getting pigeonholed.

These other groups offer broader exit opportunities and more transferable skill sets.

Also, IB has better long-term prospects than S&T (ER is in the middle).

Sales & Trading Exit Opportunity #5: The Middle Office – Risk Management

It might seem crazy to leave a front-office trading role for a middle-office one (risk management, treasury, clearing, compliance, etc.).

Certainly, the pay ceiling, even in “better” roles, is lower than in sales & trading.

But your priorities will change as you get older.

An ambitious 22-year-old might be willing to work crazy hours and tolerate constant stress in exchange for a huge payday.

But a 40-year-old with a family and a life outside of work might be less enthusiastic.

Much of the work in the middle office overlaps with traders’ daily tasks, but it’s a definite “downshift” from the stress of the trading floor.

And as a Managing Director in an MO role, you can still earn into the mid-six-figure range.

Yes, this is a big discount to MD compensation in IB and S&T, but it’s also a fraction of the stress, and you can have normal hours and a life outside work.

Sales & Trading Exit Opportunity #6: FinTech / Crypto / Other Tech Startups

This category is newer, but there is a huge demand for traders and other markets professionals who can help startups build financial products – or disrupt existing financial services companies.

There’s even a firsthand account from a reader who followed this path here.

You’ll no longer have to deal with a large bank’s bureaucracy and office politics, and while startup life is still stressful, it’s arguably more interesting than daily life in finance.

If you join a startup, you’ll most likely do so in a product manager role, with a separate set of pros and cons.

If you get into the right company at the right time, you can potentially do very well because of the equity grants.

But that is a rare outcome; more likely scenarios are “the startup fails,” “the startup muddles along,” or “you earn a good amount from a growth-stage company but not enough to retire.”

The other problem is that this entire market segment is highly cyclical and depends on factors such as VC funding, monetary policy, and the IPO and M&A markets.

So, even more than other exit opportunities, the startup route depends on luck and timing.

Sales & Trading Exit Opportunity #7: Regulatory Agency

The final “trading” exit opportunity is also the least-conventional one: you could join a regulatory agency such as the SEC, CFTC, or Federal Reserve in the U.S. or the FCA in the U.K.

They regulate markets, so they need professionals who know the financial markets very well to review, create, and enforce the rules.

The compensation will be far lower – maybe similar to what an Analyst or Associate in S&T earns – but you’ll gain significant power/influence and a wide network.

Plus, you’ll get 40-hour workweeks and generous government benefits/pensions if you stay long enough.

Also, if you get bored, you can leverage this experience to move back to the private sector. Banks love to hire regulators who can warn them of upcoming changes!

Sales & Trading Exit Opportunity #8: Investor Relations for Buy-Side Firms

This one is one of the most common exits for anyone on the sales side.

Just like normal companies need investor relations teams to market themselves and attract the right shareholders, investment firms such as hedge funds also need IR teams.

Part of the job is maintaining existing relationships, answering questions, and publishing performance updates, and part of it might also relate to fundraising from new and existing Limited Partners.

Some funds use outside private placement agents for fundraising, but others have internal groups or do a mix of both.

This is the most obvious exit as a sales professional because you’ll already have a lot of institutional relationships.

Sales & Trading Exit Opportunity #9: Sales at a Normal Company

This one is a variation on the IR/fundraising option above, but it’s less likely because the skill set is less transferable than you might think.

Part of the problem is that “sales” at a bank is more of a “distribution” job.

It’s quite different from cold-calling or cold-emailing small businesses to pitch a new SaaS product.

So, while it’s possible to move into sales in other industries, it’s far less likely outside financial services.

If you want to join a normal company, you might be better off targeting investor relations roles, especially if you worked in equity sales.

Sales & Trading Exit Opportunity #10: Entrepreneurship

Finally, some sales & trading professionals leave the industry and start businesses, ranging from offline retailers or restaurants to import/export firms to VC-backed startups.

This category is so huge that it’s hard to say anything specific – but any trader managing their own book is “entrepreneurial” since the job requires independence and quick decisions under pressure.

Whether these skills translate into starting a company is debatable, but traders should at least be good at identifying market opportunities.

The range of outcomes here is incredibly wide, ranging from “complete failure” to “replace your old income” to “become a billionaire.”

The Best and Worst Desks for Sales & Trading Exit Opportunities

On the sales side, there aren’t that many different exits, so almost any desk could work as long as you build relationships with institutional investors.

That said, groups such as equity sales are more relevant for roles like investor relations at normal companies.

On the trading side, you should avoid areas that are already heavily automated, such as cash equities and spot FX (derivatives are better).

Many desks could work if you want to go the execution trading route because your experience doesn’t necessarily need to match the hedge fund’s strategy 100%.

Derivatives desks can be an especially good bet because many funds use options for hedging.

Also, anything involving illiquid products such as exotics is a good bet for execution trading because price transparency is very low, so execution is critical.

For discretionary roles, the best desks tend to be:

1. Ones with a macro focus, such as rates trading, FX, commodities, and Delta One, because these lead into global macro funds most readily.
2. Any specialized desk that pairs with specific hedge fund strategies, such as convertible bonds for convertible arbitrage, credit derivatives for credit hedge funds, or distressed debt for distressed hedge funds.
3. Structured products because they are less liquid and involve a lot of client work, so you gain a broader skill set with these.

I mentioned at the top that exit opportunities such as private equity are highly unlikely, with “a few exceptions for certain desks.”

One exception might be something like a distressed debt desk for distressed private equity roles, especially if you can find PE firms that use “trading” strategies.

(That said, starting in IB is still better in ~99.9% of cases if you want to work in private equity.)

The Future of S&T and Exit Opportunities: Will Everyone Learn to Code?

People often complain about sales & trading exit opportunities, but the real problem is that the industry has become more automated.

So, headcount does not necessarily go up even when revenue increases due to higher market volatility and geopolitical crises.

Going back to the sales & trading vs. investment banking comparison, the main difference here is simple.

Even if you hate banking, the exit opportunities are so good that you could make a case for entering the field just for the exits.

But in sales & trading, that’s not the case because the work is quite similar – you’re still trading – and you need much more of a real track record to win these opportunities.

So, if you’re already thinking about exit opportunities, sales & trading is probably not for you.

For S&T to make sense, you need to be deeply interested in one specific product or desk so you can get very good at it.

Do that, and the exit opportunities will follow.

The post Sales & Trading Exit Opportunities: The Top 10 Ways to Make Your Escape appeared first on Mergers & Inquisitions.

In addition to Prime Ministers that serve for only 44 days and questionable weather/food, the United Kingdom is also known as a global hub for investment banking.

Many would argue that investment banking in London is second only to New York in terms of compensation, exit opportunities, deal flow, and “prestige.”

Banks in London advise not just U.K.-based companies but also firms across Europe and the entire EMEA (Europe, the Middle East, and Africa) region.

It might be the best place to gain diverse deal experience based on region, industry, and transaction type.

On the other hand, some have raised questions about the future of finance in the U.K. following Brexit, a much less valuable British Pound (GBP), the ongoing energy/inflation crisis, and more.

We’ll address these points here, but let’s start with a quick industry overview:

Investment Banking in London: Top Banks and Industries

Broadly speaking, the top 3 banks in the U.S. – Goldman Sachs, Morgan Stanley, and JP Morgan – are also the top 3 banks in London.

You’ll see them at the tops of league tables by M&A advisory volume in most years, and they tend to work on the highest-profile transactions.

After that are the top two elite boutiques in the U.K. – Rothschild and Lazard – and the other bulge bracket banks (BofA, Citi, CS (??), DB (??), Barclays, and UBS).

Various European “In-Between-a-Banks,” such as BNP Paribas and Société Générale, also tend to place well – with a much stronger presence than in North America.

The strongest middle-market bank – Jefferies – is usually in the top ~15 by advisory volume in the EMEA region, and other elite boutiques, such as Centerview and PJT Partners, round out the top ~20.

Below them are the Big 4 corporate finance teams and smaller U.K. or Europe-focused banks such as Numis and Jamieson.

If you drill down to other European countries, you’ll see other country- or region-focused banks show up in these lists (e.g., Mediobanca in Italy and France).

The main differences vs. the U.S. “rankings” are:

1. Elite Boutiques – Rothschild is far stronger and is viewed as a real elite boutique; Lazard is still strong, and the other U.S.-based independents are weaker.
2. In-Between-a-Banks – The European commercial banks mentioned above (BNP, SG, etc.) are stronger in EMEA than in North America.

In terms of industry groups and product groups, investment banking in London is highly diversified, so no single industry or deal type dominates.

The top banks are strong in the expected areas: TMT, M&A, consumer/retail, industrials, etc.

But as you move down the list, a bank’s specific strengths start to matter more.

For example, an offer in Restructuring at PJT Partners in London – the top team there – is very different from an offer in an industry group.

A Restructuring offer at PJT arguably beats a GS / MS / JPM offer if you want to focus on distressed deals, but an offer in Industry Group X does not.

Investment Banking in London: Recruiting and Interviews

The IB recruiting process in the U.K. is quite different from the one in the U.S., Canada, and most other regions – even other European countries.

The main differences are:

1. Spring Weeks – These 1-week programs take place early in university and allow you to shadow bankers and, if you do well, get fast-tracked for a summer internship the next year. You don’t “need” one to win an internship, but it certainly helps. This article on spring weeks needs a revision/update, but it’s a decent introduction.
2. Online Tests and Competency Questions – When you submit your application, you’ll have to take numerical, verbal, and logic tests and answer “competency questions,” which are written versions of the standard fit/behavioral questions. These exist to weed out candidates, and you could be rejected if you make even a small spelling or grammatical mistake. To succeed, practice as much as possible with sample tests.
3. Timing – Applications for summer internships tend to open in August / September of the preceding year, so the timing is slightly less crazy than in the U.S., where banks might start their processes well over a year in advance. You must apply IMMEDIATELY when applications open because internships are first-come, first-serve.
4. Assessment Centers (ACs) – Assuming that you apply online, pass the screening, and do well in your first-round phone interview or HireVue, the process ends with an “assessment center” (AC) rather than a Superday. At the AC, you’ll go through multiple interviews, you’ll complete a group exercise or case study (e.g., Should Client X acquire Company A or B?), and there may be other exercises such as “e-trays,” “in-trays,” or report writing. They might even give you the same numerical and verbal tests from the online application round to ensure you didn’t cheat!
5. Candidate Qualities – Bankers still want students from top universities with good grades (2:1 or above) and relevant experience, such as internships at local PE/VC firms. But extracurricular activities are more important, and interviewers often focus more on “team fit” and less on technical skills. Also, knowing other European languages is important because of all the cross-border deals. It’s not “required,” but business-level proficiency in French, German, Italian, Spanish, etc., will give you a big advantage.
6. Off-Cycle Internships – Off-cycle IB internships outside the normal summer window are much more common in the EMEA region, and if you graduate without a full-time offer, you can use them to network and work your way into an offer eventually.
7. MBA-Level Recruiting – It still exists in London, but it’s far less developed than in the U.S. Analyst-to-Associate (A2A) promotions are more common, and even lateral hiring from related fields may be slightly easier.

With all that said, IB recruiting still isn’t that different because you still need to start early and prepare for similar interview questions (Your story, why our bank, strengths/weaknesses, basic technical concepts, etc.).

The main difference is that the process is broader and shallower, so your preparation should match that.

For example, don’t spend much time learning advanced technical material; make sure you know the basics well and spend more time practicing for the online tests and the group exercises they might give you at the AC.

Does Networking “Not Work” in London?

One final note about recruiting: many people claim that “networking doesn’t work in London,” so contacting bankers and setting up informational interviews is pointless.

They argue that the entire process is too impersonal and random for networking to make a huge difference and that it’s better to attend structured networking events when banks host them.

My quick thoughts are:

1. Yes, traditional networking is probably less effective in London, but you shouldn’t ignore it completely (it’s still worth contacting a few bankers at each firm).
2. And it is still helpful if you’re at a non-target university, you’re aiming for off-cycle roles, or you’re focused on smaller firms, where “who else you know” is a key question.

Don’t ignore networking, but don’t feel pressured to go “all-in,” especially if everything else in your profile looks good.

Investment Banking Target Schools in the U.K. and Europe

The “target school” list in London includes a mix of U.K. universities and top schools in other European countries.

Within the U.K., most would say that the target universities include Oxford, Cambridge, LSE, UCL, Warwick, and Imperial.

There are also various “semi-targets” such as Durham, Bristol, Nottingham, St. Andrews, etc.

Target schools in France include HEC, ESSEC, ESCP, and the top few engineering schools; in Spain, names like ICADE, ESADE, and IE are on the list; and in Italy, Bocconi is the main target.

In Ireland, there are UCD and Trinity; in Germany/Switzerland, it’s St. Gallen, WHU, and Mannheim; in the Nordics and Benelux, the names include CBS, SSE, NTNU, RSM/Erasmus, and Solvay.

This is not an exhaustive list. I included a few top names by country, but you could argue for others and include “semi-targets” as well.

As with the U.S., you don’t need to attend one of these specific universities to get into investment banking in London.

But your chances are higher, and you don’t need to stand out quite as much in all other areas with one of these brand names on your CV.

Investment Banking in London: Salaries and Bonuses

Salaries and bonuses are significantly lower in London than in the U.S.

Expect a ~30% discount to pre-tax compensation in New York, and sometimes more like 40%+ depending on your level and the current GBP/USD exchange rate.

You can get the full numbers in the Arkesden compensation reports, but the rough total compensation ranges at large banks as of 2022 are as follows:

• Analysts: £100K – £150K total compensation
• Associates: £200K – £300K total compensation
• VPs: £350K – £450K total compensation

Salaries and bonuses tend to be lower because of:

1. The Lack of GBP/USD Exchange Rate Adjustments – The large banks set their compensation levels a long time ago based on much higher exchange rates (1.5x – 1.6x or even near 2.0x back in 2008) and never bothered to adjust them even after the GBP kept falling.
2. Lower Deal Volume and Fees – Google any league table and compare the total deal volume in North America to EMEA and see for yourself.
3. The EU Bonus Cap – After the 2008 financial crisis, EU rules limited year-end bonuses to 2x base salary. This cap might be going away now that the U.K. has left the EU, but until it does, it’s still a limiting factor for senior bankers.

People often counter these points by saying, “But housing is cheaper in London! Also, the quality of life is better, and items X/Y/Z are cheaper/better.”

I agree that rents are cheaper in London, as are other items, but the effective tax rate is also higher, so you may not save more in practice.

We can debate the “quality of life” and the cost of living all day, but the bottom line is that you will earn less in London.

IB Lifestyle and Hours in London

But that reduced compensation comes with a benefit: you also work shorter hours and get more free time and weeks of vacation.

You might see a ~5-10% reduction in work hours at the junior levels, which could mean ~1 hour of extra free time per day.

But there’s also a wide variance between banks, with the U.S. bulge brackets requiring longer hours and the elite boutiques and European banks caring a bit less.

And although it’s difficult to quantify, many bankers would say that the overall culture in London is more relaxed, so it’s easier to maintain a semblance of a personal life.

Investment Banking in London: Exit Opportunities

If you decide you need to make more money, there are plenty of exit opportunities in London, and they’re quite diversified.

The most common ones for bankers are private equity and hedge funds, but plenty go into corporate development, venture capital, growth equity, private credit, and so on.

We’ve covered the London private equity recruiting process in a previous article, but to summarize: there is no “on-cycle” and “off-cycle” split.

Instead, the process starts when PE firms need to hire people, and you have more time to gain deal experience over your first few years in IB.

Past the first few rounds, interviews are less about rapid-fire technical questions and 60-minute LBO modeling tests and more about open-ended case studies and extended interviews.

All the U.S.-based mega-funds have a presence in London, as do the larger middle-market funds.

The biggest difference is that the European upper-middle-market funds, such as Ardian, BC Partners, Bridgepoint, Cinven, CVC, EQT, PAI, and Permira, have a stronger presence in London.

(And yes, I realize some of these could be considered mega-funds.)

One issue with PE exits is that you may be limited by your language skills.

Many of these firms want to hire candidates who know other European languages, so you may not be competitive if you know only English or non-European languages.

If that’s the case, you might have better luck recruiting at hedge funds because language skills are sometimes less important.

(But they still help if you’re recruiting for something like distressed debt funds that trade Spanish and Italian bonds.)

Overall, London is probably the best city for traditional IB exit opportunities after New York.

Other U.S. cities might come close, but they have much less hedge fund activity and are strong mostly in specific verticals such as tech (SF) or energy (Houston).

Investment Banking in London in a Post-Brexit World

Following the U.K.’s vote to leave the European Union in 2016, many pundits assumed that finance jobs would instantly shift away from London and into EU cities such as Paris, Frankfurt, and Milan.

And banks have been adding staff to their offices in these cities…

…but the predictions of 100,000+ financial jobs leaving London (out of 500,000+ total) haven’t held up; the actual number is more like ~7,000.

One issue is that the other cities can’t compare to London on other dimensions, so senior bankers don’t necessarily want to relocate.

Another problem is that there’s no clear, single top alternative to London, so the jobs have become more widely distributed rather than concentrated in one city.

In the long term, more jobs and deal activity will likely move to cities still within the EU, but there will still be a sizable sector in London.

Could a city like Paris or Frankfurt eventually have more investment bankers than London?

It’s possible, but I would not bet on this happening anytime soon because these things take a very long time to change (think: decades, not years).

Investment Banking in London: Final Thoughts

So, is London the best place to be an investment banker after New York?

It depends on your goals and other options.

I would probably rank other U.S. cities, such as Chicago and SF, above London based on compensation and overall deal flow.

On the other hand, I would put London above places like Canada, other European cities, and Asia/Australia.

You could argue that Hong Kong is better than London due to higher compensation and lower taxes, but HK is no longer a viable option unless you’re a Chinese citizen and you want to deal with all the ridiculous rules and restrictions there.

The main disadvantages of investment banking in London are the reduced compensation and the relative randomness of the recruiting process.

The long-term outlook is also negative due to Brexit, but I don’t think it matters much unless you plan to be a career banker.

The biggest advantages of IB in London are the broad exit opportunities and the diverse experience you can gain (and maybe the modestly better lifestyle/hours).

So, if you cannot work in the U.S. or do not want to, London is the next-best place to start an investment banking career in most cases.

And if banks finally adjust their compensation to the lower GBP exchange rate, London might become #2 globally after NY.

The post Investment Banking in London: Equally Attractive Alternative to New York? appeared first on Mergers & Inquisitions.

A long time ago, we received one complaint/criticism more than any other:

“All your models start from templates! What about case studies where I have to start from a blank Excel sheet and do not get any data, formatting, or schedules?”

We did this mostly to save time: entering the historical information and setting up the formatting, layout, etc., usually takes at least 30 minutes and sometimes up to several hours.

But there is also value in learning how to build a full model from scratch.

We’ll cover a 90-minute 3-statement modeling test here and explain how to use the company’s financials, 10-K, and investor presentation to do everything.

WARNING: You must have a decent-to-high Excel proficiency to follow along and finish this in the allotted time.

The video walkthrough below has captions for some of the Excel shortcuts, but it’s not a full Excel tutorial, and we assume you already know the basics.

What is a 3-Statement Model?

In financial modeling, the “3 statements” refer to the Income Statement, Balance Sheet, and Cash Flow Statement.

Collectively, these show you a company’s revenue, expenses, cash, debt, equity, and cash flow over time, and you can use them to determine why these items have changed.

In a 3-statement model, you input the historical versions of these statements and then project them over a ~5-year period.

In real life, you do this to value companies, model transactions, and determine whether the company’s expected growth, margins, and cash flow metrics are plausible.

For example, if the company claims it will generate $5 billion of Free Cash Flow and use it to repay $1 billion of Debt and issue $4 billion in Dividends, is that realistic?

Will the company generate more or less cash flow? Might it need outside financing? How do the numbers change if market conditions worsen?

Banks like to test this topic because it’s a quick way to assess who’s proficient in Excel, accounting, and financial modeling.

If you cannot read or interpret a company’s historical financial statements, you won’t be working on complex deals anytime soon.

Types of 3-Statement Modeling Tests

Most 3-statement models and case studies fall into one of three categories:

1. Blank Sheet / Strict Time Limit: These are more about working quickly, knowing the Excel shortcuts, simplifying, and making decisions under pressure.
2. Template / Strict Time Limit: These tests are more about entering the correct formulas, justifying your assumptions, and answering questions based on your model’s output.
3. No Strict Time Limit: These case studies are more about using outside research and data to justify your assumptions for the revenue, expenses, cash flow, etc. You might also have to give a presentation based on your findings.

The “strict time limit” could be anything from 30 minutes to 3-4 hours, and the complexity increases as the time limit increases.

The “no strict time limit” type might give you several days or even 1 week+.

There is still a deadline, but you don’t need to rush around like a madman to finish.

The 90-Minute 3-Statement Model from a Blank Sheet

For this tutorial, I picked an example where you start from a blank sheet and review the company’s filings and presentations.

So, you must demonstrate Excel proficiency and the ability to interpret data and make reasonable assumptions.

You can get the case study prompt, the company documents, and the completed Excel file below:

• 90-Minute 3-Statement Model – Case Study Prompt (PDF)
• 90-Minute 3-Statement Model – Completed Excel File (XL)
• Overview of Main Points in 90-Minute 3-Statement Modeling Test – Slides (PDF)
• Otis – 10-K (PDF)
• Otis – 10-K in Excel Format – Raw (XL)
• Otis – User-Friendly 10-K in Excel with Swapped Columns (XL)
• Otis – Investor Presentation (PDF)

There is no “blank” or “beginning” file because we create a new sheet in Excel and enter everything from scratch in this tutorial.

You can get the video version of this entire tutorial below:

Table of Contents:

• 2:35: What is a 3-Statement Modeling Test?
• 5:54: Part 1: Inputting the Historical Financial Statements
• 15:31: Balance Sheet Entry
• 24:14: Cash Flow Statement Entry
• 35:11: Part 2: Income Statement Projections
• 50:12: Part 3: Balance Sheet Projections
• 57:51: Part 4: Cash Flow Statement Projections
• 1:07:12: Part 5: Linking the Statements
• 1:10:59: Part 6: Debt and Stock Repurchases
• 1:19:16: Part 7: Model Checks, Review, and Final Comments
• 1:22:35: Recap and Summary

This example is not taken from our courses – it’s new for this article – but it is similar to some of the case studies in our Financial Modeling Mastery course.

The full course has 3-statement models with and without templates; some are simpler than this one, and some are far more complex.

3-Statement Model, Part 1: Inputting the Historical Statements

You could attempt to input the data by copying and pasting from the PDFs, but it’s far more efficient to link directly to the Excel or CSV files.

A few tips:

• Swap the Excel columns, so they go from oldest to newest (see below).

• On the Income Statement, use positives for revenue and other income sources and negatives for all expenses and outflows, as it will be easier to check your work that way.

• Consolidate smaller line items as much as possible; you ideally want ~5 items on each side of the Balance Sheet (maybe 10 at the most) and only a few items in each section of the Cash Flow Statement.

As you proceed, you can check your work by summing up the sections and comparing the totals to the company’s numbers.

3-Statement Model, Part 2: Income Statement Projections

The case study document says that we need to use “something more complicated” than a simple percentage growth rate for Revenue:

But the investor presentation and 10-K do not make it easy to find unit-by-unit data.

We’d ideally like to project new escalators and elevators sold, forecast the average prices, and assume a certain percentage of these new units go into “Service Units,” generating Services revenue in future periods.

But we can’t find enough solid data to do this within the strict time limit, so we simplify and use Market Share and Market Size to project the New Equipment Revenue, with the Services Revenue based on the company’s estimates for the growth in Service Units:

The Cost of Products, Cost of Services, and Operating Expenses are simple percentages of Revenue, and the Taxes and NCI Net Income are based on average historical percentages:

3-Statement Model, Part 3: Balance Sheet Projections

In this part, we focus on projecting the Working Capital line items, such as Accounts Receivable, Inventory, and Accounts Payable.

The key point is that the absolute numbers do not matter.

What matter is the Change in Working Capital on the Cash Flow Statement since that affects the company’s cash flow and ability to repay Debt and repurchase Stock.

If the Change in WC has been positive as the company has grown, it should stay positive and in the same range in the future (and vice versa if it has been negative or near-0).

We make most of these items simple percentages of Income Statement lines such as Revenue, COGS, or Total Expenses:

Once we do this and set up the projections, we can calculate the Change in Working Capital on the Cash Flow Statement to check our work:

We also simplify the Operating Leases here by making the Operating Lease Assets a percentage of Operating Expenses and assuming the Operating Lease Liabilities change by the same amount each year.

Lease accounting is more complicated in real life and under IFRS, but this approach is fine for a U.S.-based company.

3-Statement Model, Part 4: Cash Flow Statement Projections

Most of the key line items here, such as CapEx and Depreciation & Amortization, are simple percentages of Revenue:

A few line items, such as the ones for Pension Contributions and Noncontrolling Interests, are more complex to project “correctly,” but we don’t have time to do so here.

One exception to these simple rules is the Dividends line, which we forecast based on the Dividend Payout Ratio (i.e., Dividends / Net Income).

In this case, the company provides specific guidance on the Dividend Payout Ratio, so we increase it slightly over the period to match their targets (see below).

The bolt-on acquisitions are also a bit different because the company estimates $50 – $100 million per year in acquisition spending in its investor presentation, so we pick the middle of the range and assume $75 million each year:

Strangely, CapEx is below D&A in each projected year, but it’s not necessarily “wrong” for a low-growth company like this one.

We would examine this point and refine these projections if we had several hours or days to complete this case study.

3-Statement Model, Part 5: Linking the Statements

We already have the Working Capital items and the Operating Lease Assets and Liabilities linked on the Balance Sheet, so there are only a few items left to complete.

The main rules are:

• Assets Side – When linking an Asset to a line on the CFS, you start with the old Asset on the Balance Sheet and subtract the matching line on the CFS. This is because cash outflows represent increases in Assets, and cash inflows represent decreases in Assets.
• Liabilities & Equity Side – It’s the opposite: add the line items on the CFS to the old numbers on the Balance Sheet.

Here’s what we do for the remaining line items:

• Cash: Old Cash Balance + Net Change in Cash on the CFS.
• PP&E/Goodwill/Intangibles: This simplified/consolidated line item equals the old balance minus CapEx minus D&A. Due to the signs on the CFS, CapEx increases this number, and D&A decreases it.
• Other Assets: Start with the old number and subtract Acquisitions and the “Pensions/Other” line.
• Total Debt: Old Debt Balance + Change in Debt from the CFS.
• Noncontrolling Interests (NCI): Old NCI Balance + NCI Net Income from the CFS + NCI Dividends from the CFS.
• Common Shareholders’ Equity (CSE): Old CSE + Net Income + Dividends + Stock Repurchases + Other Items + FX Rate Effects.

This last one is a “catch-all” for everything else on the CFS that has not yet been reflected on the Balance Sheet.

Our Balance Sheet balances after completing these links, which is a good sign:

But we’re not done because the Change in Debt, Stock Repurchases, and Interest Expense lines are still blank.

3-Statement Model, Part 6: Debt and Stock Repurchases

The case study document tells us to “follow company guidance” for these last few line items.

On slide 41 of their investor presentation, Otis provides an estimated percentage split of its Free Cash Flows over the next 3 years:

We already have the Dividends and Acquisitions, so we’ll use a simple logical check for the Debt and Stock Repurchases based on the $3 billion Minimum Cash from the case document:

• Step 1: Does the company have Excess Cash Flow in this period? In other words, is its Beginning Cash + Net Change in Cash – Minimum Cash a positive number? If so, it can use that cash flow to repay Debt principal and repurchase Stock.
• Step 2: Based on the chart above, we assume an 85% / 15% split between Stock Repurchases and Debt Principal Repayments.
• Step 3: If the company has a Cash Flow Deficit, i.e., Beginning Cash + Net Change in Cash – Minimum Cash is negative, it must issue additional Debt to fund its operations.

You can see the logic below:

With these formulas, we can now add these links to the Cash Flow Statement and set the “Other” line item in Cash Flow from Financing to ~2% of Debt Issuances to represent the issuance fees.

The last line item is the Interest Expense on the Income Statement.

We can calculate the average interest rate on Debt in the previous years, but we don’t know how it will change in the future.

Interest rates were rising at the time of this case study, but if the company’s Debt has fixed rates and matures far into the future, it may not matter.

We can search for “long-term debt” in the 10-K and get a quick answer:

Since most of this company’s Debt matures after the 5-year projection period, the average rate probably won’t increase by that much in this period.

But there are ~$3.4 billion of maturities in the next 5 years, so we increase the average interest rate from 2.0% to 3.5% and use these numbers to calculate the Interest Expense:

3-Statement Model, Part 7: Model Checks, Reviews, and Final Comments

At a high level, this model confirms that most of the company’s claims are reasonable.

For example, Otis generates just over $5 billion in FCF over the next 3 years, and it spends the expected amounts on Dividends, Acquisitions, and Stock Repurchases:

Its Free Cash Flow Conversion, which the company defines as FCF / Net Income, also stays well above 100%.

We’ve completed the model and met the requirements within the 90-minute time limit, so this attempt was successful.

However, there are some issues that we would fix with more time and resources:

• Formatting – It’s not pretty right now. We must clean up the number formats, add input boxes for the projections, fix the color coding, add headers/footers, etc.
• Revenue, Expense, and Cash Flow Detail – It’s better to project Revenue based on individual units sold and link the Product and Service segments to each other, such that New Units Sold drives Service Revenue in future periods; items like Operating Expenses should be linked to the Employee Count, and CapEx should be linked to the company’s production capacity.
• Scenarios – Finally, we always evaluate companies across multiple scenarios in real life. What happens if the market growth changes? What if the company’s market share falls? What if its expenses rise? This model is not robust enough to support these scenarios or sensitivities.

How to Master the 3-Statement Model

This example is more difficult than the average 3-statement modeling test.

If you don’t have moderate-to-high Excel proficiency, you could easily spend an entire day (or more) on this.

But if you can finish in 2-3 hours, you’re at the level where you can improve your times with repeated practice and eventually do this in 90 minutes or less.

You don’t need to score 100% to “pass” these tests; the median scores tend to be very low.

Your goal should be to finish the model, and if you can’t complete everything, simplify so that you can answer at least the main questions by the end.

If you have an upcoming 3-statement modeling test, get as many examples as possible and complete them.

If you can’t find good examples, pick companies you follow, download their statements and investor presentations, and do what we did here: start from scratch and give yourself a few hours to build a simple 3-statement model.

If you improve over time and find it interesting to pick apart companies and business models, great.

If not… well, maybe the finance industry is not for you.

The post The 3-Statement Model: Full Tutorial for a Timed 90-Minute Modeling Test appeared first on Mergers & Inquisitions.

If you search for “how to start a private equity firm” online, you’ll find results that range from useless to tangentially useful to occasional nuggets of real wisdom.

That said, much of it is better than the junk found on generic websites about how to start a hedge fund.

But the main problem remains the same: most sources discuss the process without mentioning the prerequisites.

Starting a private equity firm is a bad decision for ~95% of people who work in the finance industry.

It’s also not something you can do until you’ve reached the top of the ladder in private equity (or very close to it).

Oh, and it worked much better in 1990, 2000, or even 2010 than in the 2020s and beyond.

Since I enjoy destroying your hopes and dreams, let’s get started with the full break-down:

What is Private Equity? How Does It Work?

In this article, I will assume that you know what private equity is, what the career path is like, how PE recruiting works, and how compensation and carried interest work.

We have detailed articles on all these topics (click the links), so I don’t want to waste time re-explaining them.

How to Start a Private Equity Firm: People, Experience, and Capital

The most common backgrounds for starting a private equity firm include:

• VPs or Principals at existing upper-middle-market (UMM) or mega-fund (MF) firms who are good at their jobs but disenchanted with the fund economics or promotion opportunities.
• Partners and MDs who have better economics but may not like other aspects of the firm, such as the Founders or senior Partners, the office politics, the industry focus or investment strategy, the LP relationships, etc.
• C-level executives in normal industries who have done deals before, have extensive investor relationships, and now want to branch out and move into PE (far less common).
• MD-level bankers who might have some investing experience (e.g., through merchant banking or angel investing) and now want to do it full-time (also far less common).

The bottom line is that it’s probably a minimum of 10 years of full-time work experience before you can even consider starting your own PE firm.

I doubt that anyone could do it successfully below the age of 35 today, and most founders are probably in their 40s or beyond.

Assuming you have substantial PE work experience, here are some additional requirements:

• A great track record of deals in which you made the final investment decision and led the company in some way. And you need credible evidence showing that you were personally responsible for the results (difficult since PE is more of a “team sport”).
• Solid Limited Partner (LP) relationships at endowments, pensions, funds of funds, family offices, sovereign wealth funds, etc., so you can raise the required capital. A network of dozens of ultra-high-net-worth (UHNW) investors worth $20 – $30 million each might also work.
• A proven strategy in a specific, differentiated niche. If your investment thesis is “undervalued industrial companies with between $5 and $15 million in EBITDA,” try again.
• The ability to contribute several million dollars of your own capital while you’re fundraising, paying for legal/other expenses, and operating the fund in the first few years. If you’re uncomfortable writing a check for $1 million, you have no business starting a PE firm.
• Talent at investing, execution, AND sales. It’s hard enough to be great at even one of these, let alone all three. But each skill will be essential as you raise a fund, hire people, and do deals.

Degrees such as an MBA or a Ph.D. mean absolutely nothing, and certifications like the CFA and anything else with a “C” in front are useless in this world.

But let’s stay positive and assume you’ve met all these prerequisites.

In that case, the first step of the process will be raising capital:

How to Start a Private Equity Firm, Part 1: Raising Capital

This step is similar to the fundraising description in the article about how to start a hedge fund:

• You still need a specific, repeatable, and understandable investment strategy.
• And you’ll still market your new fund to funds of funds, endowments, pensions, family offices, and high-net-worth individuals.

Also, as with hedge fund fundraising, you’ll get faster results by targeting family offices and HNW individuals rather than huge, bureaucratic endowments or pensions.

You need robust marketing materials that present your team’s background, all the deals you’ve worked on together, and explanations of ones that performed well and ones that did not.

No PE firm earns a 20-30% IRR on every single deal, so you need to address ones that underperformed and how they influenced your process and future results.

Other important points for the marketing materials include:

• Team: Ideally, you want at least 2 GPs (other Partners), so you have a team of 3 when starting your firm. Your materials must demonstrate how you’ve worked together over a long period (ideally 5-10 years) and gotten consistent results in a specific niche.
• Sourcing: Where will your deal flow come from? How will you have an advantage over all the other firms also seeking solid companies to invest in? Of course, relationships with bankers and brokers help, but what edge do you have over other PE firms that also look at banker-led auctions?
• Runway / Personal Contributions: How much money is your team contributing to operate the firm while this fundraising process is taking place? If this number is anything less than “the low millions,” you should reconsider your plans.

As with all fundraising, the entire process is incredibly time-intensive and ego-bruising.

To give specific numbers, if you conduct 20 meetings with potential investors, you’ll be lucky to find one who ends up investing (5% success rate) – and it could be much worse than that.

The biggest differences vs. the HF fundraising process relate to the fund size and the minimum investment amount.

If you’re starting a hedge fund, you don’t need to strictly define your “size” because you can keep the fund open-ended and start investing with smaller amounts of capital.

But it’s much harder to do this in private equity because you’ll have a set number of portfolio companies, each one will be worth a certain amount, and they’ll require a specific headcount to support.

EXAMPLE: Let’s say you’re planning to have 10 portfolio companies in your first fund, and the average Purchase Enterprise Value will be $50 million. At an average 10x EBITDA multiple, each company will have ~$5 million in EBITDA, putting you in “small / lower-middle-market” territory.

Each deal will use an average of 50% debt, which means you need to raise capital of $50 million * (1 – 50%) * 10 = $250 million to acquire these 10 portfolio companies.

For a fund of this size, you’ll need a minimum investment amount of at least several million dollars unless you want to spend ages collecting $200K checks from random wealthy people.

That already limits your investor base and means it will take longer to complete the fundraising process.

But you also need to consider the management fees and what kind of headcount they can support.

In this example, if you charge a 2% management fee, that’s $5 million per year.

That seems like a lot, but if you count all the overhead expenses such as office space, accounting/legal, HR, IT, compliance, administration/marketing, etc., the remainder might cover only:

• 3 Partners (your founding team).
• Maybe ~2 VPs or Principals.
• And maybe ~2-3 Associates.

And everyone would earn below-market compensation (e.g., maybe 50-70% of the cash compensation at a larger fund).

If $5 million per year won’t cover everything you need, the usual answer is “take a pay cut until you grow and raise a larger fund.”

I’ll close this section with some good news about fundraising: the first 50% is much harder than the last 50%.

“Anchor investors” are crucial for kickstarting the process and convincing other investors that you’re serious, so you may need to offer them better terms in exchange for their early commitments.

For example, you might offer lower performance fees, a higher split of the profits, or a higher hurdle rate to incentivize them.

If you can raise enough from these early LPs, you might even be able to do a few deals before your fund closes and use these “seed assets” to keep marketing the fund.

If you cannot raise close to the amount of capital your fund will need, your best options are to raise money deal-by-deal to prove yourself until you can raise an entire fund or to go the search fund route.

How to Start a Private Equity Firm, Part 2: Paperwork and Legal Structure

In the U.S. and Europe, most private equity funds are established as Limited Partnerships or Limited Liability Firms, and you’ll need competent attorneys to complete all the necessary paperwork and registration documents.

Among the documents you’ll have to complete are the Limited Partnership Agreement (LPA), Articles of Association, Offering Memorandum for marketing the fund, Subscription Agreement, Investment Management Agreement, Due Diligence Questionnaire, Compliance and Risk Guidelines, Custody Agreements, Counterparty Risk Agreements, Valuation Policy, and more.

Some of the key terms spelled out in these agreements include:

• Fees: Will you charge a 2% management fee? 1%? 1.5%? What about the performance fee? 20%? 25? 15? Will you raise one of these fees for a lower percentage on the other fee?
• Hurdle Rate: What IRR does your firm need to earn before the GPs (your founding team) earn a percentage of the profits?
• Investment Targets and Restrictions: What types of companies will you invest in? Are you restricted from certain types of deals, industries, or strategies?
• Distributions: How frequently will you distribute dividends, cash flows, interest, and realized gains to your LPs? How will Preferred Returns, Catch-Up Returns, and Claw-backs work in the context of this returns waterfall?
• Term and Transfers: How many years will this fund last, and what options do the LPs have if they want to exit early? For example, can they sell their stakes to other LPs in the secondary market?
• Co-Investments: If the LPs like one deal, can they contribute extra capital to fund that specific deal and earn a higher percentage of its profits?

These agreements are long and complicated, and the legal fees alone will probably end up costing you over $1 million.

If you want real-world examples and templates, check out the ILPA’s collection of term sheets.

How to Start a Private Equity Firm, Part 3: Hiring a Team

Your initial “team” will be the 1-2 other Partners with whom you start the fund.

You probably won’t be able to do this solo or with just one Partner because the “key person risk” will be too high.

Even if you can raise $200 – $300 million for your first fund, it’s not enough to support a huge team because the management fees are only $4 – $6 million at that level, and other expenses will eat up a good chunk of them.

You’re also at a disadvantage because you cannot possibly offer the same salaries and bonuses to new hires that Blackstone or KKR can.

You can sometimes offset that by offering them higher carried interest or the ability to co-invest in deals, but you’re unlikely to attract the “top” bankers or PE professionals to a brand-new fund.

So, you may have to focus on “non-traditional candidates” who can get anything done, no matter how random or ridiculous the task is.

You don’t want people from Oxford or Harvard with perfect grades; you want diamond-in-the-rough candidates who had to network like crazy to get into the industry and succeed.

If you perform well enough to raise a larger fund eventually, your investment and non-investment staff will grow because the legal/compliance/auditing/other tasks will also keep growing.

But, on balance, growth almost always means higher compensation for everyone because the headcount won’t scale linearly with your assets under management.

As you move into the $1 billion+ range, you can start recruiting more like traditional, established funds that go through headhunters and might even participate in on-cycle recruiting.

How to Start a Private Equity Firm, Part 4: Surviving, Investing, and Growing

Although raising the capital for your first fund and hiring the initial team are both extremely difficult, the rest of the journey isn’t exactly a walk in the park.

The biggest issue is that many founders do not realize that they are not just “investing” or “executing deals” but also running an entire business.

That means that as you’re hunting for deals, you’re also:

• Being hyper-responsive to your LPs, especially the anchor investors who helped you get started.
• Solving HR issues, whether it’s someone complaining about their compensation, a co-worker, or your ESG policies.
• Fixing portfolio company problems, whether they relate to disappointing earnings, growth initiatives gone awry, employee protests, problems with labor unions, or anything else.
• Dealing with legal problems, such as LPs who are angry about one part of their agreement or portfolio companies getting sued.
• Representing your firm to the outside world, speaking with media outlets, and attending conferences.

It may be better than investment banking hours, but you’ll still have almost no personal life in the early stages of your fund.

And it’s much tougher than being a VP or Principal at an existing fund because you’re responsible for far more of these random tasks.

If you want to grow and eventually raise another fund, you need solid evidence of successful exits and positive cash-on-cash multiples.

“Unrealized gains” are not taken seriously by credible LPs, so no matter how much progress your portfolio companies make, it means little until you’ve sold them for good multiples.

Depending on your strategy and targeted companies, this might take years.

For example, you might think it’s “easier” to acquire lower-middle-market companies worth around $50 million.

But in this size range, it is very difficult to find companies that can grow substantially or expand into new markets.

And even if you do find growth opportunities, it will take longer to execute them for companies of this size.

As you grow, you’ll need to start moving up-market and targeting larger companies.

How to Start a Private Equity Firm, Part 5: Exit Opportunities

Let’s start with the bad news: if your PE firm does not work out, you’re unlikely to get a “second chance.”

It’s not like tech startups where failure is seen as routine; even if you wait 10-15 years, service providers, lawyers, and LPs will still remember your first failure.

Beyond that, your exit options depend on why your firm failed.

If it was due to performance, you’re probably not going to get another job in private equity, but you might be able to join a normal company in a deal-making role or even move back into investment banking or a related finance role.

If it was due to issues with your team or not being able to raise enough capital for another fund, you could potentially join an existing PE firm.

You could also move further down-market and start a search fund or raise capital for individual deals if your performance was good, but other factors were not.

So, Why Is It Such a Bad Idea to Start a Private Equity Firm?

If you’ve read this far, the downsides should already be obvious:

• Raising enough capital is extremely difficult, and a startup PE firm requires more capital than a startup hedge fund.
• There are no second chances if you fail.
• It’s stressful and time-consuming, and you’ll almost certainly take a pay cut when starting out.
• It’s more difficult to “prove” your results, and you need significant credentials and on-paper qualifications.

But there’s a more fundamental problem as well: by the time you’re in a good position to start a private equity firm, it usually makes more sense to stay at your current firm.

MDs and Partners have the best LP relationships and are, therefore, the best positioned to raise capital for a new fund…

…but they also already earn millions of dollars per year (or more), so they have little reason to leave.

Yes, they could get a higher percentage of the carried interest at their own firm, but their own firm would also be smaller – at least in its first 5-10 years.

And a smaller firm means lower management fees and investment profits, which translates into compensation that may not necessarily be higher for many years.

Would an MD or Partner in their early 40s want to go through everything above to start their own, smaller firm to potentially earn closer to $10 million per year – if the fund performs very well – rather than the low millions per year?

And is the reputation/financial risk worth it if the firm fails or delivers only mediocre performance?

To me, the answers are clearly “no,” but some people do think it is worth the risk, money, and effort.

Another major downside is that private equity is a much more saturated market today than in previous decades.

There’s too much capital chasing too few high-quality companies, which means that returns will almost certainly decrease in the future.

Finally, the macro environment is now quite unfavorable.

If you think about the 1980 – 2020 period, almost everything benefited private equity: falling interest rates, low inflation, good demographics, rising emerging markets, plentiful energy, and a massive bull market in risk assets.

We’re no longer in an environment of “falling interest rates,” “low inflation,” or “plentiful energy,” and the other factors are all worse as well.

Some firms will still succeed, but it will be difficult to do so simply by riding the macro wave.

Alternatives to Starting a Private Equity Firm

If you want to start a private equity firm, there’s a ~95% chance you probably shouldn’t.

But the alternative options depend on your goals.

Let’s go through the list:

• If you want prestige and the ability to tell people that you “run a PE firm,” you should seek a psychiatrist or therapist.
• If you like PE and want to earn more or get promoted more quickly, move to a different firm or group.
• If your goal is to “become wealthy,” i.e., $5 – $10 million net worth but not necessarily a $100+ million net worth, start your own business, invest in real estate, or join a startup. Or stay in the finance industry and grind your way up.
• If you still want to start your firm but have little experience/money and cannot raise much capital, think about search funds.
• If you inherited an 8-figure sum from your uncle and want to “play around with it,” think about starting a micro-VC firm or making angel investments. This is enough money for investing in early-stage companies but not for private equity.

And if you’re a university student, my advice is to avoid thinking about any of this because you have no idea what the world will be like in 10-15 years.

Get experience in different industries, complete internships early in university, and, most importantly, develop marketable skills in your 20s that will make money in any environment.

Do that, and you’ll probably forget that you ever looked up how to start a private equity firm.

The post How to Start a Private Equity Firm – and Why You Probably Shouldn’t appeared first on Mergers & Inquisitions.

Over the past week, there has been a ton of speculation on social media that Credit Suisse – and possibly also Deutsche Bank or UBS – is about to have its “Lehman Brothers” moment.

If you’re reading this right now, you’re probably too young to remember what happened, but the Wikipedia article about the 2008 financial crisis has a good summary.

In short, a gigantic housing bubble in the U.S. burst, banks that bet heavily on “subprime mortgages” to support this bubble started collapsing, and in September 2008, Lehman Brothers – formerly one of the biggest investment banks – went bankrupt.

Everyone knew the bank was troubled throughout 2007 and 2008, but most people assumed the government would bail it out, as it had already done for Bear Stearns.

Instead, the Federal Reserve shocked everyone by allowing a bankruptcy, which soon turned into the largest in U.S. history (involving over $600 billion in assets).

Meanwhile, Barclays and Nomura acquired Lehman Brothers’ investment bank in different regions, and Barclays turned itself into a bulge bracket bank like that.

Many of the same things that happened to Lehman in 2008 have been happening to Credit Suisse and Deutsche Bank in 2022:

• The stock price is down by 30-50%+ year-to-date.
• Credit default spreads have hit record highs.
• There have been scandals, and investments have gone horribly wrong.
• And there are doubts about the bank’s loan quality and funding sources.

So, will Credit Suisse (or DB or UBS) be “Lehman Brothers 2.0?”

The short answer is that it’s very unlikely that any of these firms will go bankrupt .

But a spin-off, divestiture, restructuring, or another major event is likely:

The European Investment Banks: How Did We Get Here?

Credit Suisse, Deutsche Bank, and UBS have all underperformed the U.S. banks since 2008, to the point where they’re now considered “lower-tier” bulge brackets.

Several factors have contributed:

• Some of these firms now focus on wealth management and other non-IB activities.
• Some of these banks are stronger in specific regions, such as Asia, and are happy to pursue growth in these regions at the expense of the U.S.
• The macro and regulatory environment in Europe is quite different, and banks have been hurt by higher compliance costs, negative interest rates, and poor economic growth and demographics.

There are also bank-specific factors. I’ll focus on CS here to make this a shorter list:

• They made bad bets on Archegos and Greensill and are likely exposed to other investments about to go bust.
• They’ve had various scandals over the past few years (corporate espionage in 2019, issues with the private banking division, fraudulent bonds in Mozambique, the CEO resigning in 2020…).
• And their recent performance has been quite bad (losses of 1.65 billion CHF in 2021 and 1.9 billion so far in 2022).

The bank plans to reveal a turnaround plan on October 27^th, which might include job cuts, asset sales, spin-offs, and maybe a fresh capital raise.

The CEO also sent out a letter this past weekend pointing to the bank’s “strong capital base and liquidity,” which completely backfired and made more people doubt the firm.

“All rumors are false until officially denied.”

Why Credit Suisse is in a Much “Less Bad” Situation Than Lehman Brothers

When analyzing these situations, I prefer to focus on the numbers rather than rumors and fearmongering on social media.

But we need to cover some quick FIG accounting to explain the comparison between Lehman and CS first.

All banks must maintain a minimum amount of Common Shareholders’ Equity (CSE) relative to their Total Assets or “Risk-Weighted Assets.”

In addition, all banks have a contra-asset called the “Allowance for Loan Losses” that represents the losses the bank expects to incur on its loan book.

This Allowance is for expected losses, and the bank’s CSE is for unexpected losses:

If a bank expects to lose more on its loans, it records that in the “Provision for Credit Losses” on the Income Statement; unexpected losses also appear here because it increases its Provision to reflect them.

Since unexpected losses affect the Income Statement, they reduce the bank’s Net Income and, therefore, its Common Shareholders’ Equity (CSE).

The problem is that if this CSE reaches $0, other parts of the Liabilities & Equity side of the Balance Sheet must “absorb the losses” as the Assets side keeps decreasing.

“Other parts” means “Debt and other funding sources, AKA the creditors” (bad) or “Deposits, AKA the bank’s customers” (really bad).

To avoid this scenario, banks must maintain their CSE – and variations like Common Equity Tier 1 (CET 1) and Tangible Common Equity (TCE) – at or above certain levels.

After the 2008 crisis, regulators also added rules about the bank’s “stable funding” sources (the Net Stable Funding Ratio) and the bank’s liquidity (the Liquidity Coverage Ratio).

Assuming a bank reports its results honestly, we can use these ratios to assess its risk.

I’ll compare CS, based on its Q2 results as of June 30, 2022, and Lehman as of its last full 10-Q on May 31, 2008 here:

In short, Credit Suisse is in no way comparable to Lehman Brothers.

Many of these ratios did not exist when Lehman went bankrupt, but if the LCR or NSFR had existed, Lehman’s would have been dangerously low (far below the 100% minimum).

That’s why Lehman failed: its short-term funding sources dried up as counter-parties lost faith in the bank, and it had minimal customer deposits for long-term funding.

By contrast, CS relies far more heavily on deposits than Lehman, and it uses ~2x less leverage (as measured by CSE / Total Assets and the related ratios).

Many of CS’ debt instruments can also be converted into equity if things get dire enough; they’re even labeled “Bail-in debt and other instruments”:

If regulators decide the company needs more equity, they can force a conversion of these instruments so that creditors take the loss.

They did this with Monte dei Paschi in Italy in 2016, although some argued it was more of a bail-out than a bail-in.

But What About the Credit Default Swaps?!! This Guy on Reddit Said…

Yes, I agree, the spreads on 5-year CS credit default swaps – which measure credit risk – have surged by 4-5x since January:

But the implied default probability is still low – something like ~5% within the next year.

Also, note that plenty of banks have had their CDS spreads blow up, and nothing has necessarily happened. One example was Morgan Stanley back in 2011.

Rising spreads can indicate troubled companies, but they tend to overestimate default probabilities because speculators often get overzealous when rumors spread.

Why I’m Skeptical of a Collapse But Not Other Events

Besides the quantitative differences above, there are some other important differences.

First, in 2008, the large banks were at the center of the subprime mortgage crisis.

This time around, some banks have made bad decisions, but they’re caught in the crosshairs of various other crises (inflation, energy, Ukraine, supply chain, currencies, etc.).

So, I’m not sure the general public would “blame” a failing bank for its failures quite as much as it did in 2008.

And after seeing the aftermath of Lehman, I doubt any regulators want to repeat the incident.

For CS or DB or any other large bank to outright fail, there would have to be something like major fraudulent activity at the highest levels… and incompetence does not equal fraud.

With all that said, these European banks will likely experience one or more major “events” very soon.

These might consist of:

• Divestitures of their non-performing loans (NPLs) or other assets.
• Spin-offs or divestitures of certain divisions, such as IB, wealth management, or private banking.
• Across-the-board cost cuts (AKA layoffs).
• And one of them might even be acquired (but it might be tricky because of rules around deposit concentrations).

What If You’re About to Start Working at CS or DB or Another “Troubled Bank”?

I can’t say much here because the job situation depends completely on the outcome of whatever happens to these firms.

There is precedent for banks rescinding summer internship and full-time offers in crisis years, but it didn’t happen in 2020 – contrary to my expectations.

If there is a divestiture of the IB group at one of these firms, you’ll probably be fine in the short term, even if they move to “cut costs” in the longer term.

If there is an actual liquidation or government-forced wind-down, you will not be fine (but, again, this seems incredibly unlikely).

So, should you start looking for other internships or full-time jobs to hedge yourself?

Unfortunately, it’s a bad time to look for other jobs because banks, tech firms, and other desirable workplaces have been announcing job cuts and hiring freezes.

Also, “full-time hiring” for banks doesn’t exist much outside of bringing back summer interns who performed well.

So, you could certainly reach out to your network and ask about other openings, but your time might be better spent looking at non-IB roles, such as ones at normal companies or even in corporate/commercial banking.

If you’re already working full-time at one of these firms, it’s a decent idea to reach out and start asking about other opportunities, but I don’t think you need to enter “panic mode” yet.

The biggest risk isn’t that one of these firms will collapse, but that in the long-term, it de-emphasizes groups such as IB even more.

So, from a long-term career perspective, you might be better off elsewhere, even if it makes sense to stay there in the short term.

Disclaimer

I’ll close with a disclaimer: I have a mixed track record with major predictions.

For example, in the middle of 2008 – when this site was less than a year old – I thought the U.S. government would not let Lehman Brothers fail.

I even mentioned this in a few reader emails, including in one message to a person with an offer there (oops).

In 2020, I thought banks would rescind internship offers due to COVID, but they kept the internships and made them all “virtual.”

I was closer to the mark on other predictions (Brexit, Trump, etc.), but I’ve certainly been wrong on some major issues before.

All that said, I think that social media has been overreacting to this one… and most bankers seem to agree.

The post Will Credit Suisse, Deutsche Bank, or UBS Become Lehman Brothers 2.0? appeared first on Mergers & Inquisitions.

We covered investment banking in Canada a long time ago on this site, but things have changed over time – and the original article was light on details and numbers.

Although there are some advantages to IB in Canada, it’s almost always better to start a finance career in the U.S. or U.K.

I can already hear Canadian readers screaming and proclaiming the benefits of free healthcare, so I’ll acknowledge that Canada does have some advantages over the U.S.

You could also argue that finance careers there beat most other careers in Canada, especially as a recent graduate.

But when you consider the recruiting landscape, compensation, and exit opportunities, Canada comes up short in most areas.

Let’s start with a quick industry overview before moving into the more controversial areas:

Investment Banking in Canada: Top Banks, Locations, and Industries

Canada is significantly smaller than the U.S. in terms of population, economy, and capital markets, and this one difference explains everything else.

It means the capital markets and banking systems are less developed and that the average deal size and volume are both lower.

It also means fewer investment banking positions within the country, making recruiting more challenging.

The Big 5 Canadian banks – the Royal Bank of Canada (RBC), the Bank of Montreal (BMO), the Toronto-Dominion Bank (TD), the Bank of Novia Scotia (Scotiabank), and the Canadian Imperial Bank of Commerce (CIBC) – tend to dominate domestic equity and debt deals.

You could also include National Bank to make it the “Big 6.”

M&A activity, as measured by dollar volume, is more of a mixed picture, and the bulge bracket banks tend to do very well because of many cross-border deals.

The Big 5/6 Canadian firms all have centers in Toronto with regional offices in places like Calgary, Montreal, and Vancouver.

Among these banks, most people would say that RBC is the strongest one internationally, followed by TD or BMO.

RBC’s M&A and BMO’s M&M (Metals & Mining) groups are usually viewed as the “best teams,” or at least the best-known ones internationally.

The bulge bracket banks also operate in Canada, but they tend to be more active on M&A deals – especially larger, cross-border ones – and on larger debt and equity offerings (over $1 billion).

Since the domestic capital markets are smaller, larger Canadian borrowers often issue in USD or other currencies to market to a larger investor base.

The standard “ranking” of BB banks is similar; GS, MS, and JPM still tend to be viewed as the top firms.

The elite boutiques have a presence in Canada, but they’re less active than in the U.S.

You’ll see the likes of Evercore, Rothschild, Lazard, and Greenhill advising on deals, along with Perella Weinberg Partners (PWP) via its merger with Tudor, Pickering & Holt (TPH).

Then there are the Big 4 investment banking / corporate finance groups, which tend to focus on much smaller deals, such as ones in the middle-market range and below.

Interestingly, many U.S.-based middle-market banks do not have offices in Canada, which leaves the market to other firms.

You could make a long list of Canada-specific middle-market and boutique investment banks, but a few names include Agentis Capital, ATB Capital (FKA: Altacorp), Canaccord, Capital West, Casgrain, Cormark, Desjardins, Eight Capital, Fort Capital, Haywood, iA Capital Markets (Industrial Alliance), Laurentian Bank Securities, Macquarie (operates more like a boutique), Maxit Capital (mining and merchant banking), Paradigm Capital, Peters & Co (energy), Research Capital (FKA: Mackie), Stifel FirstEnergy, and Stifel GMP.

Investment Banking in Canada: Toronto vs. Calgary vs. Montreal vs. Vancouver

Toronto is the biggest financial center, but it still has fewer IB jobs than places such as New York, San Francisco, or Chicago in the U.S.; it might be on par with LA.

After Toronto, either Montreal or Calgary tends to have the most deal activity, but Calgary is highly cyclical because of its oil & gas focus.

Montreal, like Toronto, covers diversified industries, but caters to companies in Quebec.

And Vancouver has a mining and forestry focus, with some bankers covering other companies that happen to be based in British Columbia.

Besides the industry focus and languages (French in Montreal), other differences between these locations and Toronto include:

• Office Size: The regional offices are all smaller, with ~10-15 up to a few dozen people in each, so there are fewer new hires.
• Target Schools: Students at “target schools” place well country-wide, but in some of these locations, you’ll also have a good shot coming from schools that are in the “semi-target” category, such as the University of British Columbia (UBC) [PMF] and Simon Fraser University (SFU) in Vancouver.
• Advancement: It can be more difficult to advance in regional offices because the teams are smaller and there’s less turnover at the mid-to-top levels.
• Deal Flow: It tends to be less consistent due to the focus on specific industries, regions, or company types in these other offices.

Investment Banking in Canada: Recruiting and Interviews

The IB recruiting process in Canada is similar to the one in the U.S.: it starts with online applications and HireVue interviews and proceeds to in-person interviews if you perform well (unlike EMEA, there are no assessment centers).

They ask similar interview questions, but some technical questions may differ because Canadian companies follow IFRS rather than U.S. GAAP.

As a specific example, lease accounting differs substantially under IFRS, so accounting questions about this one could come up.

Bankers still look for the same qualities in candidates: high grades, a well-known university, finance internships in your first and second year, and strong technical skills.

The main differences are:

• Timing: While the IB recruiting timeline has moved up in both the U.S. and Canada, it’s still a bit slower in Canada, with the Canadian firms starting and finishing a few months after the earliest start dates in the U.S.
• Number of Positions: Each Big 5 bank might hire a dozen or so Analysts for its Toronto office each year, and if you add the other cities, the bulge bracket banks, and the boutique and middle-market firms, there are maybe ~100 – 200 new IB Analyst hires across Canada each year.

I can already predict that someone will argue with this number in the comments, but the order of magnitude is correct (i.e., the number of new IB Analysts hired each year is closer to 100 than 10 or 1,000).

• MBA Recruiting: This is much less developed, so it’s harder to make a career change. Most Associates are Analysts who accept promotions.

Most of these differences sound negative, but there is one positive point: traditionally, getting a work visa in Canada has been easier than in the U.S. because there are more immigration pathways.

Investment Banking Target Schools in Canada

Western University (Ivey) and Queen’s University (Smith) are the top two schools for investment banking in Canada.

After that are McGill (Desautels), Waterloo (stronger for S&T / markets roles), and the University of Toronto (Rotman).

Below them are others such as the University of British Columbia (specifically, the Sauder Portfolio Management Foundation [PMF] program), Wilfrid Laurier, the University of Calgary, York (Schulich), HEC Montreal, the University of Alberta, and Concordia.

You could say these are “semi-targets” or “targets for specific locations.”

Why is Recruiting into Investment Banking So Hard in Canada?

Many people complain online about the difficulty of recruiting for IB roles in Canada.

It is more difficult to win offers there, but the main issue is that there aren’t that many new hires each year.

If you consider the top few schools, there might be ~1,500 graduates each year, but not all of them are interested in banking, and not all of them stay in Canada.

Perhaps one-third of this total – a few hundred candidates – target IB roles in Canada.

Source: The Ivey HBA employment report cites 575 graduating students, with 12% accepting IB roles, so it’s reasonable to assume that some multiple of this 12% applied for these roles.

Students from semi-target and other schools also compete, so the annual pool might be ~500 – 1,000 candidates for ~100 – 200 spots.

With these numbers, the success rate could be anywhere from 10% to 40%, but something in the middle (20 – 25%) is probably closest to the truth.

These are not terrible odds, but they’re modestly worse than the ones in the U.S. and U.K.

Investment Banking in Canada: Salaries and Bonuses

The general pattern here is:

3. Banks tend to pay similar base salaries and bonuses to the U.S., but in Canadian dollars (CAD) rather than USD, which means a 20 – 30% discount depending on FX rates.
4. Sometimes, the absolute numbers in CAD are also lower because Canadian banks tend to match pay increases in the U.S. more slowly (e.g., they might be 6 – 12 months behind).
5. And to make things even more confusing, some U.S.-based firms, such as Evercore and Greenhill, do pay in USD, in which case compensation is about the same as in the U.S.

If you go by 2022 investment banker compensation numbers and apply this 20 – 30% CAD/USD discount, it’s roughly $110K – $190K USD for Analysts and $225K – $410K USD for Associates.

I don’t have specific numbers for MDs and other senior bankers, but bonuses are likely lower because deals tend to be smaller.

The Lifestyle and Hours in Canada

Now we arrive at one bright spot: on average, the hours and lifestyle are slightly better in Canada.

Deal flow is lower, transactions tend to be simpler, and financial sponsors (private equity firms) usually account for a low percentage of all M&A deals (~20 – 30% range).

There’s also less travel because many client companies are concentrated in or near a few major cities.

It’s still investment banking, so don’t expect “normal hours,” but you’re less likely to get crushed by 90-100-hour workweeks in most groups.

The average week at the junior level might involve ~10% fewer hours than an equivalent group in the U.S. (e.g., a Big 5 Canadian M&A team in Toronto vs. M&A at a bulge bracket in NY).

Investment Banking in Canada: Exit Opportunities

The main exit opportunities in Canada are:

1. Move into private equity, usually at a middle-market or smaller fund (with a few seats at the mega-funds and the large domestic firms).
2. Join a pension fund in a direct investing role.
3. Join a corporate development team at a normal company or move into another industry role.
4. Accept an Analyst-to-Associate promotion.

There is very limited hedge fund activity in Canada, so hedge funds are not a common exit option.

This might sound like a reasonable set of exit opportunities, but the problem is the smaller market size.

If there are ~100 – 200 new IB Analysts hired within Canada each year, there are not even close to that many new private equity and pension fund positions.

Firms might hire a few dozen new Associates, so ~70% of IB Analysts will stay in banking or move to a corporate role.

Within private equity, there are some large, independent funds like Onex, Brookfield, Catalyst, Birch Hill, and Altas.

However, all of these – except for Onex and Brookfield – are closer to mid-sized firms in the U.S. if you judge them based on AUM or average deal size.

There are also many lower-middle-market (and smaller) firms, such as DW Healthcare, Fengate, Forum, Georgian, Inovia (more of a VC), Northleaf, NovaCap, Sagard, and TorQuest.

As with smaller firms in the U.S., compensation tends to be lower at these firms, and advancement is sometimes tricky if the firm is extremely small and Founder-led.

Outside of the dedicated private equity firms, the biggest PE investors are the pension funds: Canadian Pension Plan Investment Board (CPPIB), Caisse de dépôt et placement du Québec (CDPQ), Ontario Teachers’ Pension Plan (OTPP), British Columbia Investment Management Corporation (BCI), Ontario Municipal Employees Retirement System (OMERS), and a few others.

Of these, CPPIB and OTPP are the most active in private equity – by far – and tend to compete with the mega-funds for large deals worldwide.

A long time ago, pension funds operated more like private equity funds of funds, but they have built their direct investing teams over time.

Besides the relatively few positions, the other problem with exit opportunities in Canada is that compensation tends to be lower than at similar U.S. firms, even though cities like Toronto are quite expensive.

Salary and bonus numbers differ between direct PE firms and pension funds and depend on the firm’s AUM, but the broad range for Associates is $150K – $350K CAD.

If you ignore the “CAD” part, it doesn’t seem that much different from compensation in the U.S., but it’s a 20 – 30% discount with that factored in.

Also, pension funds pay less than firms like Onex and Brookfield, and (lower)-middle-market PE firms pay less than pension funds.

Pension funds pay lower bonuses and do not offer carried interest, so the pay is also lower at the top levels.

So, do not expect to see the top-end of this range unless you’re at one of the top two firms.

One Final Note: If you want to recruit for PE and other roles outside of Canada, you’ll have a better shot if you work at one of the top U.S. banks.

For exit opportunities within Canada, one of the Big 5/6 or other domestic firms is fine.

Investment Banking in Canada: Final Thoughts

I don’t think investment banking in Canada is terrible, but it is worse than starting in the U.S. or U.K. if you can win sponsorship there or you’re already a citizen or resident.

The compensation is lower than in the U.S., the industry is smaller, and there are fewer exit opportunities.

There are some benefits, such as slightly better hours and easier work visas in some cases, but I’m not sure these offset the negatives.

So, if your goal is to maximize compensation and exit/advancement opportunities, go to the U.S.

If you want a better work/life balance, you’re fine with reduced compensation, and you want broader exit opportunities, go to the U.K.

And if you have other priorities, such as family/personal motivations, and you want to earn a lot even if you’re not maximizing your compensation, maybe investment banking in Canada is just fine.

It could always be worse – at least you’re not in Australia!

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