Look around online, and you will quickly discover that most coverage of venture capital interview questions is junk.

Most articles are copied/pasted/tweaked text, others appear to be written by ChatGPT, and others repeat generic questions you might get in an interview for a janitorial position.

But there is a decent reason for all this: It’s much harder to write an article about VC interview questions since they are far less standardized than IB interview questions or PE interviews.

That said, it is still possible to explain the most important topics and give a few preparation tips, so let’s get started:

The Biggest Differences with Venture Capital Interview Questions

I’d summarize them as follows:

1. Less Technical and More Research – They’re not going to quiz you on merger models or how to calculate the IRR quickly, but they will expect that you’ve read about their firm and their portfolio companies and that you have investment ideas.
2. No Right or Wrong Answers – Some technical questions have correct answers, but many market and investment ones do not. There are better and worse explanations for your answers, but in the absence of time travel, VC interviewers can’t determine if your startup investment pitch was “correct.”

In some ways, prep for VC interviews is easier because you don’t have to learn or memorize many technical topics, but in some ways, it’s harder since you have to do lots of firm-specific research.

Categories of Venture Capital Interview Questions

I would split VC interview questions into 6 main categories. We’ll explain each one and give a few examples along with model answers:

1. “Fit” and Background Questions – Your resume, why venture capital, why this firm, your strengths and weaknesses, etc.
2. Market and Investment Questions – Which startup would you invest in? Which market is attractive? Which markets should we avoid?
3. Firm-Specific and Process Questions – What do you think about our portfolio? Which companies would you have invested in or not invested in? How would you analyze a potential investment and make a decision?
4. Deal, Client, and Fundraising Experience Questions – How did you add value to the deals you’ve worked on? If you worked at a startup, how did you win more customers or partners in a sales or business development role?
5. Technical Questions – You could get standard questions about accounting and valuation or VC-specific questions about cap tables, key metrics in your industry, or how to value startups.
6. Case Studies and Modeling Tests – These are less likely, but you could get a short investment recommendation, a market/company analysis, or a cap table exercise.

Venture Capital Interview Questions: Fit / Background

Q: Walk me through your resume.

A: See our guide and examples for the “Walk me through your resume” question and the article on how to walk through your resume in buy-side interviews.

The main difference for VC is that you want to emphasize your desire to advise and invest in startups in the long term.

For example, you could say that you liked the client and relationship aspects of IB but are less interested in the technical work, and you would make a bigger impact working with early-stage companies.

Q: Why venture capital?

A: Because you are passionate about working with startups, helping them grow, and finding promising new companies – and you prefer that to starting your own company or executing deals.

You can also link this back to tech or healthcare companies you’ve advised or earlier-stage businesses where your work made a difference.

Q: Where do you see yourself in 5 or 10 years?

A: The answer depends on whether you’re interviewing for a Partner-track position, which usually means “post-MBA role.”

If you are, the only correct answer is, “I want to continue in venture capital, advance, and make a long-term career of it.”

If not, you can say that you want to work with startups in the long term, but you understand that candidates normally move into something else after a few years.

So, you could mention a related job, such as strategy, finance, or business development at a portfolio company, and say that you want to return to VC at a higher level eventually.

Q: What are your strengths and weaknesses?

A: See our walk-through, guide, and examples. For VC, your strengths should include points like “communication/presentation skills,” “networking ability,” and “being able to update your views quickly” (i.e., strong opinions, loosely held).

For weaknesses, it might be acceptable to say that you don’t have the best technical skills or sometimes have trouble balancing important, long-term tasks with short-term, urgent ones.

It’s probably not a great idea to say that you second-guess yourself or take too long to make decisions because these are both bad weaknesses for investing roles.

Q: Why not private equity, growth equity, hedge funds, or entrepreneurship?

A: You’re most interested in tech or life science startups, and PE funds and hedge funds do not work with these companies in the same way, as they don’t directly fund their development activities.

Growth equity is a bit closer, but you’re more interested in early-stage companies that need VC support rather than already successful companies that need more capital.

Finally, you’re not interested in starting your own company because you like to advise portfolio companies and get a broad view of the industry rather than working on one idea for years or decades.

Q: Why our firm?

A: This one should relate directly to your research on the firm, including their target markets and portfolio companies. Example answer:

“I’m interested in your firm because you focus heavily on tech-enabled healthcare, which matches my biology and computer science background, and you have some of the best portfolio companies in the market, like [Insert Names]. I have also liked everyone I’ve met here, such as [Insert Names], and think I would fit in with your culture.”

Venture Capital Interview Questions: Markets and Investments

These questions span a wide range, as they could ask you to discuss everything from the current M&A and IPO markets to specific startup sectors you like.

There is no real “answer” to the preparation other than “Read a lot about markets and specific startups each week.”

Q: Tell me about the current IPO, M&A, and VC funding markets.

A: This one will change over time, but if you’re interviewing in 2023, you could say something like:

“Currently, all these markets are doing poorly after many companies went public over the past few years due to loose monetary conditions – and then failed to perform well. So, the IPO market has largely been closed, but there are some signs that it’s now opening up with recent deals like ARM and Instacart.

M&A activity is also down significantly, and higher interest rates, inflation, and more antitrust enforcement are making many companies think twice about acquisitions.

Finally, VC funding is also down significantly, and fewer startups are getting funded – and when they do get funded, it’s typically at much lower valuations than in the boom years, especially for late-stage deals.”

Q: Which current startup would you invest in? Why?

A: As with hedge fund stock pitches, you need to research markets and companies and develop 2-3 solid ideas here. These ideas must match the firm’s strategy and represent significant potential upside.

In other words, if the firm does mostly Series A investments, you should present ideas that could potentially generate a 10x multiple; but if the firm focuses on later-stage investments, the potential multiples can be lower.

Example answer:

“I would invest in Novoic, a healthcare IT startup in the U.K. that is using AI to do early detection of Parkinson’s, Alzheimer’s, and other diseases based on variances in speech patterns. It raised a $2.6 million seed round a few years ago, and if it could capture even a small percentage of the ~$3 billion revenue Alzheimer’s diagnostics market, it could be worth $500 million to $1 billion in 5-10 years. The market could also be much bigger than people think, especially due to aging populations worldwide – expectations are that it will double by 2030, but I think it could triple by then as younger people increasingly use these early detection tools.”

Q: Which markets are the most attractive to you? Why?

A: For this one, you should find highly specific markets – such as P&C insurance technology rather than “fintech” – and argue that others have overlooked them for reasons X, Y, and Z, but they could potentially create billion-dollar startups.

Avoid mentioning markets that are over-hyped or that represent “The Current Thing.”

Example answer:

“I would be interested in anything in the ‘care tech’ space, especially marketplace companies, because the population in most developed countries (and China) is aging rapidly, and there aren’t enough doctors, nurses, and care workers to meet demand, so technology will have to meet at least some of the needs. Marketplace companies also solve the problem of younger people who need to find jobs or income sources outside the traditional channels.

If you consider the hundreds of millions of elderly by 2030 or 2040, this market could potentially be worth tens of billions by then, with many startups positioned to grow as a complement to the traditional healthcare system.”

Q: Which markets should we avoid?

A: You’ll make the opposite argument here and say that a market is worse than the consensus view because it’s smaller than expected, it will grow more slowly than expected, or it has other disadvantages, such as too much competition or no way to build a “moat.”

Example answer:

“I would avoid anything in the ‘general AI’ space right now because most of these companies are building ‘products’ that should be features, and most of the benefits from this technology will go to the biggest tech companies, not startups. Although there have been many high-profile funding rounds lately, I don’t think most of these companies will have good outcomes for investors. There might be room for investment in something with proprietary data or a huge moat, such as a patent or other IP that gives them access to a market and limits competition.”

Venture Capital Interview Questions: Firms and Processes

These questions are important in venture capital recruiting because firms value “fit” so much – if you haven’t researched the firm and its portfolio extensively, they’ll find out quickly.

Q: Of our portfolio companies, name one that you would have invested in and another that you would not have invested in.

A: Most of your answer here should come down to the market being smaller or bigger than expected, but for later-stage companies, you can add something about the competition, the company’s product/services, and even its valuation in recent funding rounds.

Example answer:

“I would have invested in Qventus because the ‘hospital optimization’ space is huge, and many struggling hospitals are looking to cut costs ASAP. It has raised over $90 million so far at relatively low valuations, most recently in the hundreds of millions, and I believe it could eventually grow to a $1 billion market cap company, which might produce a 10x+ multiple for you.”

“I would not have invested in cargo.one because the freight forwarding space is quite crowded and commoditized, and while the market is big and the company’s product is good, it doesn’t do enough to differentiate against the competition. It might still produce a decent return, but I would have avoided this specific market and focused on others with higher potential.”

Q: How would you think through an investment decision?

A: First, you must ensure that the startup matches your firm’s size, stage, and strategy. If your firm only does Seed and Series A investments in tech companies, you won’t invest in a Series D round for a biotech company.

Next, you research the market and estimate how big the company could eventually get and what it might be worth to see if you could earn a reasonable multiple, such as 10x for a Series A or 5x for a Series B deal.

Then, you look at the team, the product, and the competitive advantages and make sure all of these are reasonable. As part of this, you’ll request due diligence data on users, customers, financial performance, clinical trial data for biotech companies, and SaaS metrics for enterprise software companies.

If all of these check out, you might recommend investing.

Assessing the risk is not that important for early-stage VC investments because most startups fail – so you focus on the potential upside rather than everything that could go wrong.

Q: Suppose that you join our firm. How would you screen for new companies to invest in?

A: You would start by reading about the market and its current startups and finding product, team, and financial information.

However, the best VC deals tend to come from your network and personal referrals – so once you have an idea of the companies you’re seeking, you would reach out to everyone who might be connected and see if they can make introductions.

You’ll usually review each startup’s pitch deck or meet with them, and if they’re of interest, you’ll go through additional meetings and request more information before investing (see above).

Q: What are the most important provisions in VC term sheets?

A: The most important terms relate to economics and control. With economics, the investment amount and pre- and post-money valuations are critical, but so are terms like the employee options pool, liquidation preference, and participating preferred and participation cap (if they exist).

The pay-to-play and anti-dilution provisions are also important for determining what happens to a VC’s ownership in future funding rounds.

With control, the key terms are the Board of Directors composition, “protective provisions” that allow investors to veto certain actions, and drag-along rights that effectively allow one investor group to make decisions for the other group(s) (usually, majority shareholders “dragging along” minority shareholders).

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There are many other potential questions, such as queries about the VC business model, the typical investment stages, sizes, and valuations, and how you might monitor portfolio companies.

Venture Capital Interview Questions: Deal, Client, and Fundraising Experience

Your deal experience could come up in venture capital interviews, but it tends to be less important because VC deals are relatively simple.

If you have an IB background, you should outline your deals by following the examples in the investment banking deal sheet article, and you should pick deals that are relevant to venture capital – a tech or healthcare IPO, a joint venture between two software companies, or something that required significant market analysis.

You should also take a critical view of each deal and be able to explain why you would or would not have done it if you had been the buyer or institutional investor.

These questions are not specific to VC interviews, so please refer to the other coverage on this site, such as in the private equity resume guide.

Venture Capital Interview Questions: Technical Concepts

You are highly unlikely to get traditional IB interview questions in VC interviews, but they could ask about VC-specific topics, such as different types of funding, startup metrics, and so on.

Q: What’s the difference between pre-money and post-money valuations?

A: The “pre-money valuation” is a startup’s Equity Value before it issues new shares to the VC firm, and the “post-money valuation” is the startup’s Equity Value after that happens.

If  the company’s pre-money valuation is $10 million before it raises $5 million from a VC firm, its post-money valuation is $15 million, and the VC firm owns $5 / $15 = 1/3 of it.

Q: Why would a startup raise money in a priced equity round vs. a SAFE note vs. a convertible note?

A: A priced equity round is based on the amount invested and the pre-money valuation, and the investors own Investment Amount / (Pre-Money Valuation + Investment Amount) afterward.

The ownership is clear, but priced rounds take longer to negotiate and may be more expensive.

Some startups prefer options like SAFE and convertible notes that defer the valuation and ownership questions. Investors that use these instruments contribute capital but do not get shares right away – instead, they convert into equity in the next priced round.

These instruments can be faster and cheaper, but they may also create problems in the priced round because the conversion method isn’t always clear, and future investors may dispute it.

Convertible notes are more complex than SAFE notes and might have terms like accrued interest in addition to the standard valuation cap and discount.

Q: What are some key metrics and ratios for SaaS companies?

A: We have a full video tutorial on this topic (see the notes). Important ones include the Lifetime Value (LTV) and CAC (Customer Acquisition Cost) and the resulting LTV / CAC ratio.

The CAC Payback Period, i.e., the number of months it takes to earn back a customer’s acquisition cost, is also important because it is far less subjective than LTV.

Other important metrics include the Gross Retention, Net Retention, Annualized Recurring Revenue (ARR), and Monthly Recurring Revenue (MRR).

ARR is different from normal “revenue” because it’s based on the recurring revenue in one month or one quarter, annualized for the entire year. So, ARR tends to be higher than simple “revenue” for growth companies since the recurring revenue grows each month.

Q: How do you value a biotech startup?

A: Assuming it is developing patent-protected products, you usually use a Sum-of-the-Parts DCF where you project revenue and expenses for each drug, discount the cash flows to Present Value, and then add them up.

Unlike in a normal DCF, there is no Terminal Value – instead, you go out many decades and assume the drug hits “peak sales,” and that revenue then declines to a low level as generics enter the market.

In the final step, you also must factor in the PV of Net Operating Losses, the PV of corporate G&A / overhead, and the standard Enterprise Value bridge items to determine the company’s Implied Equity Value.

Venture Capital Interview Questions: Case Studies

Case studies could easily come up in VC interviews, but they tend to be more qualitative. They might give you a company’s pitch deck and financial information and ask you to evaluate the market, team, and financials, and make an investment recommendation (for example).

We have a direct example of a venture capital case study in our PitchBookGPT exercise, so refer to that if you want to practice.

If you get a more quantitative case study, it will probably be a cap table exercise or a variant of “Review the customer data and tell us what you would ask questions about.”

A simple cap table exercise might go like this:

• Seed Investment: $2 million at $8 million pre-money valuation with 1x liquidation preference.
• Series A Investment: $5 million at $15 million pre-money valuation with 1x liquidation preference and 10% employee options pool (created at the same time as the VC investment). Pari passu with the Seed investors.
• Series B Investment: $15 million at $50 million pre-money valuation with 1x liquidation preference. Senior to Seed and Series A.

Calculate the proceeds to each investor group at exit values ranging from $50 million to $300 million (use sensitivity analysis in Excel).

So, How Do You Prepare for Venture Capital Interview Questions?

This point goes back to the differences discussed at the top: VC interview prep requires far more research and outside reading.

Sure, you can complete a few case studies for practice, and it’s good to learn the basics of cap tables and the VC investment process, but they’re unlikely to ask you extremely technical questions about any of these.

Unfortunately, no article you can find online – including this one – gives you the magic-bullet solution because they cannot possibly know the specific firm you are interviewing with.

But if they did, they could probably replace most of the article text with “Google this firm and its portfolio companies extensively,” and you’d be well-prepared for venture capital interview questions.

The post Venture Capital Interview Questions: What to Expect and How to Prepare appeared first on Mergers & Inquisitions.

Ask anyone interested in distressed debt hedge funds for “the pitch,” and they’ll probably mention one of the following:

“It’s like long/short equity or credit, but more interesting!”

“Distressed investing offers equity-like returns with lower risk.”

“Distressed assets offer non-correlated returns, similar to global macro.”

These are nice sales pitches, but the reality is quite different.

Distressed debt investing offers advantages over other hedge fund strategies, but the marketing often oversells the benefits.

Some people can do very well at dedicated distressed funds, but in most cases, you’d be better off pursuing the strategy at a broader credit or event-driven hedge fund:

What Are Distressed Debt Hedge Funds?

Distressed Debt Hedge Funds Definition: Distressed debt hedge funds buy and sell debt that is trading at a steep discount to face value, such as 40%+, and make money by betting on changes in the price of this debt or using it to gain influence in a restructuring or bankruptcy process.

As discussed in the distressed private equity article, there is no universal definition for a “distressed security” or a “distressed company.”

However, various books and textbooks have defined “distressed” as follows:

1. Debt Discounts – If Secured Debt is trading in the low 90% range or below, or Unsecured Debt is trading in the 60-70% range or less, it’s typically distressed. These percentages mean the market is pricing in a high likelihood of creditor losses in a restructuring or bankruptcy.
2. Troubled Company – If the company has a low Cash balance, limited Revolver availability, and a looming debt maturity with no easy way to refinance at similar terms, it is usually distressed.

As an example of the first definition, if a company has issued $1000 of Unsecured Debt, but you can now buy it for only $600, it’s distressed.

The company still pays interest on the full $1000 and must repay it upon maturity, but you can buy the issuance at a steep discount because there’s a significant chance of default (see: book value vs. market value vs. face value).

A sharply declining stock price does not necessarily mean a company is “distressed.”

For example, let’s say a tech startup with no Debt goes public, and its stock price soars from $10 to $200 and then falls to $30.

This company is not distressed; it’s an overhyped tech startup that came crashing down.

Distressed investing relates specifically to Debt and how much a company’s Debt and Equity “should” be worth when various scenarios play out.

The catalysts could be anything from quarterly earnings announcements to covenant breaches to announcements of M&A deals, financings, or strategic reviews.

Distressed debt hedge funds could be classified within either the “credit” or “event-driven” categories, which make up a combined ~22% of all hedge funds:

An Example Distressed Debt Trade

To make this strategy more concrete, we’ll look at a company that initially raised Debt with this financial profile:

The company was levered at 5x Debt / EBITDA, but most of its Debt still traded near its face value or par value, as shown above.

A few years later, the company’s industry declined, and it was slow to cut costs and enter new markets. Its financial profile now looks like this:

Its Debt / EBITDA is now 10x, its EBITDA / Interest has fallen below 1x, the Secured Debt is trading at 90% of its face value, and the Unsecured Debt is down to 60%.

The company has only $100 million of Cash and $150 million of Revolver availability, so it cannot repay the upcoming Secured Debt maturity.

It could refinance, but it will have to accept a significantly higher interest rate on the new issuance – and it can barely afford interest at the current rates.

A distressed debt hedge fund could trade this situation in several ways:

1. Long the Secured Debt and Short the Equity: The fund might do this if it expects the company to announce a full liquidation, but it has determined that the proceeds from its net tangible assets can fully repay the Secured Debt. If they’re right, this will produce a quick 11% gain from the Debt and more from the Equity. This scenario is unlikely since the company’s Equity Value is only $200 million (less than the Secured Debt balance), but you never know…
2. Long Both Debt Issuances and Use CDS to Hedge: If the fund expects the company’s business to turn around in the next earnings announcement, it might buy both the Secured and Unsecured Debt and use credit default swaps to hedge the default risk. If the Secured Debt rises to 98% and the Unsecured Debt rises to 80%, the fund will earn ~9% and ~33%, respectively, minus the hedging costs.
3. Long the Secured Debt and Short the Unsecured Debt (or Use CDS): If the fund expects the Secured lenders to be repaid in full as the Unsecured lenders get wiped out, it might bet on one tranche and against the other. In this scenario, they would earn 11% on the Secured Debt and, if the Unsecured Debt falls to 10% of face value (for example), an 83% return there.

Distressed Debt Hedge Fund Strategies

I’ll refer you to the distressed PE article for more on this one, but there are five basic distressed investment strategies:

1. Distressed Debt Trading – Buy Debt that trades at a big discount to face value, such as 30 – 40%, and sell it once the price rises (or bet against the Debt with credit default swaps).
2. Distressed Debt Non-Control – Buy Debt to gain influence in the restructuring or bankruptcy process and earn a huge gain upon repayment – or get common shares in a debt-for-equity swap and sell the shares at a profit.
3. Distressed Debt Control – Buy the “fulcrum security” that will convert into Equity to gain a controlling stake in the company post-restructuring. This one is more common for distressed PE firms.
4. Turnaround – Acquire Equity before any bankruptcy or restructuring process and turn around the company to make it profitable and cash flow-positive. Again, this is more of a PE strategy.
5. Special Situations – This could include the events above but could also refer to investments in spin-offs, asset sales, recapitalizations, acquisitions, or capital raises.

Most distressed debt hedge funds follow strategies #1 and #2: trading and non-control.

Many hedge funds use strategy #5 (special situations), but they’re usually put in a slightly different category.

Within the “event-driven” category, distressed funds fit in as shown below:

How Are Distressed Debt Hedge Funds Different?

Most dedicated distressed funds offer less liquidity and longer lock-up periods than other hedge funds, and they tend to hold positions for months or years with fairly concentrated portfolios.

They also tend to use less leverage than equity and global macro strategies because it can be difficult to exit their stakes.

If a merger arbitrage fund holds an average of 100 positions, a distressed fund might hold only 10-15 (or even fewer).

You might wonder if these differences result in better performance for distressed funds, and the best answer is “Kind of.”

The distressed strategy outperformed equity and global macro in 2000 – 2019, but not the credit category as a whole:

In terms of risk, distressed funds have fairly standard Betas to stocks and bonds:

Many people correctly point out that 2010 – 2019 was a terrible period for distressed strategies due to zero interest rates and a flood of cheap money.

Outside of events like the oil crash and COVID, there weren’t that many true distressed opportunities because virtually any company could get funding.

So, I would expect distressed performance to improve, especially as companies start to feel the effects of higher rates.

The Top Distressed Debt Hedge Funds

There are single-manager distressed funds in the $500 million – $2 billion AUM range, but these are not necessarily the best funds to target for a few reasons:

1. Cyclicality – Distressed debt investing comes into and goes out of favor quickly, so you could easily go from dozens of opportunities one year to almost nothing the next. It’s a better career bet to aim for diversified funds that do everything from “stressed” credits to event-driven and deep-value strategies.
2. Influence – In many distressed situations, smaller funds are at a disadvantage because they might own 5% of the Debt, while firms like Apollo, Oaktree, or Blackstone own 50%+. They cannot compete for better terms or more influence in this scenario.

With that said, here’s how I would split up the distressed landscape:

Huge Funds That Do Distressed Investing: Apollo, BC Partners, Blackstone, Centerbridge, Fortress, GoldenTree, Oaktree, and Sculptor Capital (FKA: Och-Ziff).

Traditional Distressed Funds That Have Diversified: Anchorage (partially shut down), Brigade, Davidson Kempner, Elliott, Marathon, Silver Point, and York Capital.

Newer/Smaller Funds with Occasional Distressed Investments: Diameter, Kennedy Lewis, and Nut Tree.

You could add plenty of names to the second and third lists: Angelo Gordon, Appaloosa, Aurelius, Avenue, Baupost, Bayside, Beach Point, Canyon, King Street, Monarch, Mudrick, and Solus Alternative are examples.

A few of these funds specialize in distressed (e.g., Mudrick and Aurelius), while most use broader credit, event, and deep-value strategies and make occasional distressed trades.

How to Recruit for Distressed Debt Hedge Funds

The best background is restructuring investment banking because the skill set is directly relevant.

But you could also move in from Leveraged Finance or an industry group that does frequent debt deals.

DCM would be a tougher sell because you only work with investment-grade bonds.

If you have a non-IB background, such as at a turnaround consulting firm, you might want to aim for operational roles in distressed PE or move to banking first to improve your chances.

You can get into distressed investing at the MBA level, but more so if you’ve already done something relevant pre-MBA, such as credit risk at a large bank, and you move into restructuring IB after the MBA.

If you want to join directly out of an MBA program, you’ll almost certainly need turnaround or distressed experience pre-MBA.

You can also get into distressed investing with a legal background because the job requires you to interpret confusing documents and know the details of the restructuring and bankruptcy processes.

But it’s more common to go from law school to investment banking and then move to a hedge fund.

If you want to get into distressed investing directly out of law school, you’ll probably need:

• A degree from one of the top law schools in the country.
• Two relevant internships in 1L and 2L, such as at a restructuring boutique bank and a PE or credit-related one.

Most distressed funds use an off-cycle recruiting process, so the timing varies, and you’ll have to network proactively to find opportunities.

The large funds that operate in the distressed space use more of a structured, on-cycle approach, which is positive if you’re an IB Analyst at a top bank and negative otherwise.

If you’re recruiting for distressed roles in Europe, language skills (especially Portuguese/Italian/Spanish) help quite a bit because you’ll have to read the original documents and understand the nuances of local bankruptcy law.

Interviews, Case Studies, and Investment Pitches

The differences in credit hedge fund interviews also apply here: Expect many questions about bond math, including the YTM calculation, pricing, recoveries, seniority, and different covenants.

They could also ask you about the bankruptcy and restructuring processes and the options for distressed companies (see the restructuring IB article).

For your investment pitches, you don’t necessarily need to pitch all distressed ideas, but you should aim for “stressed” trades, such as a high-yield bond currently trading at 90% of face value.

The main difference vs. standard credit trades is that the range of outcomes is wider.

For example, you can’t limit yourself to catalysts such as positive or negative earnings or upcoming refinancings.

You must also consider what might happen in a debt-for-equity swap, liquidation, or Chapter 7 vs. 11 bankruptcies.

Your overall approach might look like this:

1. Screen for Stressed or Distressed Issuances – You’ll need Bloomberg or another data source in most cases, but you might be able to use online research to get ideas.
2. Plot Out the Possible Scenarios – And estimate the market value of each Debt tranche and the company’s Equity in the most likely outcomes
3. Create Your Trade – The simplest approach is to long one part of the capital structure and short another, but you could also long or short just one component and use options or CDS to hedge the risk.
4. Find Support – After you have estimated the returns in different scenarios, you should read the company’s credit documents and do some industry/competitive research so you can defend your views in interviews.

This process is time-consuming, so you don’t need to develop many ideas.

You might be fine with just two (2) separate pitches, and they could be based on similar distressed situations.

Careers at Distressed Debt Hedge Funds

The biggest issue with long-term careers is that there aren’t that many viable, dedicated distressed debt hedge funds.

Economy-wide distressed cycles only come along once every 10-15 years, so if your fund does nothing but distressed investing, you’ll be waiting a long time to invest.

Some people argue that higher interest rates and the rise of non-bank lenders will create more distressed opportunities in the future – and they might be right.

But it’s still a highly cyclical investment style with too much capital chasing too few opportunities in most markets.

So, if you want to work in distressed investing, you should aim for a larger, diversified fund that uses a range of credit and event-driven strategies and has relationships with many companies.

The other differences noted in the credit hedge fund article also apply here: You’ll work longer hours because distressed investing is closer to working on deals, and you’ll work in more of a team setting since you need input from so many different parties.

Compensation, as always, has less to do with the strategy and more to do with the AUM, fund performance, your seniority, and the single vs. multi-manager distinction.

Exit Opportunities

The best part of working in distressed debt investing is that you gain a lot of mobility within the credit space.

For example, it’s much easier to go from distressed debt to investment-grade debt than the reverse, and it’s far easier to move from distressed to LevFin than the reverse.

You could also join a generalist credit hedge fund, event-driven fund, special situations fund, or a restructuring investment banking group.

Distressed private equity and turnaround consulting are more of a stretch since they’re operational, but they are plausible if you have the right experience.

You will not be a good candidate for venture capital, growth equity, or corporate finance roles because the skill sets are too different.

Normal industry groups in investment banking and corporate development jobs might also be difficult because you could be perceived as overly specialized.

For Further Learning

To learn more about this field, we recommend the following books and websites:

• Distressed Debt Analysis – The classic Moyer guide. It’s still good, but some concepts have become less relevant since it was written 20+ years ago.
• Creating Value Through Corporate Restructuring (CVCR) – This is a more recent reference that covers real-world case studies.
• Distress Investing – This is good if you’re more advanced and want something written by a top distressed hedge fund investor.
• The Art of Distressed M&A – Another good reference, but more geared toward investment banking.
• Distressed Debt Investing – This site is no longer active, but the archives have many useful case studies.
• Pari Passu and Petition – These are good newsletters related to distressed and restructuring.

Final Thoughts About Distressed Debt Hedge Funds

The biggest benefits of working at a distressed debt hedge fund are:

1. You gain in-depth technical skills.
2. You work on interesting, complex trades.
3. You get a lot of mobility within the credit/distressed/turnaround space.

If you get bored of distressed deals, you could easily move to a credit or event-driven strategy or even switch gears and return to banking or consulting.

The biggest drawbacks are that there aren’t that many dedicated distressed funds, and even if you find one, it’s risky to work on only distressed investments.

It’s arguably the most cyclical of all hedge fund strategies, and if you join at the wrong time, you could end up with limited experience.

But if you find the right fund and work in a more diversified role, distressed investing could be a career highlight – even if the reality doesn’t quite match “the pitch.”

The post Distressed Debt Hedge Funds: How to Become a Vulture Capitalist appeared first on Mergers & Inquisitions.

Private equity was viewed as a “lightly regulated” industry for a long time.

Only wealthy individuals and institutions could invest, so governments cared less about PE firms than commercial banks and brokerages.

But that is changing as of 2023, as the U.S. government has become more aggressive about regulating all “private funds” (private equity, hedge funds, venture capital, etc.) and reviewing M&A deals.

If you’re not familiar with these recent developments, I’ll summarize them below and explain how they could impact your career.

I don’t think anything the government has proposed will “kill” these industries, but the new regulations will make them less appealing:

Private Equity Regulation: What’s Changing? And Why?

You can read all ~660 pages of the new “Private Fund Rule,” but the SEC’s summary is more than enough. Dentons also has a good summary with more details on some rules.

In short:

• Quarterly Financial Statements: All “private funds” must now issue quarterly statements to investors with the fund’s performance, fees, and expenses.
• Liquid vs. Illiquid Funds: “Illiquid funds” (most private equity firms) have more reporting requirements than “liquid funds” (most hedge funds) and must present metrics such as the IRR, MOIC, and contributions and distributions.
• Annual Audits: Each private fund must receive an annual audit.
• Preferential Treatment: Firms cannot use “side letters” to give certain investors materially better terms unless they disclose them to all the other investors.
• Secondary Transactions: If there’s a “secondary transaction,” i.e., an existing investor sells its stake in the fund, the fund must get a Fairness Opinion or valuation opinion to demonstrate that the price and terms are reasonable.
• Restrictions on Certain Practices: Finally, certain activities, such as charging for regulatory/compliance fees as part of the fund expenses, are now restricted unless everything is disclosed to all the investors.

These rules were watered down from the original version the SEC proposed last year.

The original version also had provisions around the limited liability for “negligence” that would have made it easier for investors to sue PE firms for bad performance.

The changes above may sound small, but they are the most significant new rules for the industry in 10+ years, and they will affect firms’ operations.

Just as one example, private equity firms often use “side letters” to offer better redemption terms to win anchor investors for their new funds.

If they can win a well-known Limited Partner with these terms, they can use this LP’s commitment to persuade other investors and raise more capital.

Technically, they could still do this under these new rules, but later investors might demand similar redemption terms since they’ll know about the sweetened deals now.

As a result, it could become even more difficult to start a private equity firm, and you’ll likely need more time, capital, and experience.

The other new rules above will result in higher compliance costs, which firms could use as an excuse to limit compensation increases.

The private equity and hedge fund industries have sued the SEC to block these rules, but I doubt they will win.

Why Does the U.S. Government Suddenly Care So Much About Private Equity Regulation?

The main issues here are:

1) The “private funds” industry has grown tremendously since 2008 and has over $25 trillion in assets, more than the entire commercial banking sector in the U.S.

This WSJ article has a good summary graph:

2) Many teacher, firefighter, and other pensions have invested in PE firms and hedge funds, and regulators are concerned that they may be paying exorbitant fees for overstated performance.

The Biden administration has taken a much more aggressive approach toward antitrust and financial regulation, and these new rules are extensions of that.

Other Changes Related to Private Equity Regulation

Another other significant change is a revision of the HSR filing process.

In the U.S., the Hart-Scott-Rodino (HSR) Act requires firms that complete a merger to report the deal to the government, assuming they have revenue or assets above certain thresholds.

This filing isn’t required for small deals, such as $20 million acqui-hires, but it’s part of the process for almost all M&A deals that bulge bracket and elite boutique banks advise on.

Up until now, the HSR filing has mostly been a formality.

In theory, the government takes 30 days to review the deal for “potential competition issues,” but in practice, almost all deals get approved without questions.

The Federal Trade Commission and Department of Justice have proposed major changes to this process that will require acquirers to disclose points such as:

• The transaction rationale, the acquirer and target’s existing relationships, and the potential synergies.
• Details about how the firms’ products and services will be affected and how the key supplier relationships might change.
• Information about previous acquisitions, which could affect many PE firms using “roll-up” strategies to complete bolt-on acquisitions.
• The major creditors and investors in the deal, any foreign governments and PE firms that might be involved, and relevant subsidiaries and Board members.

These are only the proposed rules, so the final version could be watered down.

But even if only some of these requirements go into effect, lawyers will have to spend a few extra weeks drafting documents for deals.

Matt Stoller has a great overview and commentary about these changes if you want more details.

The large corporate law firms started freaking out months ago when the FTC and DOJ announced these changes and requested outside comments.

Yes, these new rules mean more billable hours – but they also make deals less likely to happen, which hurts their overall business.

So, How Bad Are These Regulatory Changes?

As I said at the top, I don’t think anything proposed here will “kill” industries like private equity, venture capital, or investment banking, but they certainly won’t help.

The macro environment continues to be quite bad due to higher interest rates, inflation, poor demographics, and everything else I’ve covered previously.

These new regulations will make it more difficult and expensive to execute deals and make many firms think twice before pursuing an M&A growth strategy.

I expect that fewer PE firms and hedge funds will launch, and when they do, they’ll need to raise more capital to pay for these higher expenses.

Banks might get additional business because of the Fairness Opinions required in secondary deals and the new HSR filing requirements, but none of that matters if fewer deals occur.

In short, these changes make an uptick in deal activity less likely, even if the macro environment improves.

What Does This New Private Equity Regulation Mean for Finance Careers?

I expect the following changes:

• Starting your own private equity firm, hedge fund, or venture capital firm will become even more expensive and time-consuming; expect fewer VPs, Directors, and MDs to follow this path.
• Small funds will be affected more than large ones because they are more resource-constrained, and even a few additional compliance hires will make an impact. Unlike what I previously predicted, smaller/startup firms might not offer better long-term prospects.
• There may be more of a divergence in private equity and hedge fund compensation over time because of how these new rules distinguish between “liquid” and “illiquid” funds. There is already more variance in HF pay, but it could become even more variable if the SEC continues to make separate rules.
• M&A investment banking is unlikely to recover anytime soon because deals will become more difficult to close. There may be a shift from always favoring M&A experience to preferring more diversified deals.

I still believe that the poor macro environment is the biggest problem, but these new rules do not help things.

It’s the “death by a thousand cuts” model, where each rule itself is not that bad, but when taken together, they dampen activity, slow down deals, and make it harder to do everything.

But that’s the goal of most government rules, and private equity regulation is no different.

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Almost nothing is worse than recruiting for investment banking internships, winning an offer, preparing, completing the internship, and then not getting a return offer.

After putting in all that time and effort, you feel like you’re back at square one.

Unfortunately, it’s also quite common: in some years, over 50% of interns fail to get a return offer.

And in periods where deal activity is terrible (e.g., 2008 – 2009 or 2022 – 2023), the percentage may be even higher.

While it may feel like the end of the world, you are not actually back at square one.

But if you want a good outcome, you need a solid plan and honesty about why you didn’t get a return offer. I recommend the following steps, detailed below:

1. Step 1: Figure Out Why You Didn’t Get a Return Offer
2. Step 2: Pick Your Best Next Move
3. Step 3: Network and Prepare for Interviews
4. Step 4: Reevaluate Your Options If Nothing Worked

What is a “Return Offer”?

All the large investment banks – bulge brackets, elite boutiques, and middle-market firms – use internships as a recruiting tool for Analysts and Associates.

Effectively, the internship is an 8-10-week interview where you must prove yourself on the job by helping full-time employees with their tasks.

If you perform well and the bank has enough spots, you’ll get a “return offer,” which means you can start working full-time at the bank the following year after graduation.

These internships matter because the large banks make most of their full-time job offers to interns who perform well.

To succeed in your internship, please see our guide to investment banking internships.

This guide will focus on what to do if you did not perform well or if something outside your control resulted in no return offer.

Step 1: Figure Out Why You Didn’t Get a Return Offer

You need to start by asking why you didn’t get a return offer.

Sometimes, it was because of something outside your control, such as the firm not hiring anyone, the group shutting down, or a bad market.

But in many cases, it was because you made specific mistakes, didn’t perform well, or didn’t “fit” with investment banking.

If you’re in this category, there’s no shame in admitting it.

It’s mostly the banks’ fault for accelerating recruiting so much that they hire many students who are not good fits for the job.

There are ~5 main reasons why you might not have received a return offer:

1. Poor Soft Skills – For example, maybe you made off-color comments, didn’t dress appropriately, or didn’t communicate effectively with full-time bankers. Or maybe you came across as weird or anti-social.
2. Poor Hard Skills – Maybe you could not use Excel or PowerPoint effectively, made math mistakes, or failed to check your work before turning it in.
3. Bad Market and Very Few or No Return Offers – Maybe deal activity was so bad that the bank didn’t need to award many return offers. Finance firms are notorious for under-hiring and over-hiring, so this happens a lot.
4. “No Return Offer” Policy – Some boutique banks hire interns but never plan to bring them back full-time. If you’re in this category, at least it’s easy to explain in interviews!
5. “Special Circumstances” – For example, maybe you had to start the internship late due to scheduling issues, or you had to work remotely for part of it, and these factors made it difficult to get to know the team.

You must understand which category best matches your situation because it determines your next move.

If it was something “beyond your control” (categories #3 – 5), it makes sense to give it another go and recruit for full-time IB roles or off-cycle internships.

But if it was “your fault” (categories #1 – 2), you may want to consider non-IB roles or give yourself time to improve by staying in school longer.

Step 2: Pick Your Best Next Move

Once you’ve determined why you didn’t get a return offer, you need to plan your next move.

In most cases, you have 6 main options, depending on your region and level:

1. Delay Graduation – This one no longer works well due to the accelerated internship recruiting timeline in the U.S. But if you can somehow delay your university graduation by ~3 semesters, you could use the extra time to apply for summer internships once again, ~18 months in advance.
2. Do a Master’s in Finance Degree – This one is best if you need to fix multiple issues in your profile, such as a low GPA and poor technical skills; it’s similar to delaying graduation but more realistic for the recruiting timeline.
3. Do an Off-Cycle or Post-Graduation Internship – This one is more viable in Europe because off-cycle internships are more common there. You don’t need to pay extra to stay in school, but many of these internships never turn into full-time offers, so it is a bit of a gamble.
4. Recruit Directly for Full–Time IB Roles – Banks hire most of their full-time Analysts from their summer intern classes, but you can always find a few firms and groups that under-hired or had terrible interns.
5. Aim for Non-Banking Roles in Finance – Maybe you discovered that investment banking is not for you because you don’t like the hours, the work, or dealing with sociopaths all day. But you could use the experience to aim for other finance roles, especially ones like equity research or corporate banking with less structured recruiting.
6. Aim for Non-Finance Roles – Or maybe you learned that you hate finance and never want to work in the industry. Great! You saved yourself years, and now you can find another job that’s a better fit (tech, consulting, marketing, startups, etc.).

At the MBA level, options #1 – 4 are not available, so you must look for other full-time jobs outside of banking.

(OK, there’s a small chance you can find a full-time Associate role at a smaller bank, but I would be very cautious about these roles.)

So, which of these options is best for you?

If you failed to get an offer because of your performance, you should consider options #2, 5, or 6 (Master’s degree, non-IB roles, or non-finance roles).

You need to be honest and ask yourself a simple question: “Do you want to work in banking but simply need to improve, or is it not for you?”

If it’s the former, consider another degree and how to use the extra time to improve your profile and get more experience.

If it’s the latter, read our guides to equity research recruiting, asset management internships, corporate banking, or product management (for example).

If you failed to get an offer mostly because of external factors but are still very committed to IB, you should consider options #3 and 4 (another internship or full-time recruiting).

Even if you’re in Europe or another region with off-cycle internships, I recommend networking to look for full-time roles first.

Yes, it’s difficult, and your chances aren’t great in a terrible market, but spots sometimes appear – and if you can win a full-time offer anywhere, that’s much better than interning again.

Step 3: Network and Prepare for Interviews

If you’ve decided that investment banking is not for you, please search this site for recruiting guides to other industries.

In short, you need to be a lot more proactive if you aim for something like equity research or asset management; there is less competition, but there are also many fewer spots.

If you are still aiming for full-time investment banking roles, this interview about how a reader won an IB offer at the last minute has some useful tips.

The short version: Aim for roles outside of major financial centers, target smaller banks (middle markets, in-between-a-banks, etc.), and do a ton of networking.

You can reach out to your existing contacts, find new ones, and send a message like the one below via email or LinkedIn:

“SUBJECT: Investment Banking Intern at [Bank Name] – Positions at [Name of Person’s Firm]

Hi [First Name],

I’m a student at [University Name] with a [XX] GPA and investment banking internship experience at [Bank Name] and [Describe Previous Internship Experience]. I’ve attached my resume here. I’m seeking full-time investment banking roles and just wanted to know if your group is hiring.

Thanks,

[Your Name]”

There is no magical secret to getting a response. Find people, email them, and follow up after 5-7 days until you get an answer.

If you eventually make it through to interviews, the #1 question will be:

“Why did you not receive a return offer at [Bank Name]?”

I recommend telling the truth, but not the whole truth, and spinning the reason slightly more positively.

If you say something like, “Deal activity was bad, so the group didn’t give out many offers,” the interviewer’s follow-up response will be:

“OK, but they did give out some return offers, correct? Why did some interns receive return offers while you did not?”

You can keep going back and forth like this forever unless you admit a weakness or mistake.

So, similar to the “Why is your GPA low?” question, it’s best to say that you made mistakes initially and improved over time, but it wasn’t quite enough to put you among the top few interns.

For example, you could say that you made some mistakes in email communications or office protocol at the start of the internship.

You received feedback that you had to improve, which you did, and your final review said you were much better.

However, they only brought back 1-2 interns due to the market, and because of these mistakes in the beginning, you didn’t quite make the list.

Besides this, investment banking interview questions will be the same: Expect to walk through your resume, answer technical questions, and discuss your deals.

Similar topics will come up even if you target off-cycle or summer internships.

So, if you’re already well-prepared for standard interviews, you mostly need to plan your explanation for why you didn’t get a return offer and discussions of your deals and internship work.

Step 4: Reevaluate Your Options If Nothing Worked

If you go through everything above and fail to win a full-time offer or another IB internship, return to Step 2 and reevaluate your options.

In most cases, the best choice is to aim for non-IB roles because you don’t want to spend much time without a full-time job.

So, consider related roles such as corporate banking, Big 4 firms, business valuation firms, corporate finance at normal companies, etc.

The #1 point is that you need to line up something post-graduation, even if it’s not your ideal role, it’s in a bad location, or it has below-market pay.

If you’re still 100% committed to IB and unwilling to compromise, your best option is to do a Master’s in Finance degree – but the timing may be tricky if you’ve already spent months recruiting for other roles.

No Return Offer: The End of the World?

It may seem like the end of the world if you complete an investment banking internship and fail to get a return offer, but it’s a common outcome.

The key is to be honest about why it happened so you can plan what to do next.

If you hated the internship and decided that IB is not for you, great – move on and start applying for other roles.

If you like “the idea” of investment banking but couldn’t perform well or tolerate the long hours, fine – think about something like corporate banking with better work/life balance.

And if you are 100% committed but failed to get an offer because of factors outside your control, start pounding the pavement and looking for full-time roles or internships.

In the short term, “no return offer” hurts, but in the long term, it can lead to more fitting careers if you handle it properly.

The post No Return Offer from an Investment Banking Internship: What to Do appeared first on Mergers & Inquisitions.

As with investment banking in Hong Kong, I can summarize private equity in China in one sentence:

“If you’re not Chinese, don’t even think about it, and even if you are Chinese, it’s best if you have great connections within the CCP and want to stay in China long-term.”

I could stop this article here at ~50 words, but sometimes it’s fun to indulge in a fantasy, so I’ll continue with the topic and cover:

• Deal types, investment strategies, and top firms.
• Recruiting and whether you can break in without “donating” your kidney to Xi Jinping.
• Careers, including the lifestyle, salaries/bonuses/carried interest, exit opportunities, and differences at domestic vs. international firms.

Private Equity in China: Deals, Strategies, and Top Firms

Traditionally, China has had the 3^rd highest level of private equity activity worldwide, after the U.S. and U.K., and slightly above countries like France and Germany (source: Statista).

“Private equity activity” here is based on the dollar volume of PE deals involving domestic target companies in the country:

You might look at this data and think private equity in China looks promising… until you read the fine print.

In China, traditional leveraged buyouts represent only 9% of deal activity, while “growth deals” represent 74% of all deals (source: Bain).

As with PE in many other emerging/frontier markets, it’s more like growth equity than traditional roles at middle-market PE firms and mega-funds in the U.S.

This may change due to factors like the “decoupling” with the U.S., poor stock-market performance, slowing growth rates, and an aging population.

But even if buyouts tick up, growth deals will still dominate the market into the 2030s.

In terms of industry focus, technology (especially “general IT,” Internet, and semiconductors) and healthcare have always accounted for a high percentage of deal activity.

But you’ll also see manufacturing, cleantech, consumer, energy, real estate, and financial services deals.

Here’s a good summary from this BDA report on Private Equity in China:

Tech still accounts for a huge percentage of deal volume in the U.S., but private equity activity is more diversified because growth deals represent a smaller percentage of the total.

Private Equity in China: The Top Firms

You can divide private equity firms in China into two main categories:

1. Domestic vs. International: Was the firm founded in China or another region, such as the U.S. or Europe?
2. RMB vs. USD: Does the firm raise capital in China’s currency (the RMB), or does it raise USD from Limited Partners overseas?

You might think the pairing is always Domestic/RMB and International/USD, but that’s not true.

For example, Sequoia is an international firm with USD and RMB funds in China, while domestic VC firms like Qiming Ventures have raised USD funds abroad to invest in China.

The general difference is that USD funds tend to have a broader focus, such as pan-Asia investing or all industries within China, while RMB funds might invest in one specific industry or strategy.

Traditionally, domestic firms did ~1/3 of all deal volume in China, but this has ticked up over time as international firms have become more cautious.

Some of the top firms, both international and domestic, include Blackstone, Boyu Capital, BPEA EQT (formerly Baring Asia), Carlyle, CDH Investments (formerly CICC PE), CITIC Capital, FountainVest, General Atlantic, GLP China, Hillhouse, Hony Capital, Hopu, KKR, Qiming Ventures, Sequoia, TPG, Vivo Capital, and Warburg Pincus.

You could add a few other names to this list, such as Xiaomi (its PE arm), Huaxing, and BA Capital for RMB funds, and Macquarie and Bain in the USD funds.

If you extend the list to venture capital groups, the VC arms of Tencent and Alibaba will appear, as will dedicated firms like DCM and DST.

The international firms in China have not been performing particularly well because the government wants to encourage domestic investment and help Chinese people, rather than foreigners, make money.

Domestic firms usually have better connections and are heavily involved in politics with the Chinese Communist Party at all levels, which gives them a big advantage in executing deals.

Carlyle may be the one international firm that’s an exception to this trend, but I could not find performance data for its Asia/China funds, so I’m not sure if this is true.

Recruiting: How to Break into Private Equity in China

The most important qualities for getting into PE in China include the following:

1. Pedigree (University/MBA) – PE firms always value your university degree and whether you attended a target school, but it’s even more important in China because of the “cultural values” around education and exam-taking proficiency. Also, many people report that a Master’s degree is a prerequisite to win interviews at some firms.
2. Investment Banking Experience at Bulge Bracket or Top Domestic Banks – As with PE anywhere, you need a few years of IB experience to be competitive in most cases. Working at the bulge brackets or elite boutiques is better for international funds, while IB experience at the top Chinese banks (CICC, CITIC, Huatai, Haitong, etc.) is better for domestic funds.
3. Government/Political Connections – Connections always matter in finance recruiting, but they are far more important in China because the government can make arbitrary decisions with no warning (see: Jack Ma).
4. Communication Skills and Some Technical Knowledge – Since most PE firms do growth-oriented deals, financial modeling and technical skill are a bit less important than communication skills – as you’ll need these skills to source deals and meet local entrepreneurs.

I don’t think we even need to state this, but you must be a Chinese citizen with native language skills to have a good shot of getting into PE in China.

Occasionally, there are a few exceptions, such as at international funds with a “pan-Asia” focus.

Also, you can sometimes win roles in fundraising and investor relations as a foreigner if the firm targets overseas investors for its Limited Partners.

But you have almost no chance for front-office, deal-based investing roles, even if you speak/read/write the language perfectly.

The international mega-funds tend to use something closer to the on-cycle recruiting process in the U.S., with headhunters, structured interviews, modeling tests, and case studies.

Smaller/domestic funds tend to follow the off-cycle process, so recruiters will contact you randomly based on open positions.

Interviews and case studies will be more open-ended, and since most of these firms focus on growth and VC-type deals, expect to pitch a market, industry, or specific company as part of the process.

One final difference is that the domestic and RMB-denominated funds may ask about your knowledge of China-specific rules and regulations, such as those in Chinese Company and Securities Law.

Target Schools for Private Equity in China

Degrees from the top target schools in the U.S. and U.K. are all highly regarded in China, so you can’t go wrong with any of them.

Ideally, you studied up through high school in China and then completed your university education at one of these institutions.

But you don’t necessarily “need” to attend a top U.S. or U.K. school because there are well-regarded, highly-ranked schools in China, such as Tsinghua University, Peking University, and Fudan University.

How to Network Your Way In

Unfortunately, most of the advice on this site about investment banking networking doesn’t work in China due to the many cultural differences.

As one small example, it’s less acceptable to cold email people – even HR staff or administrators – without going through the proper “channels” first.

Also, the standard process of conducting informational interviews to pitch yourself and learn more about firms is much less common.

These strategies may work if you find someone who worked overseas, moved back to China, and is familiar with the business culture elsewhere.

But if you’re targeting domestic PE firms, don’t hold your breath because you won’t find too many of these people.

Many professionals in private equity break in through personal and family connections.

“Family events,” such as birthday parties, graduations, picnics, etc., are typically the best way to get to know people and expand your network.

Other options include events such as the AVCJ conference in Hong Kong and the SuperReturn China Conference; these tend to be better if you have an international background.

Finally, private equity headhunters offer another route into the industry, but more so if you’re targeting the PE mega-funds or pan-Asia funds.

These firms tend to hire investment banking Analysts each year from abroad and prefer Chinese citizens who studied and worked in the U.S. or U.K. for a few years.

Private Equity in China: Salaries, Bonuses, and Carried Interest

Salaries and bonuses are significantly lower than in the U.S., but the discount is higher at domestic firms than international ones.

The source for this information is Robert Half’s China PE salary survey, which includes only the base salaries – no bonuses.

All the figures are in RMB, and, unfortunately, it does not separate compensation at domestic vs. international firms.

If we take the numbers in the Robert Half report and assume that bonuses are 75% of base salaries, the 25^th – 75^th percentile ranges for total compensation look like this:

• Analyst: $70K – $125K USD
• Associate: $90K – $175K USD
• Vice President: $140K – $280K USD
• Director: $230K – $420K USD
• Managing Director: $280K – $840K USD

Overall, you should expect a 25-50% discount to U.S. compensation at domestic firms (with the international firms paying closer to global standards).

China is still cheaper than major U.S. cities, but it’s not that much cheaper, and rent can be quite high in places like Beijing and Shanghai.

Also, you don’t have nearly the same tax advantage you’d get in Hong Kong; the effective rate is in the 30-40% range, like the U.S.

Some of the major PE firms offer carried interest, but this becomes more of a factor when you reach the senior levels.

Carry is far less standardized than in other markets, and you’ll see everything from the Founding Partners taking all the carry to MDs clawing it back from juniors who leave.

If your firm performs well and you stay for 10+ years and you survive all political issues at work, carried interest can potentially multiply your compensation at the senior levels.

But don’t hold your breath because most people switch firms or leave the industry before reaching the Director level.

Careers and Lifestyle

The “on the job” part of private equity in China isn’t that much different, but note the following:

• Domestic vs. International: You’ll close more deals at domestic firms, but you’ll also get less structured training and lower compensation. International firms offer a better brand, training, and pay, but you have a lower chance of closing deals.
• Hours/Work Ethic: Expect 12-14-hour days at many firms with less time off on weekends and fewer holidays. It is a “sweatshop” culture, which is common in China even outside the finance industry.
• Hierarchy: Domestic Chinese firms are very hierarchical, so key decisions get made at the top and then passed down to everyone else. As a result, mid-level managers are not always held accountable, and people can get away with underperformance… if they have the right connections.
• Government Relationships: Expect to deal with local CCP officials on everything from land leasing agreements to tax credits.
• On-Site Work: More so than in developed countries, you’ll often travel to portfolio companies or prospective portfolio companies because verification is very important in China. You can’t necessarily trust documents at face value, and there are issues with multiple versions of “the books” and other key data. You’ll often evaluate deals based on the people before even looking at a CIM.
• Deal Structures: Because of these trust/verification issues, many PE deals have “ratchet” or valuation adjustment mechanisms where the company grants the PE firm more shares if it fails to meet a financial target.

That said, there are some positives of the culture and lifestyle.

For one thing, it’s easy to visit other places in Asia since it’s just a few hours to Seoul, Hong Kong, Tokyo, or Manila.

It’s a great place for short trips if you have the occasional weekend off.

Also, working in private equity in China is a great way to expand your network since you’ll meet all sorts of entrepreneurs, executives, and other investors.

It’s much more of a “Wild West” environment than the U.S. or U.K., so people often leverage the experience to move into very different jobs based on the connections they’ve made.

Private Equity in China: Exit Opportunities

On that note, the exit opportunities are similar to private equity exit opportunities anywhere else: an MBA, a different PE/growth equity/venture capital firm, credit firms, hedge funds, family offices, portfolio companies, start a company, etc.

The main differences include:

1. Prevalent Industries – Some of these firms, such as hedge funds, are far less common in mainland China. You’ll have better luck aiming for HF roles if you go to Hong Kong.
2. Skill Transferability – Since most PE firms operate more like growth equity or VC firms, you might have trouble moving to one that does traditional leveraged buyouts.
3. Leaving Hotel California China – Recruiters in other regions will tend to discount your experience, so if all your work has been in mainland China, don’t expect to leave and find an equivalent job in the U.S. or U.K.

Finally, some finance professionals in China also leave and join the Securities Regulatory Commission (the equivalent of the SEC) and even take a pay cut to do so – since this can lead to very powerful positions in the government.

These roles may not pay much “on paper,” but if you leverage your role properly, you could still become wealthy (use your imagination).

Private Equity in China: Final Thoughts

So, if you’re a plausible candidate for private equity roles in China, should you recruit for them?

Is there a reason to turn down opportunities in the U.S. or Europe and work in China instead?

My answer would be “no” – but with a few exceptions and caveats.

The basic problem is that you’ll usually earn less in China while still working the same amount (or more), and you’ll get more limited deal experience that doesn’t translate well to other regions.

And if you’re not a Chinese citizen, it’s not even worth considering these roles in most cases.

Back in 2000 or 2005, some foreigners got into the industry and rode the wave to great success – but 20+ years later, this no longer happens.

That said, private equity in China could still make sense if you have the right background, want to live in the country long-term, and can leverage the experience into something else.

For example, it might be a good career move if you use it to win a high-level government role, start your own company, or launch your own PE fund.

And if you have great connections with CCP party officials, even better.

Just make sure you keep a close eye on both your kidneys before diving into the recruiting process.

The post Private Equity in China: The Worst of Both Worlds? appeared first on Mergers & Inquisitions.

Normally on this site, I write about a mix of careers, sectors within finance, financial modeling topics, and current events.

This week, though, I am posting a public service announcement.

Please stop using ChatGPT for email – or learn to use it correctly so you don’t write horrible emails that sink your career.

Over the past few months, I’ve seen an uptick in AI-generated messages from students, customers, suppliers, and random people asking me for favors on LinkedIn.

In ~99% of cases, I can tell within 1 second that these messages are AI-generated because tools like ChatGPT add useless words and awkward phrases that no human would ever use.

The tone is also completely inappropriate and sometimes borders on comical.

If you send these emails to bankers in your networking/recruiting efforts, they will notice, and your chances of winning interviews and job offers will decrease.

Also, if you send short emails – which you should in any networking effort – these AI tools are pointless because they barely save you time.

I will make a few recommendations here, but I’ll start with the fun part and show you some examples of clearly AI-generated messages:

ChatGPT for Email: Horrible Examples

I’ve deleted names and email addresses from these examples for privacy.

And to ensure I wasn’t going insane, I plugged each message into Copyleaks (the most accurate free detection tool) to verify that it was AI-generated.

Example #1: How to Write 1 Page When 2 Sentences Would Do

Here’s a long email from a student that is obviously AI-generated.

In case you cannot bear to read it to the end, I’ve summarized his question below:

His Question: “Can I purchase just Module 1 of your Real Estate course?”

This one baffles me because it probably took several sentences to prompt ChatGPT to write this message, given its details.

In the time it took to enter these prompts and tweak the message, he could have written a 2-sentence email to ask the same question:

“I’ve found your courses helpful. Is it possible to sign up for just Module 1 of the Real Estate course or to upgrade to the course at a lower price since I already have courses X and Y?”

Example #2: An Email Even with More Fluff Than the Average Cat

This one isn’t quite as bad, but it’s still clearly AI-generated:

Again, this person could have asked the same question in 2 sentences:

“Thanks for sending me the quick reference guides. I have an upcoming technical/modeling-based interview at the same real estate firm, and I wanted to know if you had any suggestions on the case studies I should complete to prepare for this.”

Example #3: The Student Who Requires “Assistance” from the Teacher

This one is short but also the worst example because of the tone.

If a professor, MD, or client got this type of message, they would reconsider their relationship with you:

Not only is this too wordy, but the last paragraph is nonsensical.

Have you, as a human, ever written “aligns with your query”?

Oh, and why would a student ask if the teacher needs “further assistance”?

Again, you could ask this same question in 2 sentences:

“Quick question – with the financing fees, you’re not factoring in the refinanced debt if the acquirer repays and replaces the target’s debt. Do you need to do that, or is it a simplification in this version of the model?”

What’s Wrong with ChatGPT for Email?

I’d sum up the main issues as follows:

1. Overly Verbose – These AI tools add way too many useless words to messages, and they use awkward, robotic phrases.
2. Tone/Style – The tone in these messages is inappropriate. If you already know someone, you communicate one way, but if you don’t, you say things differently. You also communicate differently with co-workers vs. clients vs. bosses.

ChatGPT for Email: What Should You Do Instead?

I do understand why you might want to use AI tools for emails.

Maybe English is not your first language, or you’re writing in another language you’re not 100% comfortable with.

Or maybe you feel intimidated by any writing, and a blank screen is the equivalent of Thanos.

But the problem is that most AI tools are bad at writing.

It goes back to what I stated in my article about ChatGPT and investment banking in January: it’s good for summarizing code/documents and can sometimes help with writing code.

If you use AI to generate code or write a formula, it just needs to work correctly.

The “style” and length don’t matter because clients will not see your code or formulas; they just need the correct output.

But as soon as you use AI to communicate with a real human, you’re gambling that it will use the correct words, length, and tone.

Here’s what I recommend instead:

1. Short Messages – Do not bother with these tools if you can ask a question in 1-2 sentences. They’ll cost you time because you’ll need to refine your prompts until you get a shorter message.
2. Longer Messages – If you need help with longer messages or documents, please take the time to learn how to use AI tools properly. You can find online guides, but you need to get comfortable with prompting them, reviewing their output, asking them to fix it, and continuing until you get what you want.
3. Get Better References and Help from Friends – If you’re unsure about an important email you just wrote, ask a native speaker friend to review it. If you don’t have time for this, find some good templates (see our cold email templates and informational interview templates) and learn how to modify them to fit your needs.
4. Always Personalize Your Networking Emails – Even before ChatGPT, plenty of students copied and pasted the same message in hundreds of emails. This is a terrible idea that will yield almost no responses. You need to spend at least 15 minutes reviewing the person’s background on LinkedIn to customize your message.
5. Improve Your Communication Skills – Finally, if you want to advance in industries like investment banking and private equity, you must improve your communication skills.

These industries are built on personal relationships.

No AI tool will ever let a banker skip 10 years of relationship-building and win a pitch just because their second sentence was strong.

If you have no interest in improving your communication skills or building relationships with clients and executives, you should rethink your career goals.

Quant finance, prop trading, or certain types of hedge funds might be a better fit for you.

ChatGPT for Email: What Next?

Networking channels such as LinkedIn and email may become less effective because of the flood of “content” generated by these AI tools.

The phone, Zoom, and in-person meetings and sessions could become more important as the only way to “prove” that you are human.

I also predict that bankers will become increasingly hostile toward AI-generated emails.

They already get flooded with terrible emails written by students who don’t know what they’re doing, and now they’re getting flooded with even more terrible emails.

And these AI-generated ones are even worse because they’re longer and full of useless words.

But if you can learn to communicate effectively and write specific, personalized messages that show you’re a real human, these developments might be good news for you.

After all, if a banker gets an average of 99 terrible emails per week, you can stand out quite easily by sending one non-terrible message.

And if you don’t want to learn how to write simple, personalized emails, please ask ChatGPT to limit your messages to 1-2 sentences the next time you use it.

The post Public Service Announcement: Please Stop Using ChatGPT for Email appeared first on Mergers & Inquisitions.

A long time ago, hardly anyone knew about search funds or search fund internships.

But over the years, they morphed into a well-known topic and then a commonly derided topic – as many people argue that search fund experience is worthless, while others claim it’s “just as good” as working in banking or private equity.

As usual, the truth is somewhere in between.

A search fund internship is not as “good” as a true IB or PE internship but is far more relevant than many other internships.

It’s helpful primarily for early university students, while it’s far less useful for career changers or anyone with significant work experience.

Search fund internships are often easier and less competitive to win, and even if you have a bad experience, you can still spin it into sounding relevant.

But these internships are often unpaid, you might end up doing menial work, and you must do a fair bit of networking to line them up, so they have significant downsides.

Before delving into the details, I want to start by explaining the industry:

What is a Search Fund?

You can think of a search fund as a private equity firm meets a SPAC, minus the celebrity sponsor who’s there to swindle retail investors.

Like a PE firm, a search fund raises capital from outside investors and aims to multiply that capital by investing it – but like a SPAC, it makes only one acquisition.

Its “portfolio” consists of that single company, assuming it finds and acquires one.

Search funds target much smaller companies than PE firms, with average EBITDAs in the low millions USD, and they require far less experience to launch.

Many search fund founders are relatively young (35-40 or less) and come from banking, consulting, or general management backgrounds; many also have MBAs.

Search funds often raise some initial capital to find potential deals, and they do a second, larger raise once they’ve decided on a company and submitted a Letter of Intent (LOI) to acquire it.

This strategy allow risk-averse banker-MBA-grinder types to “operate” a company without taking the risk of starting the company.

OK, So Where Does the Search Fund Internship Come into Play?

Search fund founders need interns for countless tasks: filtering/screening companies, conducting due diligence, reviewing company documents, and, once the deal closes, reviewing the company’s financial performance.

Because search funds raise little capital to acquire these small businesses, most search fund internships are unpaid.

Some search funds hire only undergrads, some focus on MBAs, and some do a mix of both; they might offer summer or off-cycle internships during the school year.

Often, these internships require 15-20 hours of work per week, so don’t expect to juggle them with an intense class schedule or other large commitments.

Why Do a Search Fund Internship?

There are two main reasons to do a search fund internship:

1. As an undergraduate, it gives you highly relevant experience that will be useful when you apply for investment banking internships. And you need early experience to get internships that convert into full-time offers at large banks.
2. At the MBA / experienced level, it helps if you want to start your own search fund later.

Search fund internships tend to be less selective than IB/PE internships, and they might compensate for a lack of work experience, a low GPA, or a non-target school.

What is the Search Fund Experience Like?

As with most IB and PE internships, you’re unlikely to get much “real work” at a search fund.

In other words, don’t go in expecting to run deals, do complex analysis, or make major hiring/firing decisions for an acquired company.

That said, your work may span a wide range of tasks, including:

• Finding companies via online searches and “outreach” (cold emails and cold calls).
• Reading CIMs and other marketing materials to evaluate companies.
• Helping with the deal process, such as getting NDAs signed, requesting data, and finding potential red flags in target companies.
• Researching industries and finding sectors that might match your fund’s areas of interest.

Try to avoid search fund internships that are 100% cold calling or cold emailing because these are boring and do not give you many transferable skills.

If you do end up in an internship like this, there are ways to spin the experience (see below), but you’ll have better luck if you avoid it in the first place.

How to Find a Search Fund Internship

Before you look for any search fund internship, you should review your LinkedIn profile and ensure it’s polished since you’ll be repurposing it.

Once you have your LinkedIn profile set up reasonably well, you should create a profile on searchfunder.com based on a shortened version of your LinkedIn.

You can look at job postings there, make a short post introducing yourself and explaining your internship search, and cold email people who post positions at their search funds.

As with all cold emailing strategies, you should be as direct as possible, which means “Attach your resume and put ‘Unpaid internship’ in the subject of your email.”

You can take the templates in our cold emailing article and tweak them for the specific search fund(s) you apply to.

Besides searchfunder.com, another good source is searchfunds.net, a PE firm that invests in search funds.

You can find plenty of current funds there on the “Current Searchers” page.

You can also find search funds via LinkedIn and Google searches, but dedicated search fund sites tend to produce better results.

Before sending a message, you should take at least 10-15 minutes to research each person and their fund so you can explain why you’re interested in them.

The Interview Process for a Search Fund Internship

You are unlikely to get traditional “technical questions” unless you’ve marketed yourself as having financial modeling experience.

Instead, most search fund founders will ask how you’d look for and evaluate companies and how you could save them time and money.

These questions are straightforward if you know how internships and deals work, but if you’re confused, look at our coverage of investment banking internships and the private equity case study for an example of how to screen for companies.

In most search fund interviews, asking the interviewer the right questions is more important than answering questions yourself.

Their answers can tell you whether the fund will offer a good experience and where it ranks among other options you’re considering.

Good questions to ask include:

• Are you an independent sponsor or fully funded? –> This will affect the acquisition size and the relationship between the outside investors and the operator. An “independent sponsor” can start operating more quickly but might fail to close a deal because it raises capital specifically for that deal.
• What specific target companies are you seeking, beyond the high-level criteria on your website or marketing materials? –> You can use this to determine whether the fund is likely to go anywhere, i.e., if it has realistic targets.
• What will my role be, and how many other interns are you hiring? –> You can use this question to tell how much “real work” there will be. Your chances of doing substantial work increase if you’re the only intern.
• Do you plan to use business brokers or investment bankers in your search process? –> If the answer is “yes,” you have a higher chance of getting to evaluate documents like the Confidential Information Memorandum (CIM), which is relevant when applying to IB roles later.

You don’t need favorable answers to all these questions, but more positive answers mean the internship is more likely to be useful.

How to Spin a Search Fund Internship into Sounding Useful

If your internship devolves into endless cold calls or cold emails, I recommend doing work outside the job or during your downtime to make the experience look more useful on your resume.

For example, you could take one of the companies you found in the screening process and build a simple 3-statement model and DCF model for it.

You could then list this work on your resume as part of the “deal process” you went through for this one potential acquisition target.

If you don’t have the company’s financials, find a public company in the same industry, and scale down its numbers to “simulate” what this private company might look like.

There are limits to this strategy – no one will believe that you modeled 15 different deals – but it’s fine to do it for 1-2 companies if the internship lasts a few months.

Should You Complete a Search Fund Internship?

The usefulness of a search fund internship depends heavily on your age and experience level, but I’d summarize it like this:

• If you are in Year 1 or 2 of university and need experience, YES, a search fund internship is worth it.
• A search fund internship is usually better during the school year than the summer unless you need to earn money from another part-time job (see below).
• If you have already graduated or have at least 1-2 related internships, a search fund internship is much less useful, especially if it’s unpaid.
• At the MBA level, it’s useful mostly if you want to launch your own search fund after finishing the degree. It might also work as a pre-MBA internship, but you still must win a traditional IB summer internship during your program if you want to pursue IB full-time.

University students sometimes dislike search fund internships because:

1. They are often unpaid, so completing one is an option only if you have another job, family money, or savings from previous internships/jobs.
2. They might require 15-20 hours per week during the school year, which could be tough with a difficult class schedule or other commitments such as sports.
3. The work is often boring or repetitive.

On the first point, you can’t do much if you need the money and cannot afford an unpaid internship.

In this case, the best option is to ask to complete the internship during the summer so you can work another part-time job to make money.

With the issue of time, I always recommend arranging your class schedule to finish the easy classes early in university.

Doing this not only boosts your GPA in the years when it’s most important, but it also gives you more time for internships and leadership roles.

Finally, with the repetitive/mundane work: to be blunt, you have to accept this to some extent with your first few internships.

You can try to find a search fund that offers more interesting work, but if not, think of it like hazing when joining a fraternity or sorority.

Over time, search funds have become much better known, and some people argue that bankers don’t take these internships seriously anymore.

There is some truth to this – bankers are more likely to dig into your experience if they see a “search fund” rather than a traditional bank, PE firm, or Big 4 firm on your resume.

But this claim misses the point: you do a search fund internship to leverage it into better internships in the future.

If you have no work experience, a search fund is much better than listing only student groups or activities on your resume.

And if you want to do investment banking, private equity, corporate development, or even venture capital or hedge funds, it’s a better experience than anything outside a direct internship in one of these fields.

References and How to Learn More About Search Funds

If you want to learn more about the field, I recommend:

• The Stanford (GSB) Search Fund Site – See the primer and recent studies.
• The IESE Search Fund Site – See the recent reports and conferences.

We’ve covered search fund jobs in a previous article but will expand that one and add more coverage in the future.

The post The Search Fund Internship: Perfect Pathway into Investment Banking and Private Equity Roles? appeared first on Mergers & Inquisitions.

When you hear the term “long-only hedge funds,” your first thought might be:

“How can a hedge fund hold only long positions? Doesn’t that contradict the term ‘hedge fund’? Why would investors pay high fees for what is effectively a mutual fund?”

These are all good questions.

The short answer is that there is no “formal” requirement for the strategies a hedge fund must use.

A hedge fund is defined by its structure: the split between Limited Partners (LPs) and General Partners (GPs) and the fees paid to each group.

Most hedge funds use leverage, short-selling, derivatives, and other strategies to manage their risk, but some non-hedge funds also use them.

If you’re interested in long-only hedge funds, you should ask a different set of questions:

1. Do these long-only funds offer any advantages over strategies like long/short equity?
2. And if you are interested in this strategy, should you even target hedge funds, or would a long-only asset management firm be better?

I’ll answer both questions here, but I want to start with a few definitions:

What is a Long-Only Hedge Fund?

Long-Only Hedge Fund Definition: A long-only hedge fund buys securities to earn a profit when they increase in price, and it does not bet against securities by borrowing to sell them in advance; the fund might invest in stocks, bonds, derivatives, structured products, and almost anything else.

Long-only hedge funds come in four main variations:

1. “Best Of” Lists from a Long/Short Strategy – For example, a hedge fund might produce 10 – 20 long/short ideas and then pick the top few “long” ideas for a long-only fund.
2. Long-Only with Derivatives to Hedge Risk – For example, a fund might only buy stocks, but it could use put options or other derivatives to hedge its risk and justify the fees.
3. “Long Bias” – Some hedge funds mostly buy stocks but maintain a few short positions to hedge their risk and justify the fees. Technically, these funds are not “long only,” but many data sources group them together.
4. Non-Equity Funds – Finally, it is difficult to “short” certain securities effectively, such as distressed debt and many types of credit (especially structured products). So, many distressed funds that pursue control strategies are “long-only” even if they market themselves as “distressed” or “deep value.”

This last category is the most common way hedge funds qualify as long-only.

Theoretically, an equity fund could be long-only and manage its risk by buying stocks that are negatively correlated with the market.

But this is extremely difficult because very few sizable companies have negative Betas – and when they do, it’s usually due to an anomaly or special situation.

So, in practice, many long-only equity funds outperform the market in good years and underperform in bad years.

What Makes Long-Only Hedge Funds Different?

I’ll use my favorite data set here to summarize the key differences:

Equity funds generally use moderate leverage, have moderate liquidity, and have a moderate time horizon (several months up to 1 year).

But if you consider long-only or “long-biased” funds, the liquidity and Beta are often higher:

A fund that holds only stocks can easily sell them, and the lack of short positions makes it easier to unwind trades.

Also, many long-biased funds tend to have more concentrated portfolios since they often aim to become one of the top shareholders in each company.

Long-Only Hedge Funds vs. Long/Short Equity Hedge Funds vs. Long-Only Asset Management

With the definitions out of the way, let’s return to the more interesting questions:

1. What are the advantages and disadvantages of joining a long-only hedge fund rather than a traditional long/short equity (or other) hedge fund?
2. And if you are interested in long-only investing, should you target asset management firms instead?

If you compare long-only hedge funds to traditional long/short equity funds, the main differences are:

1. Recruiting/Numbers – There are far more long/short equity funds than long-only or long-biased funds, so you’ll have an easier time finding jobs. Turnover is also high, especially at the large multi-managers.
2. Investment Style – Long/short strategies depend more on timing and getting individual quarters and events right, while long-only strategies often use longer holding periods and require deeper dives into companies.
3. Products and Strategies – Certain strategies, such as “control”-based distressed investing and activist investing, mostly work on the long side. So, if you want to pursue one of these, it might have to be at a long-only fund.
4. Skill Transferability – Moving from long/short to long-only is easier than doing the reverse because shorting requires a different skill set and more of a “trader’s mindset.”

Compensation doesn’t vary much and depends mostly on the fund size, performance, and structure (single-manager vs. multi-manager).

More differences emerge when you compare long-only hedge funds to long-only asset management:

Investment Analysis and Financial Modeling

You complete similar analyses and financial models at any “fundamental” firm (long/short equity, long-only, activist, event-driven, etc.).

Think: a deep review of companies’ financial statements, 3-statement models, and DCF-based valuations.

The difference is that hedge funds have far more latitude in what they buy and sell, how long they hold positions, and much work they do for each position.

For example, a long-only hedge fund might do a deep dive into one company, acquire a 10% stake, and hold it for 5 years.

Or it might see a company that’s about to have a good quarter, acquire a ~1% stake, get a 20% bump when it reports positive results, and then sell the stake in 2 months.

This second trade would be much less likely at a long-only asset management firm.

These firms often plan to hold stocks for 3 – 5 years, and they often acquire much bigger stakes than hedge funds, which makes selling more difficult.

The hurdles to buy and sell are higher, so you spend more time researching each company, and there’s less portfolio turnover.

Compensation and Work-Life Balance

You will almost always earn less and work less at a long-only asset management firm than at any type of hedge fund.

This is mostly due to the higher fees that hedge funds charge and because the investment strategies depend more on specific catalysts.

You might think you’ll have a more relaxing lifestyle if you work at a distressed hedge fund that’s “long only” and has multi-year holding periods…

…but this is not really the case because anything distressed is incredibly sensitive to catalysts.

So, you must pay close attention to the markets, earnings, and any events that potentially impact the company’s debt covenants.

By contrast, these factors are much less important at a long-only asset management firm because you’re holding stocks for multiple years, not thinly traded bonds whose value might suddenly fall by 50%.

A single quarterly result might change the stock price, but it probably won’t change the 5-year profile by a whole lot.

To give specific numbers, at many long-only AM firms, total compensation for Year 1 “Research Associates” is around $150K USD, with some firms paying a bit lower ($120 – $130K range).

At many hedge funds, the entry-level pay is more like $200K – $300K or more, depending on fund size and performance.

These numbers increase at the MBA level (see the mutual funds vs. hedge funds article), but hedge funds still pay a significant premium.

The senior people at long-only asset management firms can still earn in the high-six-figure-to-low-seven-figure range, but they’re unlikely to go far beyond that.

At hedge funds, though, the sky is the limit if you reach a senior position and perform well.

In terms of work-life balance, the average workweek in long-only AM is ~50 hours, while it’s closer to 60-70 hours at many hedge funds.

Recruiting and Interviews

At both long/short equity and long-only hedge funds, most recruits come from equity research or investment banking backgrounds.

You need financial statement analysis and valuation skills for these roles, and ER and IB provide the most direct paths.

At long-only funds focused on certain credit strategies, people also join from areas like direct lending or distressed debt, restructuring, or turnaround groups.

Equity research and investment banking backgrounds are still common in long-only asset management, but you’ll see more variations.

For example, some consultants get into AM via MBA programs, and some firms like to make “industry hires” in areas like healthcare (e.g., hiring MDs to analyze biotech companies).

Some people also join from buy-side research, other asset management firms, and hedge funds.

The main difference is that there are many fewer spots at these firms (dozens vs. hundreds) because the turnover is lower, and there’s less of a structured “path.”

Interviews are similar in both: you need several high-quality stock pitches, and you can expect many questions about the markets and how you think about investment ideas.

The main difference is that long-only asset management firms test you on broader but shallower knowledge.

They might ask less detailed accounting/valuation questions, but they could go outside finance and ask you about economics, trade policy, or regulation.

Exit Opportunities

People often say moving from a hedge fund to an asset management firm is easier than doing the reverse because AM is perceived as a bit “sleepy” (i.e., lower intensity).

There is some truth to this, but once you gain a few years of experience in either hedge funds or asset management, you tend to stay there.

Jumping between them is trickier than you might think because they tend to attract candidates with different skill sets and career goals.

If I had to “rank” each firm type by exit opportunity breadth, it would look something like this:

1. Long/Short Equity – You have the most potential exits here since you’ll have experience on both the long and short side, and most hedge fund strategies outside of global macro relate to equity in some way.
2. Long-Only Hedge Funds – You won’t have as many opportunities at other hedge funds since you get no exposure to shorts. But it may be easier to move to a long-only asset management role since the skill sets overlap so much.
3. Long-Only Asset Management – Finally, you have the fewest exit opportunities here because the strategies and skill sets differ from most hedge funds and even from equity research at banks. But you can still move to other AM firms or consider “corporate” roles at normal companies.

You do not have a good shot at exit opportunities such as private equity, investment banking, venture capital, or corporate development because they all require deal experience.

If you want to go into one of these, your best bet is to gain deal experience before you join any hedge fund or asset management firm.

The Top Long-Only Hedge Funds and Asset Management Firms

There aren’t that many long-only hedge funds, but the best-known one is probably Baupost Group, led by legendary investor Seth Klarman.

Other names include Abrams (long-biased and more than equity), BloombergSen, Brave Warrior, ESL (Edward Lampert), Falcon Point (also uses long/short and high-yield strategies), and Lansdowne and Egerton in the U.K. (both also do long/short equity).

You can add more names if you also count long-only credit funds, “control”-based distressed hedge funds, and activist funds, but we have (or will have) separate articles for these.

On the long-only asset management side, the biggest firms are your best bet because most do structured recruiting at the MBA and undergraduate levels.

So, on the equities side, consider names like Fidelity, BlackRock, T. Rowe Price, and Wellington (Vanguard does little active management, so it’s not on this list).

In credit, PIMCO is the giant, but other notable firms include DoubleLine, TCW, Nuveen, and PGIM.

Final Thoughts on Long-Only Hedge Funds

Outside of a few areas (credit, distressed, and activist strategies), there just aren’t that many long-only hedge funds.

So, if you’re thinking about this topic, you should probably reframe your questions:

1. Is there any reason to target long-only hedge funds rather than long/short equity or other strategies? Probably not – unless you’re interested in an inherently long-only strategy. Otherwise, recruiting will be more difficult because you won’t be able to find these firms easily.
2. Should you join a long-only asset management firm rather than a long-only or long/short hedge fund? – It could make sense if you’re fine with lower compensation, more difficult recruiting, and a murkier career path in exchange for reduced hours/stress and a longer-term investment style.

If you have a clear preference and job offers from comparable firms, this question should be an easy decision.

It gets trickier if you have offers from very different firms.

For example, let’s say you have two offers: one from a $5 billion long-only asset management firm with a solid 15-year track record and one from a $200 million long/short equity hedge fund that has only been around for 2 years.

I would recommend the long-only AM offer because you’ll almost certainly get a better experience there, even if your initial compensation is lower.

Plus, the firm is more likely to keep operating for the long term, whereas the failure rate among small hedge funds is quite high.

As with the investment banking vs. private equity debate, many of these questions depend on the specific firms involved.

It’s almost always better to start at a brand-name firm, even if you want to switch industries later or even if it means lower entry-level compensation.

If these firms were closer in size and history (e.g., $3 vs. $5 billion and 10 years vs. 15 years), it would come down to your lifestyle/investing/career preferences.

Once you know those, you can resolve this contradiction – or find that nice middle ground.

The post Long-Only Hedge Funds: A Cozy Career, or a Complete Contradiction? appeared first on Mergers & Inquisitions.

There’s plenty of information online about case studies in finance interviews (IB, PE, etc.), but the venture capital case study remains a bit mysterious.

Depending on your source, a VC case study might consist of a “cap table” exercise where you calculate the company’s ownership over many investment rounds and the proceeds to each group upon exit…

…but it could also be a qualitative discussion of a market, an evaluation of a specific startup, or even a simple 3-statement model.

But if you’re interviewing at an early-stage VC fund (i.e., Seed and Series A investments), the most common type is the “Evaluate a startup and recommend investing or not investing” one.

The VC firm might give you a short investment memo or slide deck for the company, ask you to read it, and then say “yes” or “no” based on your analysis and interpretation.

We’ll go through a short example for a fictional startup called PitchBookGPT, which comes directly from our new Venture Capital & Growth Equity Modeling course.

This is a summary version, but it should be enough to give you some practice:

The Video Tutorial and the Files

If you prefer to watch or listen to this tutorial, you can get the 14-minute video walkthrough below:

If you prefer to read, you can continue with this article.

You can get the files, including the company’s pitch deck, here:

• PitchBookGPT – Seed Round Pitch Deck (PDF)
• Venture Capital Case Study Prompt (PDF)
• Venture Capital Case Study Solutions and Investment Recommendation (PDF)
• Case Study Walkthrough and Explanation – Slides (PDF)
• SaaS Valuation Multiples and Historical Data (PDF)

Video Table of Contents:

• 0:00: Introduction
• 1:58: Part 1: What to Expect in VC Case Studies
• 3:10: Part 2: What Do VCs Want in Early-Stage Investments?
• 4:51: Part 3: “The Numbers” for PitchBookGPT
• 8:16: Part 4: The Market, Product, and Team
• 11:45: Part 5: Recommendation and Counter-Factual
• 13:04: Recap and Summary

This Venture Capital Case Study Example: PitchBookGPT

In short, this startup is riding the AI hype train and plans to offer a subscription service that will automate parts of the pitch book creation process at investment banks.

It won’t replace Analysts or Associates because it can’t create entire presentations with all the correct details.

But it speeds up the process by generating slide templates based on your queries, presentation data, and free examples on the sec.gov site.

For example, if you type in “SPAC vs. IPO” or “Market overview slide with monetary and fiscal factors,” the software will generate sample slide images, and you can click the one you want to get an editable PowerPoint version:

The “artificial intelligence” part comes in because simple keyword searches do not work well when searching for specific slides; a slide’s purpose often differs from its text.

Also, machine learning could work well for a problem such as converting slide images into editable PowerPoint templates.

This is much trickier than it sounds for moderately complex slides, and a rules-based system is less efficient than using huge data sets for the image-to-slide translation.

This startup claims that its service can boost Analyst productivity by 30% and generate millions in extra fees for the average bank, and it plans to sell it to boutique banks for $2,000 per month.

They want a $2 million seed investment at a $20 million post-money valuation, meaning that we (the VCs) will own 10% if we invest.

So, should we do the deal?

What Do Venture Capitalists Look for in an Early-Stage Investment?

To answer this question, you need to think about what early-stage VCs look for in deals.

Most early-stage companies do not have revenue, but they do have markets and teams.

Since early-stage investing is so risky, VCs seek opportunities with the potential for very high cash-on-cash multiples, such as 10x in Series A rounds or 100x in Seed rounds.

To be clear, these are the targeted multiples.

Most startups fail, and even the ones that succeed do not come close to a 100x multiple in most cases.

Since this failure rate is so high, early-stage VCs need to aim high by finding companies with the potential to serve huge markets.

Here’s a summary of the different stages:

Since the asking valuation is $20 million, we can reframe this case study as:

“Could this company potentially reach 100x that valuation, or $2 billion? If not, what about something like 10 – 20x, for a $200 – $400 million valuation?”

You can answer this question by doing some quick math and qualitatively evaluating the market, product, and team.

Venture Capital Case Study, Part 1: The Numbers

In its slide dick, this company claims that there are ~4,000 boutique banks worldwide with 1 – 20 employees and that these banks alone can support a $100 million market size (since 4,000 * $2,000 / month * 12 months = $96 million).

They plan to target these smaller and mid-sized banks because they’re easier to reach and they have fewer resources for pitch book creation.

But this company makes a common mistake with this claim: it assumes it will capture 100% of this market.

That never happens in real life, even in a narrow niche like this one – because there are competitors and many firms that don’t need the product.

In large markets (tens or hundreds of billions of dollars), capturing even a tiny percentage might be a good result.

In a narrower market like this one, something like 10 – 20% might be plausible if the company executes well.

That means a more realistic revenue estimate is $10 – $20 million.

Startup / SaaS Valuation

Subscription software companies are usually valued based on a multiple of annual recurring revenue (ARR), and this multiple is typically between 5x and 10x for public companies:

If we apply these multiples to the company’s revenue estimates, we get a valuation range of $50 million (5x * $10 million) to $200 million (10x * $20 million).

This is a great result for the company, but it’s far below what most seed-stage VCs want.

A $50 million exit value would be a 2.5x multiple, while a $200 million exit value would be a 10.0x multiple.

And these numbers represent the potential outcomes and assume that everything goes well.

Also, these numbers do not account for the dilution in future funding rounds.

This 10% ownership will likely fall to 7%, 5%, or even 3% as the startup raises money in the Series A, B, and C rounds, which means even lower returns multiples.

You might say, “OK, but couldn’t this company’s revenue go much higher? They should charge per user, not per firm, for this service.”

And that leads us to the next point about the qualitative evaluation of the market, product, and team.

Venture Capital Case Study, Part 2: The Market, Product, and Team

I wouldn’t say this company’s product is “terrible” – I’ve seen much worse startup ideas.

But it faces a “no man’s land problem” because the ideal customers differ from the reachable customers.

Boutique banks tend to be much more cost-conscious than large firms and don’t necessarily want to add a $2,000 monthly expense for multiple employees.

If a boutique bank needed this service for 5 Analysts, $2,000 per user per month would mean $120K per year, which is about the cost of hiring a full-time Analyst.

Many small banks would look at this and say, “OK, it speeds up presentations… but for that price, we could hire another Analyst and get client support, Excel work, and more.”

Also, small banks depend far less on long and detailed pitch books than large banks.

Most new deals come from longstanding relationships, not inbound inquiries or bake-offs / beauty pageants.

PitchBookGPT could target large banks (the bulge brackets) instead, as they are more willing to pay for training and productivity tools.

This service would be more useful for large firms because they tend to produce the 100+ slide pitch books where automation tools could save time.

However, it’s also much more difficult to close deals in this market, and compliance concerns mean these banks are less willing to share their data with external parties.

Could you imagine Goldman Sachs or Morgan Stanley uploading all their pitch books and slides to a VC-funded startup that may not even exist in a year?

Here’s my summary of the product/market fit problem:

Other Points in This Venture Capital Case Study

We don’t have time to analyze the team or the expected use of funds for this $2 million investment, but you would consider both in real life.

In short, they’re “fine but not amazing” – some of the budget numbers seem a bit too low (e.g., for the engineers), while others are on the high side (sales & marketing), but nothing seems completely crazy.

Similarly, the team (all fake names and bios) has relevant experience but looks a bit “junior,” so we’re neutral on them.

Our Final Decision

In short, we’d say no to this deal because we think a 100x multiple in any reasonable time frame – such as 5 or even 10 years – is implausible.

A 5 – 10x multiple might be feasible, but that’s not a great “stretch goal” for a seed-stage deal.

To reach a $1 – 2 billion valuation, the company would need hundreds of millions in annual revenue, and we don’t think that’s realistic for its business model and market.

The company could develop a different product or offer higher-end services to larger firms, but it doesn’t even have a “Version 1.0” yet, so that would be putting the cart before the horse.

You can view the full recommendation here.

What Would Change Our Mind?

If a few factors were different, we might be more inclined to recommend this deal:

1. Per-Seat Pricing – Maybe they can’t charge $2,000 / user / month, but even something like $1,000 / user / month could increase potential revenue at many firms.
2. Lower Asking Price – While a $2 million seed investment at a $20 million post-money valuation is not unheard of, it is aggressive. If the asking valuation were only $5 – 10 million, the deal math would be more feasible (maybe not for a 100x multiple, but something like 20 – 30x).
3. Higher-End Product – For example, banks might be willing to pay more if this product could replace employees rather than just boost their productivity. But that would require far more capital to develop and might require technology that doesn’t exist.

The Venture Capital Case Study: Final Thoughts

In short, unlike many startups, this PitchBookGPT idea isn’t necessarily “bad.”

There are proven markets for productivity tools, slide templates, and reference models in both PowerPoint and Excel.

But the problem is that this isn’t a great early-stage VC idea – at least not for the deal terms the company wants.

That’s not great news for this fictional company, but it is reassuring if you’re a junior banker worried about getting replaced by AI anytime soon.

It probably won’t happen – and in the near term, these new tools might even improve your life.

The post The Venture Capital Case Study: What to Expect and How to Survive appeared first on Mergers & Inquisitions.

If you want to find investment banking league tables, it’s easy: Google the term and add a specific region, industry, or year you’re interested in:

“Investment banking league tables us healthcare [20XX]”

For faster results, use Image Search to scan the results and find relevant-looking tables.

Plenty of mainstream sites and services like the Financial Times, Wall Street Journal, Bloomberg, Refinitiv, and Merger Market publish these league tables in different formats each year.

This article is not about specific league tables but the motivation behind them and when they’re useful and not so useful.

These tables come up in online discussions/arguments about ranking the top investment banks, but people often take them too seriously.

League tables have their uses, but you should interpret them as marketing – mixed with some real-world data and support:

What Are Investment Banking League Tables?

Investment Banking League Tables Definition: IB league tables “rank” banks over specific periods based on their involvement in a certain industry, region, or deal type, such as M&A transactions or equity offerings.

Here are a few examples, which took approximately 1.6 seconds to find via Google Image Search:

Sources: Seeking Alpha | Australian Financial Review | Private Banker International

These “rankings” might be based on deal value (e.g., $50 billion in total announced deals), deal count (e.g., 50 transactions), or fees (e.g., $200 million in advisory fees)

League tables also exist for law firms to show their involvement in deals, but we’re focusing on IB league tables here.

Why Are Investment Banking League Tables Useful?

You might think that league tables are useful for answering questions such as:

• Which industry group or product group should you join? Industrials at DB or healthcare at MS? Aerospace & defense at Jefferies or restructuring at Houlihan Lokey?
• If you get multiple offers in different regions, which one should you accept? BofA in NY or GS in Chicago? JPM in London or MS in NY? Guggenheim in NY or Qatalyst in SF?

To some extent, league tables can answer these questions.

For example, if Bank A hasn’t made the top 10 in the past ~3 years, while Bank B has consistently been #1 or #2, Bank A likely has more deal flow in this region or industry.

That translates into a better experience as a junior banker and more deals you can discuss in future interviews.

But investment banking league tables are not designed for you, the job seeker.

League tables are primarily marketing tools for banks.

These tables exist so that banks can state in their pitch books: “Look! We’re #1 in Deal Type X or Region Y.”

To set up the data for these claims, IB Analysts often spend hours “cutting the data” to make their bank look better.

The usual approach is to start with league table data from external sources and figure out screening criteria to eliminate deals that don’t support the narrative.

Here are a few examples from an Inovalon pitch book by JPM:

These specific examples are reasonable since the screens are minimal: year and industry.

But you’ll also see plenty of contrived cuts with the criteria selected solely to make the bank look better:

• Healthcare M&A Deals Worth Between $400 Million and $1 Billion Over the 17 Months
• Industrial Equity Offerings Worth Between $100 Million and $500 Million with > 50% Domestic Institutional Buyers Over the Past 9 Months
• SPAC Deals Worth At Least $300 Million with A-List Celebrity Sponsors and Over 1,000 Retail Investors Who Lost Money

(OK, the last one is a joke, but I think you get the idea.)

Why Can’t You Take Investment Banking League Tables That Seriously?

For marketing purposes, the flaws are obvious: you can always cut deal lists a certain way to tell whatever story you want.

If you see a league table with a contrived screen like the ones above, you should take it even less seriously than the rest of the pitch book.

But the flaws may be less obvious with league tables produced by 3rd party services.

Here are just a few of the many problems:

Problem #1: Disagreements Over Deal Counts and Volumes

If you gather league table data from different sources, you can find cases with 20 – 30% discrepancies, which is enough to shift the rankings.

There’s a specific example of this issue in the AFR article linked to above.

This happens for various reasons, but most of it comes down to the search and “credit” processes.

For example, one service might rely on publicly announced deals with clearly stated deal sizes, while another might dig deeper or use bank-provided data.

And with large deals with multiple banks involved, the standards for “crediting” banks vary.

The easiest solution is to credit each bank equally, but this is problematic when the banks play very different roles (see below).

Canceled and heavily modified deals create even more issues with the deal count and volume stats.

Problem #2: Undisclosed or Ambiguous Deal Sizes

This one is especially an issue in restructuring because many deal sizes are undisclosed, and even when the information is public, the exact price may be ambiguous.

For example, if a bank advised a $1 billion Enterprise Value company on restructuring $600 million of Senior Notes, should the deal size be $600 million? $1 billion? $400 million?

If there was a debt-for-equity swap, should the deal size be based on the debt balance or the estimated value of the new equity?

Undisclosed deal sizes are also an issue in middle- and lower-middle-market league tables because plenty of small companies get acquired for undisclosed prices.

Earnouts also present a challenge: if a company gets acquired for $1 billion, with an additional $500 million if it achieves its financial goals, do you use $1 billion or $1.5 billion for the size?

Or do you split the difference and say $1.25 billion?

Problem #3: Deal Count, Dollar Volume, or Advisory Fees?

The most common approaches in IB league tables are to rank banks by either deal count or dollar volume.

So, if JPM announced $50 billion worth of M&A deals last year, while GS announced $45 billion, JPM ranks #1, and GS ranks #2 based on dollar volume.

But if JPM advised on 15 deals while GS advised on 17 deals, and you use deal count rather than dollar volume, GS ranks #1.

You can see the problems with ranking banks by deal count if you look at a table like this one for middle-market deals:

Yes, PricewaterhouseCoopers is #1, but would you ever want to work in investment banking at PwC over Houlihan Lokey, Rothschild, Jefferies, Lazard, BofA, or UBS?

No, of course not – because they mostly advise on small deals and issue Fairness Opinions rather than executing full deals.

Because of these issues, it’s always better to go by dollar volume, not deal count.

That said, both these methods are flawed because they do not account for the fees.

The fees give the best indication of how much work the bank did and, therefore, the experience you got by working on the deal.

Unfortunately, finding fee breakouts for individual deals is difficult, so region and industry-specific tables based on fees are rare.

Problem #4: The Advisers’ Roles

A bank can act in different capacities in a single deal, and not all roles are created equal:

• It might be the “lead adviser” in an M&A deal, or it might just issue a Fairness Opinion near the end for a small fee.
• It might advise on all aspects of the transaction, or it might just provide the debt financing required to close the deal (e.g., Leveraged Finance).
• In an equity deal (ECM), the bank could be the bookrunner or a co-manager.
• In restructuring deals, the bank might advise the debtor (the company) or the creditor(s).

Issuing a Fairness Opinion or co-managing a deal requires far less work than executing the entire deal from start to finish.

So, banks that act in these lesser roles should receive less credit in the league tables…

…but that’s typically not how it works.

Banks do everything they can to “jump into” large deals at the last minute and get at least some credit, since they know they can claim the entire deal value.

Problem #5: The Senior Banker Shuffle

Finally, while league tables can be decent guides over short periods, they tend to be less accurate over long periods (5-10+ years) because turnover is so high.

Some senior bankers stay at one firm for a long time, but most move around a few times in their careers, and when they do, their clients come with them.

Sometimes, large banks even hire entire teams from other banks to get these client lists.

Banks like to pretend that clients are loyal to their brand, but decision-makers at companies are more often loyal to individual bankers, whom they’ve gotten to know over many years.

So, When Are Investment Banking League Tables Useful?

League tables have their uses, but they are not oracles of truth because of all these issues.

If you want to use them to decide on a bank, group, or region, I would recommend the following:

1. Review the Past ~2-3 Years of Data – Results in a single year or quarter are not always representative, so you want at least a few years of data. But I don’t think it’s useful to go back 10 or even 5 years because the landscape changes too much over that time frame.
2. Be As Specific As Possible – For example, find tables that screen by at least industry or region rather than “global” rankings. Maybe you can’t find a “European tech M&A” league table, but even a European M&A or tech M&A league table would be far more useful than a global, all-industry table.
3. Don’t Use League Tables to Make Close Decisions – If Bank A has been #5 over the past few years, while Bank B has been #3, you should not pick a Bank B internship offer on this basis. These numbers are so close that you’d be better off using the team, cultural fit, and other factors to decide.

Further Reading About Investment Banking League Tables

If you want to learn more about the uses, drawbacks, and effects of investment banking league tables, please see:

• M&A investment bank rankings are in a league of their own for flaws (Financial Times)
• The Effects of Investment Banking Rankings: Evidence from M&A League Tables (Academic Paper)

And if you ever meet someone who relies on league tables to argue for a specific bank ranking, run far away and ignore everything else they say.

The post Investment Banking League Tables: Neutral Arbiter of Bank Rankings or Marketing Manipulation? appeared first on Mergers & Inquisitions.

We are making major changes to the main BIWS financial modeling course in a few days, which I also wanted to announce directly on this site.

Effective June 30^th, 2023 (Friday), we are splitting the main financial modeling course (“Financial Modeling Mastery”) into 3 separate courses: Core Financial Modeling, Advanced Financial Modeling, and VC / Growth Equity Modeling.

You can read the full details here, but the TL;DR is that you get a much better deal if you sign up before Friday, June 30^th because you’ll gain access to the 3 courses for $397.

If you sign up on or after Friday, you’ll pay about twice that for all the courses separately.

If you need only one of these courses, you’ll get a better deal on or after June 30^th because each one will be less than $397.

And if you already have the current financial modeling course from a previous purchase, you’ll also have access to these 3 new courses, so you don’t have to do anything here.

We are moving to shorter, simpler, and cheaper courses everywhere, and I expect to split up our other training over the next 6-12 months.

I also plan to shorten the videos, make the certification quizzes shorter and easier, and better align the training to a world of falling attention spans induced by TikTok addiction.

If you’re short on time, you can stop reading here and make your decision (sign up now, sign up on Friday, or do nothing).

If you want more details and context around these changes, you can keep reading:

Why Now, and Why This Course Split?

The current Financial Modeling Mastery course is far too long and detailed for most students and professionals.

There’s so much content that it’s difficult to navigate, and most students complete only a small percentage.

Not only have many users complained about this, but some of our institutional clients, such as JP Morgan, have also asked for shorter training.

The main BIWS financial modeling course has been too long since about 2015, so I am finally taking this chance to fix it.

The course’s current length is a direct result of several bad decisions, including:

1. Listening to a Vocal Minority – In 2010 – 2013, many people on WSO, Analyst Forum, Reddit, etc., complained that our courses were “too basic.” I overreacted to this feedback and went too far in the opposite direction over the next ~10 years.
2. Creating Too Much Content During COVID – When everyone was locked down and stuck inside, demand for video-based training skyrocketed… but then it fell as the world normalized. 100 hours of video suddenly seemed less appealing than going outside to get sunlight.
3. Not Splitting Up New Content Appropriately – For example, there was no reason to add an advanced LBO model or a granular SaaS model to the main course. These should have been in separate products from the start.

A Long Time Ago, in a Financial Modeling Course Far, Far Away…

The initial version of this financial modeling course, first released in 2009, had about 10 hours of training and featured the same company in each module.

You could finish it in a week, and many students did.

But then people started complaining and saying it was “too simple” – even at its lower price – so I caved in and added material.

With the second version in 2010, the course length increased to ~20 hours.

But the online complainers were still unsatisfied, and I made a bad decision in response to these complaints in 2014.

I spent that entire year redoing the course and basing each module on a different company (EasyJet, Netflix, Chuck E. Cheese, etc.).

In theory, this was a reasonable idea.

In practice, I executed it badly because I had no idea how to do it efficiently.

I repeated too much content, the videos became too long, and the 2-hour modules turned into 8-hour modules.

As a result, the course expanded to nearly 80 hours.

People started complaining about the length, but sales were still increasing, and most students were still getting results by finishing smaller portions.

In 2017, though, these problems worsened, and I began working to shorten and simplify everything.

I simplified a few case studies and cut some material, but it was still too long.

And then COVID hit in 2020, and I made 2 good decisions and 1 very bad decision:

1. Good Decision: I removed the old “Advanced Financial Modeling” course because it was outdated, the models and videos were bad, and no one used it.
2. Good Decision: We changed the BIWS Premium package and replaced this older “Advanced” course with the PowerPoint Pro course since PowerPoint is approximately 10x more useful for interns and new hires.
3. Very Bad Decision: Instead of just dropping the “Advanced” training, I created and updated it within the main financial modeling course and added new topics, such as spin-off M&A models.

I felt people would be “disappointed” if the older Advanced material disappeared.

But hardly anyone even used that course, so I was not thinking about this rationally.

Rather than shrinking, the financial modeling course got even longer, and now there was a new problem: each module consisted of multiple case studies.

The version from 2014 was also long, but at least the content was clear: Module 1 covered Company A, Module 2 covered Company B, Module 3 covered Deal C, etc.

But this new setup with multiple case studies per module made it difficult to find specific topics and skip around.

A Better Approach: What I Should Have Done

A much better approach would have been:

1. Remove the old Advanced course and replace it with PowerPoint in most course packages.
2. Update and simplify the entire “main” financial modeling course to ~30 hours, focusing on 20-hour completion plans. Limit all videos to 10-15 minutes. Cut anything not directly related to entry-level interviews and case studies.
3. Create some advanced content but turn each major topic into a separate 10-hour course (e.g., Private Equity Modeling, Credit Modeling, Hedge Fund Modeling & Stock Pitches, etc.).

We are now moving in this direction, but finishing points #2 and #3 will take time. The changes this week are the beginning of this process.

What Happens Next?

The most immediate change happens in a few days, when the main course is split on June 30^th.

Again, if you want the best deal on the most content, sign up before then, and you’ll gain access to these 3 separate courses for 50% less.

In the future, I expect to release shorter, separate courses on Credit, Private Equity, Hedge Funds, and Advanced M&A Modeling.

Each one will be about 10 hours and target a 1-2-week completion time.

The Private Equity and Advanced M&A Modeling ones are actually “done” and could be released today, but I want to see how this initial course split goes.

The Project Finance & Infrastructure course is coming, but I expect to keep it short and simple (~10-15 hours of training with maybe ~5 case studies).

We will also likely split Real Estate & REIT Modeling and Bank Modeling into shorter, more focused courses.

It would make more sense to offer one course on just properties for $200 – $250 and another on just REITs for $200 – $250 rather than one long course.

I also plan to shorten and simplify all the certification quizzes and any video longer than ~10 minutes.

I can’t promise a specific date because these changes are more complex; I’m also trying to balance this with new topics and training.

But you should see at least some changes within the next year.

Questions?

In the spirit of streamlining, I’ll end this announcement right here.

As always, if you have any questions, comments, or feedback, please leave a comment below or reply to the email newsletter.

The post Major BIWS Course Package and Price Changes Coming on June 30th, 2023 (Friday) appeared first on Mergers & Inquisitions.

Investment banking in Dubai stands out for attracting remarkable hype on social media.

You’ll find influencers on Instagram, TikTok, LinkedIn, and other sites constantly praising Dubai and claiming it’s the best place to work or start a business.

It’s almost like the city has its own PR department and never-ending marketing campaign.

If you’re interested in the Middle East or have connections to the region, all this hype has probably made you wonder about finance careers there.

Specifically, should you aim for entry-level investment banking roles in Dubai rather than London, New York, or other financial centers?

Are the tax benefits, safety, and diversification worth the drawbacks of less deal activity, smaller intern classes, and somewhat “random” work?

The short answer is that, like other smaller regions, Dubai is best in very specific cases; the average student would still be better off starting in NY or London.

And if you want all the details and some sports analogies to sum up everything, read on:

Investment Banking in Dubai: Hub of the Middle East

Dubai acts as a hub for transactions in the Middle East and North Africa (MENA) region, which includes ~20 countries.

The most prominent three countries by deal activity are the United Arab Emirates (UAE) itself, Saudi Arabia (KSA), and Egypt:

The “Others” category includes countries like Algeria, Jordan, Lebanon, Qatar, Morocco, and Oman.

And while Dubai may be a hub for this region, deal activity across MENA is fairly low.

There are usually a few hundred M&A deals per year for $50 – $100 billion of total volume:

For context, that’s less activity than Canada in an average year, and it’s about 5-10% of the deal volume of the Asia-Pacific (APAC) region.

That doesn’t make Dubai “bad” – it just means it’s smaller than many think.

Industry-wise, oil & gas and power & utilities are huge, but sectors like healthcare, financials, and telecom are quite significant as well:

Technology has been growing, but it’s still less developed than in regions like London or NY.

You’ll also see a fair number of deals in the financial sponsors group due to the many sovereign wealth funds in the region.

The bottom line is that while there is a lot of energy-related deal activity, Dubai is more diversified than you might expect, and many bankers work as generalists.

Another selling point is that when other regions are doing poorly, Dubai often performs well and acts as a “counter-cyclical” finance center.

This happened back in 2008 and, more recently, in 2022, when deal activity fell almost everywhere except for the Middle East.

But I would be careful about reading too much into this because Dubai doesn’t necessarily defy long-term trends for long.

For example, total deal activity held up better than in other places in 2008, but it fell substantially in 2009, following the rest of the world.

Investment Banking in Dubai: The Top Banks

The usual U.S. bulge-bracket banks, such as JPM, GS, MS, and Citi, always rank well in the league tables.

The other bulge brackets (BofA, Barclays, UBS, and DB) tend to rank lower, but this varies each year.

Many people would say that the elite boutiques – specifically, Moelis and Rothschild – are the top banks in the region based on deal activity, business model, and overall experience.

Among the other banks, HSBC usually makes a strong showing, most middle-market banks are barely present, and the other elite boutiques (Evercore, Lazard, etc.) are much less active.

The most important point is that many bulge-bracket banks do “coverage work” in Dubai, which means more “process management” and less technical analysis.

This has changed over time and varies based on the industry, but in many cases, teams based in London do much of the heavy lifting in deals.

Moelis and Rothschild are unique because they do everything out of their Dubai offices, which means a better experience for Analysts and Associates in most cases.

It also means larger Analyst classes than at some of the other banks.

Some MENA-based banks also do a lot of deals in the region, but as in Hong Kong and Canada, they tend to focus on corporate bonds for domestic companies (DCM).

Example firms here include Riyadh Bank Ltd, Saudi National Bank SJSC, Abu Dhabi Commercial Bank, First Abu Dhabi Bank, and the Arab Banking Corporation.

As you can tell by the names, many are based in Saudi Arabia or other Middle Eastern countries and also operate in Dubai.

Finally, there are MENA-based boutique investment banks, such as Alpen, Arqaam, Awad, deNovo, EFG Hermes, SHUAA, and Swicorp.

Some of these firms offer internships or off-cycle roles, but there’s not much information about most of them.

Investment Banking in Dubai: Recruiting and Interviews

The biggest differences in recruiting and interviews are as follows:

1. Entry-Level vs. Lateral Roles – Dubai tends to be very skewed toward lateral hires, such as Analysts who spent 1-2 years working in Europe. Internships and off-cycle roles for fresh graduates pop up, but the “class sizes” are small (see below).
2. Technical Skill Required – Partially due to this emphasis on lateral recruits, the technical rigor seems to be higher than in London. Most of our students and coaching clients in the Middle East have had to complete modeling tests or case studies, even for entry-level roles, and something like the 90-minute 3-statement modeling test or DCF model on this site could easily come up.
3. Smaller Class Sizes – The numbers change yearly, but many banks in Dubai have “Analyst classes” of only 5 – 15 per year. There are probably a few dozen new Analyst hires per year in the city, making it comparable to Australia in terms of headcount.
4. Drawn-Out Process – Due to the emphasis on lateral hires, recruiting processes in Dubai are mostly “off-cycle” (i.e., network yourself, follow up repeatedly, and interview over several months to win the job).
5. Ideal Candidate Profiles – For the best chance of working in Dubai, you should attend a top-ranked university or Master’s program in the U.S. or U.K., gain 1-2 years of deal experience first, and have a strong connection to the Middle East.

Technically, Arabic is not required to win IB roles in Dubai, and banks hire non-Arabic speakers since English is the standard business language.

But native-level Arabic skills will give you an advantage and compensate for other weaknesses in your profile.

It’s just that language skills are not a “requirement” like they are in Hong Kong, nor do they give you quite the same boost as European languages in London.

Target School and Degrees

The investment banking target schools for Dubai combine the U.S. and European lists, but you can also add a few of the top schools in the Middle East, such as the American University of Beirut (perhaps more for consulting).

There is no preferred degree or major, as your university, work experience, interview prep, and networking matter the most.

Investment Banking in Dubai: Salaries, Bonuses, and Taxes

In most cases, IB salaries and bonuses in Dubai match New York compensation, with some banks paying slightly less – but there are no personal income taxes.

For reference, you can view our NY-based IB salary and bonus report here.

If you’re a U.S. citizen, you still need to report and pay taxes on your worldwide income, but you get an exemption on the first ~$120K per year, which means you save a good amount.

The Dubai influencer team likes to highlight this lack of personal income taxes as one of the top selling points of the region.

They’re correct that it is a significant benefit, but they also miss some important points.

First, the tax savings are much more impactful when you earn, say, $500K+ at the senior levels and your home country has a high tax rate.

If you’re earning $150K per year, the lack of taxes helps, but you don’t necessarily want to change your life and career to save $30K.

Second, working in Dubai makes it more difficult to transfer to other regions if you change your mind and want to return to the U.S. or Europe.

Finally, although I don’t have hard data to back this up, I assume that most Managing Directors in Dubai earn less than in NY because of the reduced deal flow and smaller deal sizes.

They might still come out ahead post-tax, but the lower pre-tax pay may translate into a smaller-than-expected difference.

With all that said, the tax benefits are great, and if your main goal is to save as much money as possible over a few years in investment banking, nothing beats Dubai.

Pretty much any other city with real IB roles has income taxes or pays less than NY – or both.

And while Dubai is an expensive city, it’s also cheaper than NY and London in rent, food, and transportation, so your savings can be substantial.

IB Lifestyle, Culture, and Hours in Dubai

Banks in Dubai have a reputation for maintaining a “sweaty” culture (i.e., you will work even longer hours than usual).

Clients tend to be demanding and unsophisticated, which often translates into a lot of last-minute work (especially when you factor in the smaller team sizes).

So, expect the usual 70-80-hour workweeks with spikes to higher levels when deals heat up, or when there’s an emergency.

People often say that the work culture is “no-nonsense,” meaning that bankers are direct about the quality of your work and your overall performance.

That could be a positive if you like transparency but a negative if you don’t respond well to criticism.

Getting promoted can be very political because banks tend to favor certain nationalities and offices within the broader MENA region.

Like the issues with sovereign wealth funds there, you’ll face a much tougher path if you’re not from the right country or you don’t have the right connections.

I hesitate to say much about Dubai as a “place to live” because it’s subjective and depends on how you want to spend your free time.

But even the biggest Dubai influencers would admit that there are fewer cultural hotspots and activities than in cities like London, New York, or Tokyo.

There are sports, outdoor activities, and shopping, but the city’s main draw is that it’s great for weekend trips due to the cheap flights to other parts of the Middle East.

Of course, this assumes that you’ll have the occasional free weekend, which is a bit of a gamble as a junior banker.

Investment Banking in Dubai: Exit Opportunities

The standard exits – private equity, hedge funds, corporate development, family offices, and sovereign wealth funds – exist, but they’re all smaller than in other regions, except for SWFs.

I’ll back this up by citing Capital IQ data about the number of firms in different regions:

• Private Equity Firms:S.: ~7,200 | U.K.: ~1,000 | Dubai: ~150
• Hedge Funds:S.: ~3,200 | U.K.: ~500 | Dubai: ~15

Admittedly, the real numbers are slightly higher, as these lists include only firms headquartered in Dubai.

The Dubai PR team even claims that 60 hedge funds are setting up base there.

But even if you add up all the PE firms and hedge funds in the entire Middle East and Africa region, it’s still less than the total number in just the U.K.

All the private equity mega-funds have offices in Dubai or Abu Dhabi, and the big SWFs all do PE-style deals as well.

The 2018 collapse of Abraaj, one of the most prominent domestic PE firms, hurt Dubai’s local private equity scene, and it still hasn’t fully recovered.

There are a few MENA-specific PE firms that have done well, such as Gulf Capital, Waha Capital, and NBK, but they would all be considered “lower-middle-market” by U.S. standards (i.e., low billions up to $10 billion in AUM across all funds).

But the biggest issue with the exit opportunities is that it is much harder to go from Dubai to NY/London than to do the reverse.

So, if you spend a few years there, build up your stacks of cash, and decide you want to leave, it might not be the easiest transition.

Recruiters and bankers still tend to “discount” experience gained outside the major financial centers, and that’s unlikely to change anytime soon.

Is Investment Banking in Dubai an Oasis or a Mirage?

If you consider the advantages of Dubai:

• After-tax savings potential.
• Deal/market diversification.

And the disadvantages:

• More difficult recruiting.
• Questionable deal experience, depending on the bank.
• More limited exit opportunities (except for SWFs)

It makes the most sense to work there in three scenarios:

1. You’re a High Earner Who Wants to Save More and Leave – If you’re already at the senior level in finance and want to boost your savings for a few more years before you leave the industry, Dubai is great (ideally, you’ll also be a non-U.S. citizen).
2. You’ve Already Worked in London or NY and Want Something Different – You might be able to enhance your profile with this experience, especially if you stay for 1-2 years and then move on.
3. You Have a Strong Connection to the Middle East – In some cases, a strong enough connection might make you competitive for Dubai roles even if your profile is not quite good enough for London or NY roles.

Online detractors sometimes say that working in Dubai is like joining “the minor leagues” in U.S. baseball.

But I think another sports analogy is more apt: a banker moving to Dubai is like Lionel Messi leaving Paris Saint-Germain to join Inter Miami.

Messi has already established himself as one of the best football/soccer players of all time, he’s earned over $1 billion, and he just won the World Cup.

But at 35 years old, he doesn’t have that much time left in his sports career, and he’s unlikely to win another World Cup.

So, he’s joining a weaker, U.S.-based team to downshift and get a huge pay package for his last few years.

If you move to Dubai toward the end of your finance career, you’ll get similar benefits.

Just don’t expect to win the World Cup again.

The post Investment Banking in Dubai: The New York of the Middle East? appeared first on Mergers & Inquisitions.

Whenever internships begin, we get a lot of questions about how to “prepare quickly.”

A long time ago, most questions were about Excel, financial modeling, and how to find data quickly.

Today, they’ve shifted to programming languages, automation tools, and AI (e.g., can InternGPT do everything for you?).

I get the obsession with The Shiny New Thing, but if you’re a new hire in banking or another corporate finance role, boring old PowerPoint might be your highest-ROI skill.

It doesn’t take that much time to reach a decent proficiency level, and in many groups, you’ll spend more time in PowerPoint than Excel.

Since PowerPoint is an important-but-often-overlooked skill, this article will give you a 30-minute crash course on the most important parts:

Investment Banking PowerPoint Shortcuts: The Tutorial, the PDF Guide, and More

I recommend starting by grabbing the free PowerPoint shortcut guide and other documents below:

• Investment Banking PowerPoint Shortcuts (PDF)
• PowerPoint Crash Course – Slides (PDF)
• Reference Slides Used in This Tutorial (PPT)

And then you can watch the full crash-course video or read the written summary below:

Table of Contents:

• 2:17: Part 1: Quick Access Toolbar
• 4:16: Part 2: Windows Shortcuts & Slide Fundamentals
• 10:01: Part 3: Inserting and Formatting Shapes
• 15:01: Formatting Shortcuts
• 20:02: Part 4: Aligning and Distributing Shapes
• 27:55: Part 5: Grouping and Ordering Shapes
• 30:54: Recap and Summary

This video and the written version below are extremely condensed versions of our PowerPoint & VBA course.

The course is about 30x more detailed and has a full macro package, practice exercises, and extensive VBA training, but you can easily get started with this shorter version.

Investment Banking PowerPoint Shortcuts: The Quick Access Toolbar (QAT)

The Quick Access Toolbar in Office programs lets you build shorter versions of existing shortcuts.

If you execute certain commands 500 times per day, entering them with 2 keystrokes rather than 4-5 results in significant time savings.

We make our recommended PowerPoint QAT freely available right here, so you should download it and follow the installation instructions.

If you cannot install it, you can also create the QAT yourself via the Options menu (Alt, T, O).

Enter the menu, click “Quick Access Toolbar” on the left side, and go to “All Commands” to add the ones you want:

Slide #8 in the presentation has the full list and the proper order.

Investment Banking PowerPoint Shortcuts: Windows/Office and Slide Commands

All the standard Windows/Office shortcuts work in PowerPoint as well.

This includes shortcuts like Ctrl + N for creating a new file, Ctrl + O for opening an existing file, and Ctrl + C, Ctrl + X, and Ctrl + V for Copy, Cut, and Paste.

Look at slides 9-11 of the presentation or the shortcut reference guide for more; they’re all important and useful, but you should already know them.

If you’re on the Mac, you can substitute the “Command” key (CMD) for Ctrl and make most of these work – but check the guide for the full details.

With these shortcuts, you should be careful with your selected range because you can select either slides or specific shapes in PowerPoint:

If you’ve just clicked something in the left pane, a shortcut like Ctrl + A will select all the slides in your presentation.

But if you’ve just clicked something in the right pane for your current slide, Ctrl + A will select all the shapes on this slide.

Once you’ve reviewed the key Windows/Office shortcuts, the next-most important ones are the slide shortcuts.

To insert a new slide, press Ctrl + M (new slide based on your current template) or Alt, H, I (pick the template you want to use).

The “+” symbol in these shortcuts means “press the keys sequentially, hold them, and then release them at the same time.”

The “,” symbol means, “press the key, release it, and then press the next key.”

So, for Ctrl + M, you press and hold Ctrl and M and then release both; for Alt, H, I, you press Alt, release it, press H, release it, and then press I and release it.

You can also use Ctrl + Shift + D to duplicate your current slide, regardless of your selection.

The Home and End keys jump to the first and last slides, respectively, while PgUp and PgDn advance to the previous and next slides.

Of all these shortcuts, I probably use Ctrl + Shift + D the most because it’s very common to copy and tweak existing slides in pitch books and other investment-style presentations:

Investment Banking PowerPoint Shortcuts: Inserting and Formatting Shapes

In presentations and pitch books, you’ll need to insert shapes, text boxes, and lines when you’re adding and editing slides.

The most important shortcuts are:

• Alt, 09: Draw Shape
• Alt, 8: Draw Rectangle
• Alt, 9: Draw Horizontal Text Box
• Alt, 08: Draw Line
• Shift + Draw Shape: Draw Shape with a Constant Height/Width Ratio

The first four in this list require our QAT to be installed.

If you’re wondering about the difference between a shape and a text box, a shape has a fill color, centered text, and a white font color.

A text box has no fill color, left-aligned text, and a black font color.

But you can easily change one to the other, so there’s no real difference in simple use cases.

Drawing a shape or inserting the default-sized shape is up to you, but if you want to draw it, you should activate the shortcut and then click the shape with the mouse:

If you want to insert a default-sized shape, you should use the arrow keys to navigate to the shape and press the “Enter” key.

Once you have inserted multiple shapes, the Shift key is essential for selecting them, resizing them, and moving them around:

• Shift + Left Click: Select Multiple Shapes (or use the mouse – often faster/easier)
• Shift + Drag Diagonal Edge: Resize Shape & Keep Height/Width Ratio Constant
• Shift + Drag Shape: Move Shape & Keep Horizontal or Vertical Axis Constant

I find the Shift + Drag Shape shortcut the most useful because there’s no other way to move shapes in a straight line.

It’s especially good when you’ve selected multiple shapes and want to move them all in one direction:

Formatting Shapes

The two key shortcuts here are Alt, 5, which brings up the “Format Shape” menu on the right side of PowerPoint, and Alt, JD, which brings up the “Shape Format” area in the ribbon menu.

The difference is that Alt, 5 gives you more options but is slower to access, while Alt, JD is good for quick/simple edits, such as changing a shape’s height and width:

You can also use shortcuts for more specific formatting changes.

For example, Alt, 2 changes the Font Color, Alt, 3 changes the shape’s Fill Color, and Alt, 4 changes its border colors, weight, styles, etc.

Alt, 7 lets you change the font size, and the standard Windows shortcuts for bolding, italicizing, and underlining text also work (Ctrl + B, Ctrl + I, and Ctrl + U).

You can left-align, center, and right-align text with Ctrl + L, Ctrl + E, and Ctrl + R.

You can format specific text in a shape (if you use the mouse to select only parts of the text) or the entire shape (if you click the entire shape).

But it’s almost always better to format the entire shape for consistency:

Once you have your slides set up, you don’t want to reinvent the wheel, so you should learn the shortcuts for copying and pasting shape formats and duplicating shapes:

• Ctrl + Shift + C: Copy Shape Format
• Ctrl + Shift + V: Paste Shape Format
• Ctrl + D: Duplicate Object(s)
• Ctrl + Shift + Drag: Duplicate Object(s) in Place

Copying and pasting shape formats have their uses, but I use Ctrl + Shift + Drag the most often:

It’s essential on any slide with multiple columns or rows in a grid-like layout when you want to add a new area.

Investment Banking PowerPoint Shortcuts: Aligning and Distributing Shapes

When you start inserting new shapes and creating slides, you’ll rarely align everything perfectly on your first try.

You’ll also come across a lot of slides that look like this:

You probably don’t want to show this slide to a client or your Managing Director in its current form.

You can fix these issues with the alignment and distribution shortcuts.

With both these commands, there are two modes: “Align to Slide” and “Align Selected Objects.”

By default, PowerPoint uses “Align to Slide,” but you almost always want to use “Align Selected Objects.”

To change this setting, select at least two shapes (using Shift + Left Click or the mouse), press the Alt, 1 shortcut, and then press “O” for “Align Selected Objects”:

Once you’ve done this, you can fix the alignment on slides like the one above using these shortcuts:

• Ctrl + Mouse Scroll Wheel or Alt, V, Z: Zoom
• Alt, 1, L / C / R: Align Left / Center / Right
• Alt, 1, T / M / B: Align Top / Middle / Bottom

These alignment commands work by finding the furthest edge of your selection and aligning everything else to it.

For example, if you select all the rounded blue boxes on the slide above and press Alt, 1, L, you’ll get something like this:

But you probably want to left-align everything to the “Project Jaguar” or “Goldman Stanley” text so there’s padding on the left side.

To do that, move the entire selection of blue boxes to the right of the “Project Jaguar” text with Shift + Drag, add the “Project Jaguar” textbox to the selection with Shift + Left Click, and then press Alt, 1, L:

You can keep going with these commands and fix most of the other issues on this slide.

But even if you’ve aligned the objects properly, there may not be equal spacing between them.

To fix this, you can use the distribution commands: Alt, 1, H for Distribute Horizontally and Alt, 1, V for Distribute Vertically.

Taking these rounded blue boxes as the example once again, here’s what the Alt, 1, V command does:

If you want to get even better at alignment and distribution, you can use the Ruler, Smart Guides, and Drawing Guides in PowerPoint.

You can toggle the Ruler off and on with the Alt, W, R shortcut; I almost always keep it enabled because it takes up very little space.

You can enable Smart Guides by pressing Alt, W, X and checking the “Display Smart Guides” option:

Once you do this, dashed, orange lines will appear whenever you’ve aligned objects correctly or arranged them with equidistant spacing.

This feature helps a lot because it lets you fix shapes without selecting everything and entering the alignment/distribution commands:

Finally, you can activate Drawing Guides with the Alt, W, S shortcut.

These lines appear on every slide in the presentation, and you can use them as references for the shapes and other layouts you want to create.

To create a new Guide, press and hold Ctrl and drag the mouse on an existing one:

To delete it, drag the Guide off the slide’s edge.

Investment Banking PowerPoint Shortcuts: Grouping and Ordering Shapes

While you can select multiple shapes with Shift + Left Click and move them around, it’s often easier to group them so you can treat them like a single shape.

They’re also much easier to resize and “swap” with other shapes when they’re grouped.

The key shortcuts are:

• Ctrl + G: Group Shapes
• Ctrl + Shift + G: Ungroup Shapes

Grouping is especially useful on a slide like this if you want to rearrange the order of the scenarios:

Moving around each column is much easier when it’s treated as a single shape.

Finally, moving objects forward and backward is useful when you’re working with “compound shapes,” like these arrows:

The most useful commands here are Alt, 6, R for Bring to Front and Alt, 6, K for Send to Back.

With these commands, you can click a shape and change its “position” on the slide so that it moves on top of or below the other shapes.

These commands are useful for fixing the issues on the slide above:

…but they’re not that important.

I use the alignment and distribution commands 10x more often than these ordering shortcuts.

Investment Banking PowerPoint Shortcuts: What’s Next?

If you follow along and learn the shortcuts above, you will be ahead of ~80% of interns.

That said, this 30-minute tutorial only scratches the surface of PowerPoint.

Topics covered in our PowerPoint & VBA course that we skipped here include the Slide Master, sections, text and tables, Excel and Word integration, images, maps, and macros in PowerPoint.

If you learn something about these topics, you’ll become even faster at key tasks and more likely to leave the office before 3 AM.

Even if you have no interest or time/money for our full course, I recommend looking at the ~10 free PowerPoint tutorials with screenshots and videos within the BIWS Knowledge Base.

They’re not as good as having your own InternGPT – but they also give you a more realistic path to winning a full-time return offer.

The post Investment Banking PowerPoint Shortcuts: Your 30-Minute Crash Course appeared first on Mergers & Inquisitions.

Succession just ended a few days ago.

When a top TV show ends, it is sad.

All our favorite shows will end one day.

In this case, it is Succession that has done so.

Succession ran for 4 excellent seasons, but no more.

Now it is over.

And now I am sad.

But unlike Connor Roy at Lester’s funeral, I can write a real eulogy via my final review of this show.

This is the first time I’ve ever reviewed a book, movie, or TV show multiple times.

But it is just that good, and if you haven’t seen it yet, you need to watch it ASAP.

It is not only the best finance TV show or movie but also one of the all-time great TV series.

I’ll explain both these claims, say whether it stuck the landing (yes), and admit a few weaknesses if you watch it for the “educational value.”

This review will be spoiler-free beyond the pilot episode because I hate when people ruin shows for me:

Succession Review: The Show Explained

If you haven’t seen it or heard anything about it, Succession could be described as “Game of Thrones meets corporate America.”

The series follows the Roy family, owners of global media conglomerate “Waystar Royco.”

The Founder/CEO and family patriarch, Logan Roy, turns 80 as the show starts, and he runs into health problems, which leads his children (Kendall, Roman, Shiv, and half-brother Connor) to battle for control of the company.

The surface-level conflict concerns which one will “win” and become CEO.

But the deeper conflict is that their father doesn’t love them, and they’ll sacrifice almost anything for his love and attention – even though it’s a bit like Charlie Brown and Lucy’s football.

The four seasons see the children scheme, plot, ally, and backstab each other – ostensibly in pursuit of power, but in reality, in pursuit of validation.

It’s equal parts comedy and drama, and the writers frequently execute 180-degree tone shifts in scenes and somehow make it work.

The characters feel more like real people than in anything else I’ve watched recently, and you get a sense of their strengths, flaws, and quirks in seconds.

They are not “likable,” but they are interesting, and your opinion of each one flips back and forth over the episodes.

The show is also highly relevant to finance because entire seasons revolve around mergers, acquisitions, private equity, and shareholder revolts.

And yes, there’s even a plot point about debt covenants, of all things.

Bankers and other financiers play a major role in everything that happens on screen, from setting up buyouts to staging activist campaigns.

The details of some of these “finance plots” are unrealistic, but they still give you a great feel for the world.

Succession vs. Other Finance-Related TV Shows and Movies

The two most recent comparable shows are Billions and Industry, and if you go further back, you could even add Mad Men, Suits, Silicon Valley, and House of Lies to this list.

And… the only one in the same league as Succession is Mad Men.

All these shows can be entertaining, but the writing quality isn’t the same.

Taking Billions and Industry as examples, the characters feel more like caricatures or, at least, far less dimensional.

Sure, we get some sense of Bobby Axelrod’s family and life outside of his job as a hedge fund PM… but it doesn’t factor into the show’s stories in a major way.

Also, the character motivations are a bit weak.

Yes, they all want to get rich or stay rich, but what else is there on an emotional level? We understand their wants but not their needs.

Industry has similar issues (at least from what I saw of Season 1): it’s a fine portrayal of what you’ll do at a large bank, but it feels very work-focused.

Succession works because it effectively combines the corporate/finance world and the characters’ emotional journeys.

Without the big corporate events, it would feel more like a soap opera; without the emotional journeys, it would be incredibly boring.

Succession vs. Other Top TV Shows (Breaking Bad, The Wire, etc.)

Now that it’s over, I feel comfortable saying that Succession should rank as one of the all-time TV greats, in the same category as Breaking Bad, The Wire, and The Sopranos.

These shows all have their strengths and weaknesses, and in some ways, they’re better than Succession.

For example, I would argue that Breaking Bad has a better, more focused story, and that it’s more exciting to watch.

Meanwhile, The Wire covers deep themes about society, education, politics, and the criminal justice system that no other show has come close to matching.

Succession stands out by doing two things extremely well:

1. Conveying nuance in each character’s interactions and dialogue.
2. Making every character, even minor ones, feel dimensional (i.e., they have plausible contradictions).

Imagine that you put 20 people in a room, showed them Breaking Bad, The Wire, and Succession, and then asked them to write essays about the characters in each one.

You’d get plenty of good essays about Walter White, Omar Little, or Stringer Bell – but most of them would say similar things.

They’re all great, well-developed characters, but their motivations for Decision X or Action Y are usually clear.

By contrast, with Succession, you’d get essays with completely different interpretations of the characters.

Why did Greg betray Tom in this one scene? Why did Roman choke up at the last minute? Why did Shiv change her mind about a major power play? Why did Kendall self-sabotage himself?

No two people would offer the same explanations for these because the show spells out very little.

It drops hints and implies motivations, but it’s up to you to connect the dots.

All great writing uses subtext to some extent, but Succession uses it more effectively than almost any other show.

Body language, facial expressions, and unspoken words often ring louder than any piece of dialogue.

As Kendall Roy even said in one episode:

“Words are just, what? Nothing. Complicated air flow.”

Succession Review: Did It Stick the Landing?

As anyone still upset over Game of Thrones can tell you, TV endings are hard – and a bad ending can ruin an otherwise great show.

I’m happy to report that Succession’s final season (#4) was its strongest and that the final episode was satisfying.

I wouldn’t say it was amazing, but it was a solid conclusion that logically wrapped up the main characters’ stories.

I’d put it in the same category as the Breaking Bad finale: good, but mostly predictable with a few smaller surprises.

Some people might be disappointed because their favorite character did not “win,” but anyone rating this a 1 / 10 is media-illiterate or didn’t understand the show.

Succession Review: Flaws and Weaknesses

With all that said, the show does have some weaknesses.

As I mentioned above, the characters and the acting are stronger than the overall story.

You can see this in a few issues throughout the show’s run:

1. Repetition – Some people found the betrayals and scheming repetitive, and they do have a point: one of the Roy children attempts to take over the company at least 3 times throughout the show. Each attempt uses a different strategy and rationale, but his goal is always the same.
2. Uneven Start – It took me a few episodes to get into the show and connect with the characters, and in Season 1, it felt like it was still finding its footing.
3. Contrivances – Some of the events and corporate/financial details around M&A deals and deal processes are not realistic and occasionally took me out of the story.

As one example, there are several important Board votes throughout the show.

Many of these votes conveniently happen to be tied until the final person – always one of the lead characters – gets to vote.

When this happens, we get a dramatic scene or argument, and everything changes based on this decision.

As another example, many M&A deals in the show have a convenient habit of falling apart or almost falling apart at the last minute.

M&A deals fall apart all the time in real life, but when there is a signed agreement and a fiduciary duty to vote “yes,” last-minute changes and cancellations are unlikely.

On that note, although I thought Season 4 was fantastic, the timeline felt contrived because each episode takes place in a single day, and the entire season spans only 1-2 weeks.

The problem is that many very important events happen in this short period: an election, a major deal close, a family wedding, and more.

On a character level, this works well because it forces different people to interact under stressful conditions.

But looking at the bigger picture, there’s no real reason why all these events had to happen so close together.

It seemed like drama for the sake of drama, which is fine for the character work, but a bit unrealistic for the plot.

Why You Should Watch Succession ASAP If You Haven’t Already

I don’t know if I can say that Succession is “better” than the other all-time greats I mentioned above.

But I can say that it is my favorite show and the most entertaining and relevant series around if you’re interested in finance.

Its real weakness is not anything I wrote about above, but the fact that it’s very much a “now” show.

If you think about the year 2050 or 2100 and assume that human civilization still exists, people will still watch The Lord of the Rings trilogy or the early seasons of Game of Thrones.

They’re relatively timeless stories about consistent human struggles, and they’re set in alternate timelines and universes.

But Succession is a product of the late 2010s and early 2020s, with Big Tech and digital media rising and legacy-media companies sinking.

And the sooner you watch it, the more you’ll appreciate the broader context, the corporate maneuvering, and all the big events.

As a bonus, you might also walk away glad that you weren’t born into a multi-billion-dollar family fortune.

The Roy kids all were, and it didn’t seem to help them much.

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“Event-driven hedge funds” is one of the more confusing labels in finance.

Part of the issue is that many different strategies fall within the “event-driven” category: merger arbitrage, activist investing, distressed investing, special situations, and more.

But the other problem is that all hedge funds are “event-driven” because they invest based on catalysts, or specific events that could change a security’s price.

You could even say that a long-only fund that invests in undervalued companies based on their earnings announcements is “event-driven.”

They have their investment thesis and valuation, and the earnings announcement is the event that unlocks value…

…but this is not what “event-driven” means in most cases.

I’ll do a deep dive into the entire space in this article, including the top funds, example trades, recruiting, exit opportunities, and more.

But, as usual, I want to start with the definitions and fund types:

What is an “Event-Driven Hedge Fund”?

Event-Driven Hedge Funds Definition: Event-driven hedge funds bet on specific corporate actions, such as M&A deals, divestitures, spin-offs, bankruptcies, and business reorganizations, and they profit based on changes in the value of a company’s debt or equity after the action.

Event-driven hedge funds differ from other funds because they rely on specific “hard catalysts,” such as acquisitions and divestitures.

A long/short equity fund could find an undervalued company, like it for reasons A, B, and C, and argue that its price will increase by 50%.

It doesn’t necessarily need “hard catalysts”; they could be softer or more speculative, such as the expectation that the company will announce higher growth for the year.

If this fund is right, the company’s price may increase by 50%.

But even if the specific catalysts never materialize, the stock price might still increase by 20% or 30%.

By contrast, an event-driven fund would never bet on such a situation.

Instead, the fund would look for a company that has announced plans for a specific action, such as a spin-off of one division, and use this logic to invest:

• “If this spin-off happens and we’re right about the new company’s value, we could potentially earn 50% by buying the parent company’s shares.”
• “But if we’re wrong, and the spin-off doesn’t happen or gets done at a lower valuation, the parent company’s share price would fall by only 10%.”

It’s 50% upside and 10% downside, so a fund specializing in this strategy might invest.

According to Preqin data, event-driven funds represent 8% of all hedge fund strategies, roughly the 3^rd largest category:

Types of Event-Driven Hedge Funds

Opinions vary on the exact categories, but in this article, I’ll assume there are 4 main types of event-driven hedge funds:

1. Merger Arbitrage – These funds bet on mergers and acquisitions closing; most focus on making lots of small, modestly profitable bets while avoiding blowups.
2. Special Situations – These funds focus on companies that are spinning off or divesting divisions, reorganizing, or otherwise going through more unusual changes (not just simple acquisitions or capital raises).
3. Distressed / Restructuring – These funds invest in the debt or equity of distressed companies or ones entering the bankruptcy process.
4. Activist – These funds attempt to create their own catalysts by forcing specific changes at companies and then profiting when the share price increases.

We’ve covered merger arbitrage and activist hedge funds in separate articles, and distressed hedge funds will get their own future article, so I’ll focus on special situations here.

Here’s how these strategies compare on the “trading vs. private equity” spectrum:

The big selling point of the “middle” strategies – special situations and distressed – is that their returns are relatively uncorrelated with the overall market, and they have greater potential upside than something like merger arbitrage.

And unlike activist hedge funds, they don’t have to force the company to do something – instead, they bet on a specific event that has already been announced.

It’s the best of both worlds because they can analyze deals and put money behind their views without grinding through deal processes or forcing changes.

A Sample Event-Driven Hedge Fund Trade

To illustrate how these hedge funds work, I’ll walk through an announced spin-off here – Jacobs Solutions’ plan to divest its Critical Mission Solutions (CMS) division.

Jacobs is a moderate-growth, moderate-margin company in the professional services space, currently trading at 1.2x revenue and 11.5x EBITDA.

CMS contributes about 1/3 of its revenue and operating income, but it has lower revenue growth, with margins in about the same range as Jacobs:

The company uses this corporate-speak to justify the deal:

“By separating CMS, we will streamline our business portfolio and transform Jacobs into a higher-growth, higher-margin company more closely aligned with key global mega trends and growth sectors.”

Translating that to English: “We can grow more quickly and get higher margins without CMS, so our multiples will increase, and our share price will go up.”

Here it is in the investor presentation:

We don’t know the planned valuation for CMS in this spin-off, but let’s assume that Jacobs plans to spin it off at an IPO offering price that implies an 11.5x EBITDA multiple, matching its own.

If you’re working at a special situations fund, you could trade this deal in many ways:

1. Long Jacobs and Short CMS – You believe the company is correct about the deal’s benefits, but you think CMS is overvalued at 11.5x EBITDA since it’s only growing at 2-3% per year vs. 5-10% per year for Jacobs.
2. Long Jacobs and Long CMS – You think Jacobs’ share price will increase, but you also think CMS will grow at higher-than-expected rates as a separate entity, so it might trade up to a 14-15x multiple.
3. Short Jacobs and Short CMS – You think this deal is a terrible idea that will result in “dis-synergies” and cause both companies’ growth rates and margins to fall, resulting in multiple compression and lower share prices.
4. Short Jacobs and Long CMS – You think Jacobs’ growth rate will slow down without CMS, but CMS’ prospects will increase since it can win more government clients as a separate company.
5. Capital Structure Trades – Or you could focus on Jacobs’ ~$4 billion in debt and long or short some of their bonds (or use credit default swaps) if you believe its credit rating will change once the deal takes place. You could do the same with CMS if any debt is transferred here.

You could also use call or put options to hedge the risk in all these trades, especially if you’re longing or shorting both companies.

Since this deal will take at least one year to close, and possibly more than that, you also need to think about time frames and annualized returns.

For example, if Jacobs trades up from an 11.5x multiple to 14.0x, that’s a 22% increase – but if it takes 2 years to reach that level, it’s only ~11% per year.

This is a good return, but it may be below what your fund is seeking.

What Makes Event-Driven Hedge Funds Different?

With this one, you need to look at the entire category, which means merger arbitrage on one end and activist on the other.

But if we do that and take special situations and distressed as the “mid-points”:

1) Liquidity – Overall liquidity is higher than it is for activist hedge funds, and lock-up periods are shorter for obvious reasons: these funds need less time to execute their trades. But lock-up periods are longer than most long/short equity funds.

2) Time Horizon – Activist hedge fund trades could take years (or even longer), merger arbitrage trades could take months, and special situations and distressed are somewhere in between.

3) Low/Moderate Leverage – On average, event-driven hedge funds use about the same leverage as credit hedge funds: less than equity strategies and far less than global macro.

4) Moderate Net Exposure and Beta to Bonds and Equities – The image below shows the full spread of these variables: activist funds are highly correlated with equities, merger arbitrage is much less so, and everything else is in the middle.

5) Portfolio Concentration – Many special situations and distressed funds run concentrated portfolios (e.g., 10-15 positions) because each trade takes a lot of time and effort to analyze and follow, and the potential upside and downside vary greatly.

Deal and Valuation Analysis

The analytical side depends heavily on the specific strategy your firm uses.

Merger arbitrage is closer to plain-vanilla valuation with a bit of merger model and accretion/dilution analysis, while activist investing is closer to private equity due to the longer holding periods.

Special situations funds are in between these, but one key difference is that methodologies like Sum of the Parts (SOTP) are especially useful here.

Companies are usually motivated to spin off divisions because they believe their valuations will increase afterward.

And the only way to test this claim is to value each division separately and add them up:

The example here is for LG Chem, a conglomerate in South Korea.

If you want more, there are several Sum of the Parts lessons in the valuation sections of our Financial Modeling Mastery course.

Not all event-driven trades require a Sum of the Parts analysis, but you’ll usually have to factor in a significant business change to value the company’s debt or equity properly.

The Top Event-Driven Hedge Funds

There are full lists of the top funds in the merger arbitrage and activist hedge fund articles, so you can refer to those for all the details.

Some of the best-known activist hedge funds in the U.S. include Elliott Management, Third Point Partners, ValueAct Capital, Trian Partners, JANA Partners, and Starboard Value.

Dedicated merger arbitrage funds are more niche and lesser-known, but a few names include Lyxor/Tiedemann Arbitrage Strategy, Man GLG Event-Driven Alternative, GAMCO Merger Arbitrage, Alpine Merger Arbitrage Fund, and the Franklin K2 Bardin Hill Arbitrage UCITS Fund.

All the large multi-manager funds, such as Millennium, also use event-driven strategies to some extent.

Other well-known funds with a broad event-driven focus include Davidson Kempner, Farallon, HG Vora, Luxor, Canyon, P. Schoenfeld Asset Management (PSAM), Pentwater, Silver Point, Anchorage, and King Street.

Some of these, such as PSAM, use only event-driven strategies, while others, like Farallon, are highly diversified but have specific funds for strategies like merger arbitrage.

Recruiting: Who Wins Offers at Event-Driven Hedge Funds?

I did my usual LinkedIn survey of professionals at event-driven hedge funds and got the following results for the most common backgrounds:

• Other Hedge Funds: 37%
• Investment Banking: 26%
• Sales & Trading: 26%
• Other (Credit, Equity Research, Corp Dev, Consulting, etc.): 11%

I was surprised at the high percentage from sales & trading, but that’s mostly due to classification issues (e.g., should convertible arbitrage be in this category?) and the fact that I did not filter out execution traders.

If you do not start working at a hedge fund out of undergrad, you are best off working in investment banking if you want to join an event-driven fund.

This is true for pretty much anything in the category because all these strategies require you to analyze major transactions.

Restructuring groups lend themselves to distressed strategies, and M&A and strong industry groups are good for special situations, activist, and merger arbitrage funds.

In the hedge fund recruiting process, you can expect more of an “off-cycle” approach, especially at smaller funds, with the usual questions about the market, your deal experience, and your ideas for potential trades.

Interviews and Case Studies

There’s a lot of overlap between case studies and stock pitches for long/short equity and activist hedge funds, but also some key differences.

The biggest difference is that you need a “hard” catalyst, such as a specific action or transaction the company has announced.

You can create your own catalysts on the activist side, and for L/S equity, you don’t necessarily need highly specific catalysts – but for special situations, you do.

If you’re preparing for interviews at different funds, I recommend searching for recently announced spin-offs and divestitures on Bloomberg or Capital IQ to get ideas.

You can then run a simple Sum-of-the-Parts valuation to get ideas for potential trades.

If you then interview for a long/short equity or activist fund, you can re-use this idea but tweak it a bit.

For example, at an activist fund, you could acknowledge that this spin-off or divestiture will take place but say that the company needs to go even further and spin off another division – and recommend winning a Board seat to force that change.

The “special situations” and “event-driven” categories include more than spin-offs and divestitures, but I recommend sticking to these because it’s easier to generate ideas.

Careers, Hours, Lifestyle, and Compensation

If you look up people who have worked at event-driven hedge funds on LinkedIn, you’ll find that many of them leave for other types of hedge funds, such as long/short equity.

The reason is simple: it’s a stressful job with somewhat longer hours than many other hedge fund roles since you’re analyzing and following deals (or even making them happen sometimes).

Many event-driven strategies are also quite cyclical because, depending on market conditions, there are tons of opportunities or very few.

For example, in periods of loose monetary policy, large M&A deals become more common, which benefits merger arbitrage.

But spin-offs and divestitures become less common since companies do not feel they “need” to shore up their cash balances – which is bad news for special situations.

So, as with other cyclical strategies, it may be a bit of a twisted path to advance to the senior ranks.

Compensation is like any other hedge fund strategy: you’ll start in the low six figures and advance to the low seven figures at the Portfolio Manager level or above.

Payouts are tied to fund size and overall performance, but they tend to be very discretionary at single-manager funds and more systematic at multi-managers.

You can read “discretionary” as “a higher chance of a surprise in either direction, depending on the PM’s mood.”

Exit Opportunities

The good news is that event-driven hedge funds span a wide range of strategies, so you have some flexibility.

You could go to one of the more specialized sub-strategies, such as distressed or merger arbitrage, or become more of a generalist with something like long/short equity.

You could even return to investment banking since you’ll have a decent amount of “deal experience” (and you probably had IB experience before joining).

Even corporate development or private equity might be possible, depending on what you did before joining your current fund.

If you have enough credit experience, you could even go in that direction and think about direct lending, mezzanine, or distressed PE funds.

You would not be a good candidate for more “trading-oriented” opportunities, such as global macro funds.

Finally, fields like venture capital and growth equity might also be out of reach, as the skill sets are quite different.

Additional Resources

The merger arbitrage and activist hedge fund articles both have suggested books and articles, so I’ll refer you to those.

Unfortunately, I’ve never been able to find much specifically about special situations investing.

The best source seems to be this classic book by Maurice Schiller about “Special Situations in the Stock Market,” but I’m not sure if there’s anything better or more recent.

Feel free to leave any tips or recommendations in the comments.

Final Thoughts on Event-Driven Hedge Funds

Since this category of hedge funds spans a wide range of strategies, there’s something for almost everyone here.

But the main benefit of the “middle” strategies, such as special situations, is that they’re a bit like “investment banking / private equity lite.”

You need to understand deals and take a strong view of them to succeed, but you don’t grind through all the documents and process work yourself.

Also, you can find event-driven strategies at nearly all large hedge funds and many mid-sized and smaller ones, so you don’t necessarily need to be in the “top” group or bank to recruit for these roles.

The biggest issue is that these strategies tend to be either “simple but boring” (merger arbitrage) or “more interesting but also more stressful” (distressed, special situations, and activist).

But if you’re fine with that trade-off, joining an event-driven hedge fund might just be your best “career event.”

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Ever since the 2008 financial crisis, there has been massive hype about both private equity and technology.

Seemingly every MBA student wants to get into one of these industries, and when you combine them, the hype tends to multiply.

Over the past few decades, technology private equity has gone from “barely existing” to representing the largest single sector in PE by both deal value and deal count.

And just as tech and TMT investment banking have become the most desirable groups on the sell-side, tech private equity has reached a similar status on the buy-side.

Some tech specialist firms have delivered an incredible performance, often with annualized returns (IRRs) of 30-40%, while others “followed the herd” and didn’t do quite so well.

I’ll cover the top firms, deals, recruiting, and career differences here, but as with any superhero saga, I’ll start with the origin story:

Definitions: What is a Technology Private Equity Firm?

Technology Private Equity Definition: A tech private equity firm raises capital from outside investors (Limited Partners), acquires minority or majority stakes in software, internet, hardware, and IT services companies, and grows and sell these stakes within 3 – 7 years to realize a return on their investment.

This definition includes both traditional private equity (buyouts and control stakes) and growth equity (minority stakes) because many “tech PE firms” do both.

The lines between different strategies have blurred over time, and many firms have multiple funds that target companies at different stages.

Why Did PE Firms Start Buying Tech Companies?

When private equity was relatively new in the 1970s, 1980s, and 1990s, most firms stayed far away from technology.

If they did invest at all, they stuck to areas like hardware/semiconductors and services since they were seen as “less risky” than software.

Hardware companies had significant assets that could be used as collateral, pleasing the lenders, and services companies often had large corporate contracts that represented predictable revenue streams.

But all that started to change during the dot-com boom of the late 1990s.

Two of the biggest tech PE firms, Silver Lake and Vista, were founded in 1999 – 2000, partially as contrarian bets on the sector.

At the time, most people assumed that the only way to “invest in technology” was for venture capitalists to pay computer science majors to drop out, strap themselves to Red Bull IVs and espresso machines, start coding 24/7, and launch new websites that might become worth billions overnight.

But Vista and Silver Lake (and eventually Thoma Bravo) saw an opportunity to acquire and grow mature firms, and as the tech industry developed, that opportunity expanded.

Four major trends caused PE interest in tech to skyrocket:

1. The Shift to Subscription-Based Software (SaaS) – Software companies always had some recurring revenue from maintenance & support fees, but the switch to 100% subscriptions made revenue and cash flows far more predictable.
2. Industry Maturation – By the 2000s, many technology companies had matured and fallen into the “low-to-moderate growth, with too much corporate bloat” category.
3. Software Took a Few Bites of the World, But Didn’t Finish Eating – As Marc Andreessen wrote in his famous editorial, software became integral to so many industries that PE investors could no longer ignore it. But some areas proved much harder to “disrupt” than expected, so there remained a perception of untapped opportunity.
4. Loose Monetary and Fiscal Policy – Zero and negative interest rates and massive money printing tend to inflate valuations the most for high-risk, high-growth companies. So, as central banks kept printing, PE firms, VCs, and other investors kept benefiting as they could buy companies at nosebleed multiples and sell them at even higher multiples.

Tech represents the best of both worlds for PE firms: it offers high growth potential with light capital requirements, but also some downside protection because of most companies’ recurring revenue.

There is some risk that customers could switch to other vendors, but if the software is truly “mission-critical,” it’s likely to be deeply entangled with companies’ operations.

That makes switching or canceling long and very expensive processes, further reducing the risk.

Because of these factors, PE firms have been able to pay high multiples for software and other tech companies and still earn high returns.

The Top Technology Private Equity Firms

I would put tech PE firms and PE firms that “do many tech deals” into 6 main categories:

#1: Large, Pure-Play Tech Private Equity Firms

There are three main firms here: Vista, Thoma Bravo, and Silver Lake.

Vista and Thoma Bravo have accounted for around half of all software buyouts over the past few years, and they use a similar playbook: cut costs, increase efficiency, and raise prices when possible.

They also use “buy and build” strategies, such as bolt-on acquisitions, but most large deals are motivated by efficiency gains.

A great example of this is Vista’s $2.6 billion buyout of Duck Creek Technologies (insurance SaaS) in early 2023 for a seemingly nonsensical 234x EBITDA multiple and 7.6x revenue multiple:

And this was not a high-growth business: historical growth rates were in the 15 – 25% range (solid but unremarkable for tech).

But Duck Creek also had low margins, which PE firms likely viewed as an opportunity to cut costs:

A standard LBO model where you assume similar growth rates and margins into the future wouldn’t support this deal.

But if you assume the company can reach 20% or 30% margins, the IRR math might become much more plausible.

Silver Lake, in contrast to these two firms, is less of a software specialist because it also does plenty of hardware, communications, services, and even media deals.

It also does plenty of non-buyout deals, including minority stakes and occasional “rescue” deals for troubled companies, such as for Airbnb when COVID first struck in 2020.

#2: Mid-Sized and Smaller Tech-Focused Private Equity Firms

In this category are firms like Francisco Partners, Vector Capital, Accel-KKR, Marlin, Siris, Hg, Clearlake (more than tech), Symphony Technology Group, and GI Partners (more than tech).

You could also add names like Ardan, Luminate, Fulcrum, and Hermitage (Asia tech) to this list.

Some of these firms, like Francisco Partners, were founded around the same time as Silver Lake and Vista but did not grow to the same extent, with about half as much in AUM currently.

They still execute large deals but do fewer transactions in the $1+ billion range.

If you go even smaller, you’ll find names like Sumeru (Silver Lake’s middle-market firm), Banneker (founded by ex-Vista employees), Riverwood, and Leeds (with a “knowledge industries” focus).

Smaller firms in this category often focus on organic growth and bolt-on acquisitions to scale their portfolio companies.

You will still see traditional buyouts and some efficiency focus, but this group is closer to the “growth equity” side.

#3: Tech-Focused Growth Equity Firms

This list includes firms like Summit, General Atlantic, TA Associates, Insight, PSG, and Susquehanna Growth Equity (not structured as a traditional PE/VC firm).

Many large PE firms and mega-funds also have smaller, growth-oriented funds (ex: “Tech Growth” at KKR and similar names at Blackstone, Providence, TPG, Bain, Advent, Permira, etc.).

The business model here is simple: find high-growth tech companies that need more capital to reach the next level, typically to pay for sales & marketing, and invest in minority stakes.

These stakes often have structure attached, such as liquidation preferences, which reduce the downside risk if growth slows or multiples compress.

Many of these deals also include both secondary purchases (existing shares) and primary purchases (new shares issued, which boost the cash balance).

Growth equity firms can often buy existing shares from employees at lower valuations, giving them more potential upside – while they can attach terms like liquidation preferences to primary shares for more downside protection.

#4: Private Equity Mega-Funds and Other “Large Funds” with a Tech Focus

All the PE mega-funds do tech deals, as do other “large PE firms,” such as Hellman & Friedman, Advent, Warburg Pincus, Permira, Bain, EQT, and Apax.

Some of these firms compete with Vista and Thoma Bravo to win deals, so you’ll see many of them in the same sell-side M&A auction processes.

In some cases, they might even team up to acquire companies together – one example was Blackstone and Vista partnering to acquire Ellucian in 2021.

I would also put many sovereign wealth funds and pension funds in this category – especially ones that are more active in deals, such as GIC in Singapore and CPPIB in Canada.

In some cases, they can be even more aggressive bidders because they’re funded by the government, not traditional Limited Partners.

#5: Middle-Market Private Equity Firms with a Tech Focus

You could add many of the firms in the middle-market private equity article to this list, but a few worth noting are Welsh Carson, Veritas, Genstar, New Mountain, and Audax (some of these do more than tech, but they all have a solid presence in the industry).

These firms usually do not compete with Vista or Thoma Bravo to win deals – the key competitors include smaller tech-focused PE firms and other MM PE firms.

Sometimes, these firms will put together custom deals outside bank-run auction processes, often via “sourcing” (cold outreach) and existing relationships.

#6: Tech Venture Capital Firms

Venture capital is a whole separate topic, but I list it here because many traditional, early-stage firms have moved up-market over time and now have separate funds that do growth deals for later-stage companies.

Also, you’ll occasionally see Vista, Thoma Bravo, or Silver Lake go “down market” and invest in earlier-stage companies alongside VC firms.

One example was MedTrainer’s $43 million Series B round in 2022, led by VC firm Telescope Partners and Vista.

On the Job in Technology Private Equity

You might look at these lists and think, “OK, there’s a metric ton of PE firms operating in tech. But how is the day-to-day experience different? And how is tech PE different from any other vertical within PE?”

Unfortunately, the answer here is boring: “It’s not that much different.”

The differences relate mostly to your firm’s strategy and size, not whether you work in tech vs. industrials vs. consumer/retail.

So, at a middle-market tech PE firm, expect the usual MM PE differences: smaller companies, less bureaucracy, more focus on operations and less on financial engineering, and more accessible recruiting.

Compensation has more to do with your firm’s size and performance than its industry focus, and the hours and lifestyle are similar.

The main difference is that you’re more likely to specialize in a vertical, such as insurance software, at the pure-play tech PE firms, while you’re more likely to be a generalist at a tech team within a larger PE firm.

Also, working at one of the “Big 3” tech PE firms might seem more like working at a mega-fund than working in tech at an actual mega-fund.

Since the entire firm does tech, it feels like “the team” is massive.

By contrast, tech is only a small part of what the PE mega-funds and other large firms do, and the day-to-day teams are smaller.

Recruiting at Tech PE Firms

Again, most of the differences here relate to the firm’s size and strategy, not its industry focus.

Recruiting differs far more between private equity vs. growth equity vs. venture capital firms than it does between industrial vs. tech PE firms.

That said, the “Top 3” tech PE firms have a reputation for starting very early, often launching the entire on-cycle private equity recruiting process each year.

So, you can expect fierce competition to win a role at one of these firms, as you’ll be up against all the other 1^st Year Analysts in the best groups.

Having tech or TMT experience in investment banking helps, but it’s not essential if you have good technical skills and can confidently explain your deals.

At the smaller tech PE firms, you can expect the off-cycle recruiting process (lots of networking, outreach, and following up) and open-ended private equity case studies.

Growth equity firms tend to use a mix of the on-cycle and off-cycle processes, depending on their size, but they test slightly different topics (see below).

And most VC firms are in the “off-cycle” category, as they’re not necessarily competing for the same types of candidates.

If you ignore firm size and the on-cycle vs. off-cycle distinction, the biggest recruiting difference is that different types of firms test different skills in case studies and modeling tests.

Here’s a summary from our upcoming Venture Capital & Growth Equity Modeling course:

Expect more qualitative case studies in VC and possibly a few cap table exercises; growth equity tends to focus on “customer analysis” and 3-statement models; and LBO modeling tests in private equity are more about the formulas and calculations.

Final Thoughts on Technology Private Equity

Technology private equity has had a great run, but I’m skeptical that it will continue at the same pace.

We’re now in a very different macro environment than the 2008 – 2021 period, enterprise software is increasingly difficult to sell, and tech valuations have fallen across the board.

Some of these points could change over time, but I doubt that we’ll return to QE Infinity anytime soon.

Tech and software will continue to be growth industries, but I don’t think pure growth will be valued as highly going forward.

And I expect that many of the funds raised and deployed toward the end of this cycle will deliver underwhelming returns (see: PE funds raised in 2007).

I’m not predicting the apocalypse; just that overall tech performance will move closer to the industry median over time.

That means the tech/PE hype train will probably decelerate – even though it will never go off the rails completely.

For Further Reading

I recommend these two articles/interviews if you want to learn even more about tech PE firms and one of the most prominent people in the industry:

• Operating Manual – Profile of Robert F. Smith of Vista
• Bain – Global Software Private Equity Report

The post The Complete Guide to Technology Private Equity appeared first on Mergers & Inquisitions.

I’ve found that two main groups care about investment banking in Singapore:

1. Students who are from Southeast Asia and are considering whether they want to work in Singapore, NY, London, or other places.
2. People who want to work in Asia but have no chance of winning an offer in Hong Kong and see Singapore as their “Plan B” option.

If you’re in the first group, congrats! You’ll learn about the trade-offs of Singapore and other locations in this article.

If you’re in the second group, you might want to think again because Singapore may not be quite the “Plan B” option you think it is.

But before I crush your hopes and dreams, I’ll start with an overview of the industry and the top banks:

What is Investment Banking in Singapore All About?

Singapore (SG) serves as a hub for Southeast Asia and the many cross-border deals that take place there.

It’s safe, stable, low-tax, and light on corporate regulation – you can safely ignore the occasional executions of cannabis traffickers.

As a result, many companies from nearby countries want to do deals there.

Even though Singapore itself is not an emerging market, you’ll be exposed to plenty of emerging markets if you work there because most Southeast Asian countries fall into this category.

That said, it is also much smaller than NY, London, and HK in terms of average office size, deal volume, and deal size.

The IB industry there is arguably even smaller than in countries like Australia and Canada, which makes it quite difficult to get hired.

Yes, Singapore is a hub for Southeast Asia, but Southeast Asia has relatively few deals in the Asia-Pacific region vs. places such as China/HK or even Australia.

Asia-Pacific sees ~$1+ trillion of M&A deal activity per year, and SE Asia accounts for only ~10% of that (note that the first image below is only for 9 months of the year, so the full-year numbers are higher):

$50 – $100 billion of M&A deal activity per year may seem like a lot, but it’s less than Canada in an average year.

You can see a breakout of deals by specific country below, based on the same sources (ION Analytics, Dealogic, and Merger Market):

None of this means that Singapore is “bad.”

It’s just that it’s smaller than you might expect, which means a lower investment banking headcount than true financial centers.

Investment Banking in Singapore: Top Banks, Industries, and Deals

You can divide firms in Singapore into “large international banks” and “Asia/Singapore-focused banks.”

The basic difference is that the international bulge bracket banks tend to be stronger in M&A advisory and weaker in equity and debt capital markets.

If you look at the M&A league table for Southeast Asia, you’ll see the expected names: Morgan Stanley, Citi, BofA, JP Morgan, Credit Suisse (now acquired by UBS), and so on.

Goldman Sachs’ status has been questionable for a few years due to the continued fallout from the 1MDB scandal in Malaysia.

Among the elite boutiques, Evercore has the strongest presence in Singapore, and Rothschild also works on many deals, mostly in the middle-market space.

Lazard also used to be active but has since shut down its Southeast Asia M&A practice.

If you focus on the capital markets, you’ll still see some of these names (e.g., Morgan Stanley, BofA, and UBS/CS), but also a huge range of other firms.

The top three domestic banks in Singapore are DBS Group, United Overseas Bank (UOB), and Overseas-Chinese Banking Corp (OCBC), which, despite the name, is actually Singaporean.

You’ll also see banks from other Southeast Asian countries, including CIMB, Bangkok Bank, Kasikornbank, and Maybank, and various Chinese banks, such as CITIC and the Bank of China.

Then there are the European “In-Between-a-Banks,” such as HSBC, Standard Chartered, and BNP Paribas, the Japanese banks (Nomura, Sumitomo, and Mitsubishi UFJ), and Australian firms like ANZ and Commonwealth Bank Australia.

These banks focus on the capital markets, so you should target the bulge brackets if you want to work on M&A deals.

In terms of industries and deal types, Singapore is quite diversified.

You can expect to see everything from energy, mining, and agricultural deals to real estate, consumer retail, chemicals, semiconductors, and pharmaceuticals; technology has also become increasingly popular.

Some of the most common industries for M&A deals are shown below:

Since bankers in Singapore cover resource-rich countries like Indonesia and Malaysia, you will see many commodity-linked deals.

The deal types span a wide range, but equity and debt deals are more common than M&A since many companies in emerging markets are in “growth mode.”

Investment Banking in Singapore: Recruiting and Interviews

The overall recruiting process, timeline, and interviews are not that different in Singapore.

The main differences are:

1. Candidate Profiles – You are at a huge advantage if you are a Singaporean citizen or Southeast Asian national with language skills and attend a top university in the U.S. or U.K. (but the top few Singaporean schools can also work).
2. Target Schools – The top target schools in the U.S. and Europe are also targets in Singapore, but the top few SG universities also join the list (see below).
3. Small Intern Classes – Many bank offices in SG hire 4-5 summer interns per year, so there might be a total of 50-100 spots available, putting it in the same size range as Australia.

As in the U.S., the undergrad recruiting process starts a year or more in advance of internships, and it has moved up over time.

The most important controllable factors are your university’s quality/ranking, your GPA, your previous internships, and the networking you do.

(You cannot control whether you’re a Singaporean citizen or a native speaker of Thai or Vietnamese, so these points are not on the list).

As in other regions, the most important point is to start as early as possible in Year 1 of university because you need time to complete off-cycle internships at boutique firms.

A few smaller IB/PE firms known to offer these internships include Reciprocus, Redpeak, Titan Capital, Pickering Pacific, and Provident.

Some bulge bracket banks, such as JP Morgan, also offer off-cycle internships as a “pipeline” into summer internships and eventual full-time offers.

Interviews are not much different, and you can expect the same behavioral, deal, and technical questions you’d get in other regions.

Firms do not appear to use formal assessment centers as they do in the U.K., but they might still ask you to complete a case study or group exercise.

Do You Need to Know Southeast Asian Languages to Work in Singapore? Do You Need to Be a Citizen?

The short answer is: “Technically, no, but Southeast Asian languages and Singaporean citizenship help a lot.”

Since there are so many cross-border deals in Singapore, English is the common business language.

But many companies do not necessarily have all their information in English, so knowing a language like Vietnamese, Thai, Tagalog, or Indonesian can give you a huge boost.

Chinese might also help, but most deals involving Chinese companies have shifted to Hong Kong, so it has become a bit less relevant over time.

On the question of citizenship: For many decades, Singapore actively encouraged foreigners to work in the country as it developed.

But more recently, it has taken a protectionist/nationalist turn and made employers jump through more hoops to hire foreigners (often requiring them to “prove” that no local candidates could do the job).

You could still apply and get a firm to sponsor your work visa, but it’s more difficult than it was in, say, 2015 or 2005.

Investment Banking Target Schools for Singapore-Based Roles

The U.S. and U.K. target schools are also target schools for Singapore IB recruiting (especially the top 2-3 in each country).

You could even argue that recruiters prefer candidates from Southeast Asia who attend top schools in the U.S. or Europe and plan to return to Singapore.

Within the city-state, there are also 3 target universities: Singapore Management University (SMU), Nanyang Technological University (NTU), and the National University of Singapore (NUS).

People often say that SMU is the “best” among these due to its alumni network and placement record, but I’m not sure I want to get into that argument/debate in this article.

The specific degree/major you choose doesn’t matter that much, but Business Administration & Accounting (or “Accountancy & Business”) is a popular choice.

Accounting is far more relevant for IB than general “business” skills, and at a place like NTU, it’s a 4-year degree rather than a 3-year degree, giving you more time for internships.

Investment Banking in Singapore: Salaries, Bonuses, and Taxes

As with the IB in Australia article, I found contradictory data from different compensation reports.

The main claims were:

1. Base salaries are similar to those in NY, but bonuses are slightly lower percentages of the base.
2. Or base salaries are similar numbers to the ones in the U.S., but they’re all in Singapore Dollars (SGD) instead. So, instead of earning a $120K USD base salary, you would earn the $120K in SGD, which is about $90K USD.

I do not know which claim is correct, but if you split the difference, you can assume that you’ll earn at least slightly less pre-tax in Singapore than in the U.S.

On the other hand, the pay seems higher than in London and most European countries.

And if you factor in taxes, the post-tax compensation is quite good because the top rate is currently 24%.

As an Analyst, you’ll pay something in the 15 – 20% range, similar to Hong Kong.

Singapore is an expensive city, but it’s also cheaper than NY in terms of rent, food, and other expenses (and about on par with HK; maybe slightly more, depending on the metric).

So, even if total compensation is lower in USD, you could easily save more in Singapore due to the lower taxes and reduced cost of living.

And if you have better numbers for the base salaries and bonuses, please feel free to leave a comment.

The Lifestyle and Hours in Singapore

The hours are somewhat better than in Hong Kong or New York but worse than in London and most other parts of Europe.

Like investment banking in other regions, if you’re at a large firm and have a relatively “easy day,” you might arrive home after ~10-12 hours at the office.

If you have a bad day (client emergency, deal blow-up, last-minute pitch book, etc.), you might be at the office until 5 AM.

The average is somewhere in between, so expect lots of office stays past midnight and limited free time outside of weekends, at least as an Analyst.

In terms of the actual work, there are relatively few mega-deals, so even at the largest firms, you’ll see a lot of transactions in the $500 million – $5 billion range; the non-BB banks will go well below that range.

Offices also tend to be smaller, with perhaps a dozen or two people in each, which is both good and bad: you get more exposure but also less “cover” when something goes wrong.

Sector specialization tends to occur later because no single industry dominates all deal activity.

Investment Banking in Singapore: Exit Opportunities

The standard exit opportunities – private equity, hedge funds, and corporate development – are all available in Singapore, but everything is smaller.

I’ll contextualize this with Capital IQ search results for PE firms and hedge funds in different regions:

• Private Equity Firms: U.S.: ~7,200 | U.K.: ~1,000 | Singapore: ~170
• Hedge Funds: U.S.: ~3,200 | U.K.: ~500 | Singapore: ~50

Even Hong Kong has 50-100 more firms in each category, and that’s not counting the China-based funds with HK offices.

That said, the private equity mega-funds all operate in Southeast Asia, and most have offices in Singapore.

PE recruiting mostly follows the “off-cycle” process, which can be long, drawn out, and somewhat random.

The large firms recruit Analysts from Singapore and occasionally other locations, like London, NY, and HK, so you’re not necessarily region locked.

Outside the biggest firms are Asia-focused funds like Barings (now owned by EQT) and L Catterton Asia, followed by firms that invest in smaller deals or only in specific countries.

Other PE names here include Hillhouse Capital (East Asia focus), Affinity Equity (Pan-Asia), Lighthouse Canton, Aura Private Equity (Pan Asia), Creador (SE Asia), Dymon Asia Private Equity (SE Asia), Navis (SE Asia), Makara Capital, Axiom Asia, Northstar (SE Asia), and Gateway Partners (EM focus).

Then there are pension funds and sovereign wealth funds, including Singapore’s own Temasek and GIC, which are very active in deals there.

Because of the emerging markets focus, most “private equity deals” are more like growth equity deals, with minimal leverage and more complexity operationally than financially.

You’ll still get modeling experience, but you won’t be building the same LBO models that you would in the NY office of Blackstone.

The hedge fund side is much sparser, and while many of the large multi-managers operate in Singapore, there aren’t many domestic funds.

To be fair, hedge fund activity anywhere outside the U.S. and U.K. is limited, so Singapore is not unique here.

Many bankers also stay in banking and advance up the ladder, as it’s tough to beat the after-tax savings and somewhat-better lifestyle.

But be careful about staying too long if your long-term goal is to work elsewhere.

Deal experience in Singapore doesn’t always translate well to other regions because of the focus on emerging markets, so leave early if you want something else.

Investment Banking in Singapore: Final Thoughts

The biggest takeaway is that Singapore is not a great “Plan B” if your goal is to work in Asia without knowing a local language or having a strong connection to the region.

Yes, it’s more plausible to win a role in SG than HK as a foreigner, but both have become more difficult over time.

Singapore has its advantages, but it is very much geared toward people with a background in the region who want to be there long-term.

I think the more relevant question here is: “If you’re from Southeast Asia, should you aim to start working in Singapore, or should you start in NY or London?”

And I would still recommend NY or London for the networking, resume/CV value, higher number of positions, and exit opportunities.

Singapore could be interesting after you gain experience in a bigger financial center and then return to the region (due to family, higher savings, or a desire to specialize).

It could also make sense to transfer to Singapore for 1-2 years and then move elsewhere to get a unique experience without getting “stuck.”

And if you ever find yourself disappointed by the downsides of Singapore when you’re stuck at the office at 2 AM, just think about the taxes vs. NY or London for a quick boost.

The post Investment Banking in Singapore: The Best Gateway to Asia for the Non-Chinese? appeared first on Mergers & Inquisitions.

When I started offering financial modeling training, I never expected to get questions about a methodology like the Dividend Discount Model (DDM).

It’s not a likely interview topic, and it goes against my normal advice to focus on the core concepts, learn them very well, and skip the bells and whistles.

But people who aim for investment banking roles are very much into those bells and whistles, so questions about the DDM and other “exotic” methodologies began rolling in.

To be fair, in some industries – like commercial banks and insurance within FIG – the DDM is a core valuation methodology.

But outside of those, its status is murkier.

It can be useful for certain companies, such as power and utility firms and midstream (pipeline) operators in oil & gas…

…but it’s also much harder to set up and use than a standard DCF.

This tutorial will explain the advantages and disadvantages of the DDM, give you a sample Excel file for a midstream company, and walk you through the steps:

The Dividend Discount Model Template, Files, and Tutorial

For some context, here’s a sample DDM for an oil & gas pipeline company (DT Midstream), the investor presentation, 10-K, and a full video tutorial:

• DT Midstream – Dividend Discount Model (XL)
• DT Midstream – Slide Explanation and Overview (PDF)
• DT Midstream – 10-K with Highlights for Capacity Estimates (PDF)
• DT Midstream – Investor Presentation with CapEx, Dividends, and Other Guidance (PDF)

Table of Contents:

• 1:16: The Short Answer
• 7:07: Part 1: Revenue, Expense, and Cash Flow for DT Midstream
• 10:42: Part 2: Distributable Cash Flow Calculations
• 13:10: Part 3: Debt, Cash, and Interest Projections
• 15:11: Part 4: PV of Dividends, Terminal Value, and Implied Value
• 17:18: Part 5: Merits and Drawbacks of the DDM
• 19:24: Recap and Summary

If you’d rather watch or listen than read, check out the 20-minute video above.

Otherwise, the written version follows:

Why Use a Dividend Discount Model?

The main argument in favor of the DDM is that it best represents what happens in real life when you buy a stock.

In other words, you profit based on the company’s dividends and the potential increases in its stock price over time.

If you think about a standard DCF, metrics like Unlevered Free Cash Flow and Levered Free Cash Flow are a bit “imaginary” – because no company distributes them to its investors.

The DDM is more grounded because it’s based on the company’s actual distributions and potential future value.

And it values the company today based on the present value of its dividends and that potential future value (either the stock price or the Equity Value via the Terminal Value calculation).

If you sum up these numbers, you can see whether the company is valued appropriately.

The Dividend Discount Model works well in two main cases:

1. Companies with Special Legal/Regulatory Requirements – For example, banks must maintain a certain amount of regulatory capital (mostly Common Shareholders’ Equity), so they issue dividends based on their capital targets, and you “back into” the proper dividend numbers in models. And Equity Real Estate Investment Trusts (REITs) must distribute almost all their Net Income, so the DDM can work well in REIT valuations.
2. Companies That Issue Reliable/Predictable Dividends as a Business Policy – Many oil & gas transportation companies are like this, as are power/utility companies with regional monopolies on essential services like electricity and water.

The DDM is a horrible idea for tech/biotech startups and anything else in the “growth” category with unstable or unpredictable cash flows.

Even if you pick the right company, though, the DDM is more difficult to set up and use than a standard DCF because it requires more assumptions and knowledge of the company’s capital structure.

The Basic Steps of a Dividend Discount Model

Bank and insurance Dividend Discount Models are more complicated (you can see a sample here) and require more industry knowledge, so we’ll focus on normal, non-financial companies.

The basic set of steps looks like this:

Step 1: Forecast Revenue and Expenses

This is the same as in any other 3-statement model or DCF.

You usually link Revenue to market share * market size or units sold * average selling price, with expenses linked to Capacity, unit sales, or another top-level driver.

Step 2: Calculate the “Distributable Cash Flow”

“Distributable Cash Flow” means different things in different industries, but it’s often like Free Cash Flow but with only maintenance CapEx deducted.

In other words, how much cash does the company generate if you ignore the spending required for long-term growth?

You calculate this by starting with Net Income, adding back non-cash expenses, and subtracting only what the company must spend to keep its business running.

Of this remaining cash flow, you assume that some is distributed (Dividends), some is used to grow the business (Growth CapEx), and some is retained (Cash).

Step 3: Project the Changing Cash and Debt Balances and the Net Interest Expense

If the company needs extra funds to maintain its Cash balance, you can assume it issues Debt; if it has excess Distributable Cash Flow, you can assume it retains the Cash.

Interest Income and Interest Expense are based on the changing interest rates times these balances.

Step 4: Discount the Dividends and Terminal Value to Present Value and Add Them

This is like the final step of a DCF, but you use the Cost of Equity since the Dividend Discount Model is based on Equity Value, not Enterprise Value.

Also, the Terminal Value is normally based on a P / E multiple or a Net Income Growth Rate.

The Dividend Discount Model in More Detail

The steps and sample files above are enough to get you started, but here’s a bit more on each step for the company used here (DT Midstream):

Dividend Discount Model, Part 1: Revenue and Expense Forecasts

For oil & gas pipeline companies like this one, Revenue is based on “Capacity” or “Throughput” times the per-unit fees.

In other words, if the company can transport X Billion Cubic Feet (Bcf) of natural gas or Y Barrels of Oil, how much does it charge its clients for each Cubic Foot or Barrel transported?

We backed into these numbers and created trends based on the historical patterns here:

On the expense side, items like operations and maintenance are all tied to Capacity, and they generally increase over time:

Finally, CapEx must be split into Growth and Maintenance for this type of company.

Luckily, they give us estimates for both in the investor presentation, and we can go back and get the historical numbers from the older filings:

After the near-term forecasts through 2027, we make Growth CapEx a percentage of Distributable Cash Flow instead (see below):

There is a question about the relationship between Growth CapEx and Capacity Growth because the historical numbers are all over the place.

I used a more conservative number, but you could argue it’s too low based on the historical data.

Dividend Discount Model, Part 2: Distributable Cash Flow

Distributable Cash Flow is similar to Free Cash Flow (i.e., Cash Flow from Operations minus CapEx) with one major difference: it deducts only Maintenance CapEx.

Unlike Unlevered Free Cash Flow, it also deducts the Net Interest Expense, factors in Equity Investment Dividends, and includes other items related to the capital structure.

The exact items vary from company to company, but DT Midstream discloses the full calculation in its presentations:

We made simple forecasts for most of these items and assumed that Net Income and Distributable Cash Flow increase over time.

We split it into Dividends, Growth CapEx, and Cash Retained and linked these to the other parts of the model.

If these add up to more than the company’s Distributable Cash Flow, it issues additional Debt to cover the difference:

This setup seems simple, but it’s probably the #1 most common mistake in the DDM.

People tend to ignore this trade-off between Payouts, Growth, and Cash Retention and blindly assume Dividends based on dividend-per-share or EPS figures.

This is wrong because all financial models must reflect the trade-off between getting paid today and investing in future growth.

Dividend Discount Model, Part 3: Capital Structure Projections

You don’t want to “rock the boat” too much with Cash and Debt in this model.

They can grow modestly as the company’s Revenue grows, but they shouldn’t increase to very high levels or fall to very low ones.

In our forecast, Cash rises too much, and Debt / EBITDA goes from 5.0x to 2.5x over 10 years, which is too much de-leveraging:

But it’s difficult to “fix” these issues in a quick model without a more detailed review, so we’ve left them in for now.

The interest rates increase as the existing Debt matures and gets replaced with more expensive Debt, but they fall later as interest rates return to lower levels.

Dividend Discount Model, Part 4: Present Value of Terminal Value and Dividends

Since the Dividend Discount Model is based on Equity Value, not Enterprise Value, the Discount Rate is the Cost of Equity: Risk-Free Rate + Equity Risk Premium * Levered Beta.

The normal WACC formula does not apply since WACC is linked to all investors in the company (Enterprise Value).

DTM’s Levered Beta at this time was only 0.80, but I increased it to 1.00 because all the comparable companies had higher numbers:

For the Terminal Value, you can use either the Multiples Method or the Growth Rate Method, but if you use a multiple, it should be something like P / E that is also based on Equity Value:

Discounting and summing up the Dividends and Terminal Value is straightforward, and you can divide by the share count to get the Implied Share Price.

Note that there is no Equity Value to Enterprise Value bridge here.

Since the DDM is based on Equity Value, it calculates the Implied Equity Value directly, so no bridge is needed.

Overall, DT Midstream seems significantly undervalued based on our analysis.

Even in the sensitivity tables, its Implied Share Price is always well above its ~$49 share price at the time of this analysis:

Dividend Discount Model, Part 5: Is It Useful or Believable?

There are various issues in this model related to the Cash, Debt, and Capacity Growth – but despite all that, the company seems at least somewhat undervalued.

It may not be 50% undervalued, but we’re inclined to believe this result because the Dividend Discount Model tends to produce lower values than the DCF for many companies.

Dividends are always less than Unlevered FCF, and the Cost of Equity is usually greater than WACC, so the PV of Dividends usually adds less to the implied value than the PV of Unlevered Free Cash Flow in a DCF.

But the Terminal Value is not necessarily higher to compensate for this issue – so the overall implied value tends to be lower.

There are some ways to solve this problem, such as by setting a higher Payout Ratio or purposely picking a higher Terminal Value, but these are not always realistic options.

The biggest issues with the Dividend Discount Model, though, are:

1. The difficulty in getting the Cash, Debt, and Distribution vs. Growth vs. Retention assumptions
2. And the inability to sanity-check everything due to limited disclosures by companies.

For example, I reviewed ~10 other midstream companies before settling on this one.

In all the other cases, the companies’ financial statements were too complicated, the presentations did not disclose information in a useful way, or there were other data issues.

So, it’s best to think of the Dividend Discount Model as essential in some industries (banks/insurance), nice to have in others, and “impractical” otherwise.

It does correspond more closely to the reality of buying stocks (dividends + stock price increases)…

…but that doesn’t mean it’s easier to use in reality.

The post The Dividend Discount Model (DDM): The Black Sheep of Valuation? appeared first on Mergers & Inquisitions.

Metals & mining investment banking used to be a “sleepy” group.

Many people viewed the sector as a short, poorly dressed cousin of oil & gas, but concentrated in places like Canada and Australia.

The two industries have a lot in common, but in the current cycle, different forces are driving mining – such as the demand created by renewable energy, electric vehicles (EVs), and the promised “energy transition.”

The good news is that if you work in mining IB, and your clients produce the cobalt, copper, or lithium that ends up in EV batteries, you can feel good about saving the world.

The bad news is that your clients might also be exploiting underpaid workers and child labor in the Democratic Republic of Congo, which may slightly offset “saving the world.”

But let’s forget about the children temporarily and focus on the verticals, the drivers, deal examples, and the exit opportunities if you escape from the underground mines:

What Is Metals & Mining Investment Banking?

Metals & Mining Investment Banking Definition: In metals & mining investment banking, professionals advise companies that find, produce, and distribute base metals, bulk commodities, and precious metals on debt and equity issuances and mergers and acquisitions.

The concepts of upstream (“find”) and midstream/downstream (“produce and distribute”) still exist, as they do in oil & gas.

For example, an iron ore miner is “upstream” since it extracts the raw materials, and the steel producers that turn that ore into steel and distribute it to customers are downstream.

However, mining companies are usually classified based on their focus metal.

For example, Capital IQ splits up the sector by metal type (aluminum, diversified, copper, gold, precious metals, silver, and steel).

I think this is a bit too complicated, so this article will use these 3 categories:

1. Base Metals and Bulk Commodities – Anything used for energy (coal), as a precursor to other metals (iron ore), or to produce electronics, batteries, and other products (copper, cobalt, lithium, aluminum, etc.) goes here.
2. Precious Metals – Gold is the biggest component here, but metals like silver, palladium, platinum, diamond, and emerald also go in this category. Some of these may be used for non-industrial purposes, such as investment or jewelry, but others, such as silver and platinum, have many practical uses in cars and electronics.
3. Diversified Miners – These companies have a wide global portfolio of mines, and they extract, produce, and distribute just about every metal in the two categories above.

The metals & mining team’s classification varies based on the bank.

Sometimes, it’s in the broad “Natural Resources” group, but it could also be in Industrials, Renewables, or even Power & Utilities.

And in regions where it’s especially important, such as Canada and Australia, metals & mining is often a separate team at banks.

Recruitment: Tunneling Your Way into Metals & Mining Investment Banking

Metals & mining is highly specialized, so you have an advantage if you have a background in geology, geophysics, or mining.

But it’s not necessarily required, and plenty of undergrads join these groups via internships without detailed knowledge of the engineering side.

If you have an engineering background, you might get hired for your ability to read and interpret technical analyses such as feasibility reports and help bankers incorporate them into financial model assumptions.

Aside from that, banks look for the same criteria as always: a high GPA, a good university or business school, previous internships, and networking and interview preparation.

You don’t need to be a technical mining expert to pass your interviews, as all the standard topics will still come up, but you should know the following:

• The main categories of metals and the factors that drive their prices, production, and supply (see below).
• A recent mining deal, especially if the bank you’re interviewing with advised on it.
• Valuation, such as the different multiples used for mining companies and the NAV model in place of the DCF (see below).

What Do You Do as an Analyst or Associate in the Group?

If you’re advising mostly large companies like BHP or Rio Tinto, expect lots of debt deals, occasional M&A mega-deals, and many smaller asset-level deals.

Here’s an example from BHP’s deal activity:

If you’re at a smaller bank that advises growth-stage companies, expect more equity deals, private placements, and sell-side M&A transactions.

Here’s an example from Olympic Steel’s deal activity:

If you’re wondering about the modeling and technical experience, most differences relate to the company type rather than the specific metal.

In other words, a gold miner and a copper miner are slightly different, but they are much closer than a pure-play miner and a pure-play producer.

In practice, you’ll usually work with various companies (miners, producers, vertically integrated, royalty-based, etc.) in your focus area.

Metals & Mining Trends and Drivers

The most important sector drivers include:

• Overall Economic Growth – When the economy grows more quickly, companies need more raw materials for cars, TVs, infrastructure, and everything else in modern life. The sources of growth also matter; emerging markets’ infrastructure spending drove up metal consumption for a long time, but now there’s a rising demand in developed markets due to EVs and renewable energy.
• Commodity Prices – Higher metal prices help upstream mining firms but hurt downstream firms that purchase raw material inputs from other companies. And vertically integrated firms are in the middle since they experience both higher prices and higher costs. Oil, gas, and electricity prices also factor in because most metals are extremely energy-intensive to produce.
• Production and Reserves – All mining companies deplete their resources as they extract more from the ground, so they’re constantly racing to replace them. But new mines take a very long time to come online – years or even decades. As a result, supply and demand shocks tend to make a much greater short-term impact on prices than growth from new projects.
• Capacity and Spreads – Production companies always have a certain amount of “capacity” in their plants and factories, and they earn revenue based on the percentage capacity used to produce finished products and their realized prices. Profits are based on the spreads between the cost of the raw materials (iron ore) and the finished products (steel).
• Exploration and Development (Capital Expenditures) – How much are companies spending to develop new mines and expand existing ones? CapEx spending affects everything in metals, but because of the long lead time required to launch new mines, it’s a greatly delayed effect. On the producer side, you can see how much they spend to build new plants, factories, and processing centers.
• Taxes, (Geo)Politics, and Regulations – Many mining projects are in regions with unstable governments, wars, and other problems. These governments are often eager to charge foreign companies a premium to access their resources, and the rules and taxes around extraction can change at any time.

You might be wondering if “inflation” should be on this list.

It is a driver for precious metals, especially gold, but it’s less of a demand driver for metals with mostly industrial purposes.

Metals & Mining Overview by Vertical

Here’s the list:

Base Metals and Bulk Commodities

Representative Large-Cap Public Companies: ArcelorMittal (Luxembourg), Jiangxi Copper Company (China), POSCO Holdings (South Korea), Nippon Steel (Japan), Baoshan Iron & Steel (China), thyssenkrupp (Germany), Vale (Brazil), Aluminum Corporation of China, Nucor (U.S.), JFE (Japan), Tata Steel (India), Hindalco (India), Hunan Valin Steel (China), Cleveland-Cliffs (U.S.), Freeport-McMoRan (U.S.), and Steel Dynamics (U.S.).

Note that most of these firms are steel producers, not iron ore miners, so they’re closer to “normal companies.”

Also, note that some of these companies, such as Freeport-McMoRan, also mine precious metals, but they’re classified as “copper” since most of their revenue comes from copper.

Finally, some significant companies are missing from this list because they’re state-owned – the best example is Codelco in Chile, the world’s first or second-biggest copper producer.

With those disclaimers out of the way, let’s assume that you’re analyzing a copper mining company. You’ll think about issues such as:

• Production and Consumption: Chile is the world’s largest producer, while China is the largest consumer, which means that shocks in one can greatly impact prices and production.
• Costs: These vary based on the region and metal; for example, some metals are more energy-intensive (aluminum), while others are more labor-intensive. Shipping costs may also be a major factor for some metals, especially those with lower “value to weight” ratios, such as coal and iron ore.
• Key Uses: Since copper is the best conductor of electricity among non-precious metals, it’s widely used in machinery, appliances, batteries, and even electrical wiring for entire buildings.

All mining companies care about their production and reserves and always want to convince investors that they can grow them over time.

Here’s an example from the Capstone / Mantos Copper presentation below:

Companies often go into detail on individual mines, with estimates for their useful lives, annual production, and “all-in sustaining costs,” or AISC.

AISC is usually defined as the cash costs to operate the mine plus corporate G&A, reclamation costs, exploration/study costs, and the required development and CapEx.

Companies often provide long-term production forecasts in their investor presentations, so you don’t necessarily need to make many judgment calls in your models:

Gold and Precious Metals

Representative Large-Cap Public Companies: Zijin Mining (China), Newmont (U.S.), Barrick Gold (Canada), Anglo American Platinum (South Africa), Sibanye Stillwater (South Africa), Zhongjin Gold (China), Shandong Humon Smelting (China), Impala Platinum (South Africa), Sino-Platinum Metals (China), Agnico Eagle Mines (U.S.), and Industrias Peñoles (Mexico).

The big difference here is that the end markets differ – but many precious metals still have industrial uses beyond wealth storage and jewelry (e.g., silver and platinum).

Precious metals miners are driven by many of the same factors as the base metals ones above: reserves, production, all-in sustaining costs (AISC), and the lives of individual mines:

But there are some key differences:

1. Reserves and Extraction – Since metals like gold and diamond are rare, companies usually present their reserves in tonnes and estimate a “grade” they expect to find (in grams or ounces per tonne). On the other hand, gold also requires little to no refining once it is extracted, so at least part of the process is “easier” than the one for base metals such as copper.
2. Global Pricing and Market Dynamics – The value-to-weight ratio of precious metals is high, so the freight costs are insignificant, and they can be shipped anywhere in the world. As a result, they operate in more of a global market, with fewer regional disparities. By contrast, metals like coal, iron ore, and steel are much more localized, and copper and aluminum are in between.
3. Valuation – Since many people perceive gold as a stable, irreplaceable store of value, gold miners often trade at higher multiples than base metal miners (see the examples below).

Precious metals miners earn much less revenue than companies that focus on copper or steel, but the sector gets a disproportionate share of M&A activity because of the factors above.

Diversified Metals & Miners

Representative Large-Cap Public Companies: Glencore (Switzerland), BHP (Australia), Rio Tinto (U.K.), Anglo-American (U.K.), CMOC (China), Vedanta (India), Norilsk Nickel (Russia), Grupo México, Mitsubishi Materials (Japan), Teck Resources (Canada), Baiyin Nonferrous Group (China), Saudi Arabian Mining Company, and Sumitomo Metal Mining (Japan).

These companies are so large and diverse that their performance reflects mostly sector-wide trends rather than regional or metal-specific issues.

This entire vertical is highly concentrated because of the huge barriers to entry and economies of scale at this level.

Companies tend to present their results in a high-level way, rarely going down to the level of individual mines:

So, you tend to create equally high-level forecasts for these firms unless one is a client company sharing much more detailed information with you.

You focus on the mix of different metals, production levels, and long-term prices and use them to project revenue, expenses, and cash flow.

For example, many of these companies have been expecting stronger demand for lithium, nickel, and cobalt to power renewables, so you might tweak your long-term production assumptions based on that:

Metals & Mining Accounting, Valuation, and Financial Modeling

Let’s start with the easy part: there are virtually no differences for “production-only” companies.

One example is Steel Dynamics, which we feature in our main financial modeling course.

To value it, we build a standard DCF based on production volumes, CapEx to drive capacity, and assumed steel prices:

The valuation multiples are also standard (TEV / Revenue, TEV / EBITDA, and P / E).

Most of the differences emerge on the mining side.

As with oil & gas, I’d split the differences into three categories:

1. Lingo and Terminology – You need to know about different reserve types and resources, mine types (underground vs. open pit), and the extraction and refinement processes used for different metals. Standards like NI 43-101 in Canada or JORC in Australia are also important.
2. Metrics and Multiples – You can use standard multiples, such as TEV / EBITDA, to value mining companies, but you’ll also see a few new ones and some resource-specific metrics.
3. New or Tweaked Valuation Methodologies – As in the E&P segment of oil & gas, there’s also a Net Asset Value (NAV) model for mining companies, and it’s set up similarly (essentially, it’s a long-term DCF with no Terminal Value).

Starting with the terminology, mining companies split their minerals into “Reserves” and “Resources.”

Reserves have a higher probability of recovery, and they’re divided into the “Proved” and “Probable” categories.

Resources are split into Measured, Indicated, and Inferred, with the first two often grouped as “M&I Resources” (I like this name!).

You can see an example of a company’s Reserves and Resources here:

You might build a NAV model based on Reserves if you want to be more conservative or include the Resources if you want to be more speculative (but discounted by some percentage).

The NAV model follows the same steps as the one in oil & gas but uses different inputs:

1. Split the company into “developed mines” and “undeveloped/potential mines.”
2. Assume that the existing mines produce over their lifespans (usually 10-20 years, and sometimes more) until they become economically unviable.
3. Assume the development of the new mines, which might take years or decades, and estimate the CapEx required for each one.
4. Forecast the production levels for each new mine until it becomes economically unviable. There’s usually a ramp-up of a few years in the beginning, a peak, and an eventual decline.
5. Build a price deck with different long-term metal prices. You might assume differences from current levels in the near term, but you’ll set these to long-term assumed averages after the first few years.
6. CapEx will depend on each mine’s reserves and geography, while OpEx and the cash costs to operate the mine will usually be based on a per-unit metric, such as $ per ounce produced for gold miners.
7. Aggregate the cash flows from all the mines, add corporate overhead, and use these to estimate the company’s cash flows over the next few decades. Again, there is no Terminal Value since you forecast production until the mines stop producing at viable levels.
8. The Discount Rate is often fixed at some pre-determined level, such as 5% for gold or 8-10% for copper. You might also add a premium for emerging/frontier markets and mines in the middle of war zones and pirate camps.

I don’t have a great visual of a mining NAV model, but here’s a good example of long-term cash flow projections from TD’s presentation to Turquoise Hill Resources:

And yes, you read that correctly: they forecast cash flow until the year 2100.

In terms of metrics and multiples, this slide from the Gold Fields / Yamana Gold presentation sums it up well:

These multiples are high because gold miners often trade at premium valuations; P / NAV multiples are often below 1x for other miners.

This P / NAV multiple is based on the Net Asset Value methodology output above, but it’s often simplified for use in valuation multiples.

You can still use the TEV / EBITDA multiple, but it’s more appropriate for the diversified miners since their output fluctuates less.

Another common multiple is TEV / Resources or TEV / Reserves, which values a mining company based on its “potential capacity.”

Some banks even combine these metrics and use them to illustrate companies’ relative valuations, as in this example from BMO for Turquoise Hill:

You’ll often see references to metrics like “Au Eq.” and “Cu Eq.”; these stand for “Gold Equivalent” and “Copper Equivalent.”

If a company owns/mines several metals but is dominant in one, you can convert the dollar values of their other metals into this dominant metal to create an “equivalent” metric.

For example, if they have 1,000 ounces of gold and 10,000 pounds of copper, and prices are currently $2,000 per ounce for gold and $4.00 per pound for copper, the “Gold Equivalent” resources are 1,000 + 10,000 * $4.00 / $2,000 = 1,020 ounces.

Example Valuations, Pitch Books, Fairness Opinions, and Investor Presentations

There are many examples here, so I will split these into Base Metals and Bulk Commodities vs. Precious Metals:

Base Metals and Bulk Commodities

• Rio Tinto / Turquoise Hill – Acquisition (CS, Rothschild, RBC, BMO, TD, MS)
  • Deal Process Update (BMO)
  • Deal Process Update and Valuation (TD)
  • Fairness Opinions (starts on page 38)
• Capstone Mining / Mantos Copper – Acquisition (Scotia, CIBC, and GenCap)
  • Investor Presentation
  • Fairness Opinions (go to page 322)
• Westmoreland – Restructuring (Centerview)
  • 13-Week Cash Flow Projections
• Cosan / Vale – Minority Stake (Citi, JPM, Bradesco, and Itaú)
  • Investor Presentation
• Cleveland-Cliffs / AK Steel – Acquisition (Moelis, BofA, CS, GS):
  • Investor Presentation
  • Fairness Opinions – Moelis | GS

Precious Metals

• Gold Fields / Yamana Gold – Acquisition (JPM, BofA, CIBC, Canaccord, Scotia, Stifel)
  • Investor Presentation
• Kinross / Great Bear – Acquisition (BMO, CIBC, GenCap, Canaccord, Trinity Advisors)
  • Investor Presentation
  • Fairness Opinions (page 204)
• Newcrest / Pretium Resources – Acquisition (Lazard, RBC, BMO, Citi)
  • Investor Presentation
  • Fairness Opinions (page 204)
• Impala Platinum / Royal Bafokeng – Acquisition (JPM, Macquarie, Ned Bank, Standard Bank, PSG, BofA, QuestCo)
  • Investor Presentation
• South32 / Sierra Gorda – Minority Stake (UBS and RBC)
  • Investor Presentation

Metals & Mining Investment Banking League Tables: The Top Firms

If you look at the league tables, you’ll see the usual large banks at or near the top: GS, MS, JPM, BofA, Citi, etc.

But you’ll also see many Canadian banks there, including BMO, which is usually viewed as the top metals and mining group in all banking (but is also a complete sweatshop).

The other large Canadian banks (CIBC, TD, Scotiabank, and RBC) also make a strong showing in most league tables.

The elite boutiques do not have a huge presence in mining, but you’ll sometimes see Rothschild or Perella Weinberg on the list.

Macquarie also shows up occasionally, likely due to its HQ in Australia and all the mining deals there.

A few middle market and regional boutique names in the space include Canaccord Genuity, Maxit Capital, Cormark, Haywood Securities, and Eight Capital.

Some of these, like Canaccord, do more than just mining but happen to have a strong presence in the sector.

Exit Opportunities

Let’s start with the bad news: As with any other specialized group, metals & mining investment banking will tend to pigeonhole you.

Also, few private equity firms are dedicated to the sector because commodity prices are volatile, and mining companies are levered bets on commodity prices.

Even if you work with standard spread-based companies, such as steel manufacturers, headhunters will rarely take the time to understand your full experience.

OK, now to the good news: This situation is starting to change.

More private equity firms are springing up to invest in the sector, driven by the “energy transition” and the importance of mining for renewables.

Some private equity mega-funds do occasional mining deals; outside of them, several smaller firms do equity and credit deals in the sector.

A few names include Appian Capital, Resource Land Holdings, Greenstone Resources, Proterra, Denham, Tembo, Sun Valley, Resource Capital, Ibaeria, Waterton Global Resource Management, Orion Resource Partners, EMR Capital, and Sentient Equity.

There are also quite a few hedge funds in the space, and many global macro funds and commodity funds will be interested in candidates with mining backgrounds.

(You’d still be better off working in sales & trading if you want to enter one of these, but a mining IB background gives you a higher chance than other bankers.)

The most common exit opportunity for mining bankers is corporate development since you can apply all your modeling, technical, and deal skills directly to acquisitive companies.

Another option is to aim for PE firms that work in broader areas that have some overlap with mining, such as in industrials or power/utilities.

For example, KPS Capital technically operates in the “manufacturing” space, but it does deals involving basic materials, including metals and mining companies.

So, the exit opportunities aren’t great, but they’re a bit better than in oil & gas, and they are improving due to the ESG/renewables/EV craze.

For Further Reading and Learning

No, we don’t have a metals & mining financial modeling course.

I’ve considered it before, but it’s a niche area, and the economics never made sense.

There’s an outside chance we might release a short version as a $97 course, but I can’t estimate a time frame.

For other resources, I recommend:

• News: Mining Feeds | com | Financial Times
• Research: EY | PwC | KPMG | Deloitte | McKinsey
• Market Data: London Metals Exchange (LME)
• Books: Fisher Investments on Materials | The Mining Valuation Handbook

Is Metals & Mining Investment Banking for You?

Despite the positive recent trends, I still wouldn’t recommend metals & mining over sectors like technology, TMT, healthcare, or consumer retail for most people.

If you really like mining and want to specialize in it, sure, go ahead.

Of the “specialized” sectors within IB (real estate, FIG, and oil & gas), metals & mining probably has the most growth potential through ~2030.

But cyclicality and specialization are major issues.

Yes, mining is hot right now due to renewables and EVs, but I wouldn’t bet money that this will last “forever.”

Traditionally, these shorter commodity cycles tend to run for 5-10 years – which matters if you enter the industry or get promoted at the wrong time.

Finally, you have more exit options than bankers in other specialized groups, but you still have worse overall access than bankers in the generalist groups.

But at least you’ll get to make the world a better place – if you forget about those child laborers in the Congo.

The post Metals & Mining Investment Banking: The Full Guide to Ground Zero for the Energy Transition appeared first on Mergers & Inquisitions.

Over time, investment banking recruiting has become more impersonal with developments like HireVue interviews, online tests, and recruiters conducting the initial screens.

People often complain about how it’s impossible to make a “good first impression” in a pre-recorded video or when speaking to a hapless recruiter.

Ironically, though, the most personal part of the recruiting process – the assessment center – also generates many complaints.

If you’re about to attend an investment banking assessment center, you can look forward to a fun-filled day of activities, case studies, group exercises, and even more interviews and verbal/math/logical tests.

When everything moved online for a few years, people predicted the end of assessment centers, but they adapted and survived – and I think they’ll become even more important in the future:

What is an Assessment Center, and When Should You Expect One?

Investment Banking Assessment Center Definition: The assessment center (AC) is the final step in the IB recruiting process in places like Hong Kong, London, and other parts of EMEA; it requires you to complete online tests, case studies, group exercises, and specialized tasks in addition to standard interviews.

An AC is broader than the typical Superday in the U.S. since you complete a wide range of tasks beyond standard 30-minute interviews.

At some banks and groups in the U.S., candidates memorize obscure technical questions, and interviewers ask about these topics and dig in until they find something the interviewee can’t answer.

But this behavior is less common in any region that uses ACs.

You’re better off developing a broader set of skills, such as how to work in a group, prioritize emails, and give a simple presentation, rather than memorizing technical details.

In regions like London and Hong Kong, ACs are used for investment banking, sales & trading, and other areas at banks and consulting firms.

I will focus on the investment banking AC here to avoid turning this article into a novella (for S&T tips, see the article on rates trading).

Banks mostly use assessment centers to recruit university and Master’s students for internships and full-time roles, so you’re much less likely to attend one if you’re a lateral hire or you’re at the MBA level.

ACs sometimes come up when you apply for off-cycle internships, but it depends on your timing and how many others apply at the same time.

OK, But Why Do Investment Banking Assessment Centers Exist?

Banks use ACs to make sure that candidates are competent and qualified in real life – not just on paper.

When you apply for IB roles in a place like London, you must submit an online application, go through an initial interview or HireVue, submit competency questions, and complete online tests.

These eliminate a certain percentage of applicants, but plenty of people cheat on these tests, take them in pairs, or use tools like ChatGPT to do the work for them.

But even beyond these problems, these tests are inherently limited because they have little correlation with on-the-job performance.

Traditional investment banking interviews are also deceptive because some people are great at BSing their way through a 30-minute discussion, even if they’re terrible at the job.

But it’s much harder to deceive your way through an assessment center because:

1. You must be there in-person, so it’s easy to tell if you’re cheating (and even if it’s “virtual,” you’re still doing everything in front of other people).
2. You must work with other humans for at least part of the AC, which means you can succeed only if you work in a team.
3. Finally, you must complete tasks similar to the ones in banking – the fact that you memorized the WACC formula means nothing if you can’t use the concepts to advise a client.

The best way to assess someone is to give them a 10-12-week internship and see how they perform, but that is expensive and impractical for thousands of applicants.

So, ACs act as a bit of a compromise:

If you’re wondering why assessment centers are universal in London but not in the U.S., I am not 100% certain.

My guess is that banks want to standardize the process and properly compare applicants since students there come from many different countries, educational systems, etc.

This is less of a problem in the U.S. because most applicants have attended university in the country, so there are fewer “cross-cultural communication” issues.

What to Expect in an IB Assessment Center

The structure, timing, tasks, and number of candidates vary by bank, but you might expect something like this:

• Number of Candidates: A few dozen in a single day (maybe 30 – 40 total).
• Universities: Expect heavy representation from the top U.K. and European target schools (Oxbridge, LSE, Bocconi, IE, HEC, etc.) along with a few students from semi-targets and non-targets.
• Offer Rate: Around the same as a Superday; expect something in the 20 – 40% range.
• Total Time Required: Around 4 – 6 hours (excluding transportation time).
• Interviews: Expect 2 – 3 interviews for 60 – 90 minutes total.
• Online Tests: They may ask you to take or re-take one or more of the earlier tests, which could consume another ~30 minutes.
• Other Tasks: They might ask you to complete something specialized, like an in-tray exercise (see below), which could take another ~30 minutes.
• (Group) Case Study: Expect a solo or group case study that might take 45 – 60 minutes. If they give you both a solo and a group case study, this will be more like 90 – 120 minutes.
• Social/Networking: Finally, there may be a networking panel or “social event,” such as a group lunch, which will take another 30 – 60 minutes.

Before you go through any of this, one simple tip is to arrive as early as possible, even if it means camping out at a coffee shop nearby.

If you’re even a few minutes late, you might be eliminated before the festivities begin!

Some of the AC tasks above are simple, while others require more explanation:

IB Assessment Centers, Part 1: Interviews

There are no huge differences here, but expect interviewers to do more cross-checking to verify that you’re telling a consistent story – since they can easily compare notes.

You’re also more likely to speak to senior bankers than in the first rounds.

You might also want to do some firm-specific research (e.g., look up a few recent deals), especially if you only have 2-3 ACs rather than 10 or 15.

Honestly, though, if you are prepared with your story, fit/behavioral questions, and decent technical skills, you shouldn’t kill yourself with even more prep.

IB Assessment Centers, Part 2: Re-Taking the Online Tests

It’s very easy to cheat, so banks may give you slight variations of the same tests on-site, with no internet access, to verify your scores.

The questions resemble the ones you might find on the GMAT or the “mental math” questions common in sales & trading interviews. Here’s an example:

Q: Suppose that the market value of the real estate in France increases by 10% next year. How much would it be worth?

A: There’s 540 total, so 540 * 10% = 54, and 54 * 5% = 27.

Therefore, the value of real estate in France is currently 3 * 54 + 27 = 3 * 50 + 3 * 4 + 27 = 150 + 12 + 27 = 189.

10% of 189 is 18.9, so the value would increase to 189 + ~19 = ~208 next year.

These questions are not difficult, but they can be challenging to finish within the time limit (often 15 – 30 minutes per test), so you need to practice repeatedly.

Some banks, like JPM, also give “Situational Judgment Tests” (SJTs), where they describe a work situation and ask how you might respond (in multiple choice format).

IB Assessment Centers, Part 3: E-Tray / In-Tray and Other Specialized Tasks

These exercises give you 5-10 minutes to read files or information about a client or ongoing deal.

Then, you’ll start receiving “simulated emails” that you’ll need to respond to (via multiple choice questions), and you might have to explain or justify your decisions afterward.

For example, you might get an urgent client request, a VP’s request to schedule a meeting for a potential client, and the same VP who wants to know the dates of an upcoming IPO roadshow.

You must prioritize and respond to these emails using the information you gathered in the beginning and common sense (i.e., client requests matter more than internal ones).

The most common mistakes here include ignoring or overlooking information and forgetting about date and time conflicts.

In the scenario above, for example, you wouldn’t want to schedule a VP’s potential client meeting on any of the same days as the IPO roadshow.

NOTE: It appears that these exercises may be less common now (as of 2023). ACs seem to have shifted to interviews and case studies, but feel free to leave a comment and clarify this point if you’ve completed one recently.

IB Assessment Centers, Part 4: Presentations, Case Studies, and Group Exercises

If you’ve already done well enough to make it to the AC, you can probably handle everything above with ease – but the case studies are a different story.

The two main variants here are solo exercises and group exercises.

If it’s a solo exercise, they might give you 30 – 60 minutes to do something like:

• Read information about a company and draft a profile in PowerPoint.
• Complete a modeling test, such as a simple merger model, the Enterprise Value bridge calculation, valuation multiples, or credit stats and ratios in different scenarios.
• Complete a pencil-and-paper test for the tasks above to test your understanding and arithmetic skills.
• Read about a company and draft a report, similar to an equity research report, describing its key risks, opportunities, and current valuation.
• Read about several target companies and recommend the best acquisition for the larger company you are advising.

You should not expect a detailed financial modeling test or other Excel work; these short case studies usually involve “back of the envelope” math.

The 3-statement model and LBO modeling test on this site are highly unlikely, as they’re too complex and require too much time to check.

If you want example of solo case studies, please see:

• This assessment center case study based on a simple merger model.
• A few sample “company profile” slides in different formats.
• This qualitative M&A case study, inspired by an assessment center.

The group exercise, which might last 45 – 60 minutes, is more likely to involve advising a client or potential client:

• Of target companies A, B, and C, which one should Company X acquire?
• Should Company Y raise debt or equity to expand into a new region?
• Of acquisition offers D, E, and F, which one should Company Z accept?
• Should our bank onboard Company Q as a client? Why or why not?
• Which M&A process should Company W follow if it wants to sell? Targeted or broad, and should it sell to a strategic or a financial sponsor?

As with the solo exercises, complex Excel work and financial models are unlikely.

The “answer” and its reasoning are also straightforward in most cases.

If you want to see an example, look at this debt vs. equity case and the logic – any test you get in real life would have even simpler numbers.

The best advice is to be structured, boring, and simple; people do poorly when they fail to state the answer upfront or make it overly complicated.

Since the numbers and logic are simple, the real test is evaluating how well you work in a team. Some tips include:

• Strike a balance between being quiet and talkative. For example, aim to contribute one targeted comment or question every 3-4 minutes, but never speak for 3 minutes straight.
• Volunteer for the “boring tasks,” such as keeping time, taking notes, and assembling the final presentation, since you want to come across like a team player.
• Avoid interrupting others or being negative, even if they say something incredibly stupid or ridiculous.
• Bring others into the discussion, especially team members who have been quiet.
• Use everyone’s first names as much as possible to show your attention to detail and personal touch.
• In the final presentation, make sure everyone has at least some speaking role, even if it’s short.

There is no great way to practice these group exercises, but there are some tricks for improving (see the bottom section of this article).

What Happens After the Assessment Center?

As with the Superday, you’ll generally hear back quickly if you’ve won an offer, but it can sometimes take a few weeks; all you can do in the meantime is follow up occasionally.

If you have your interviewers’ contact details, it’s worth sending a few quick, personalized “thank you” messages.

Finally, you should also write down as much as you can remember about the exercises, interviews, and case studies at the AC immediately after you finish, so you have it as a reference for your next one.

How to Practice and Prepare for Investment Banking Assessment Centers

Assuming you’ve legitimately prepared for the initial interviews, you shouldn’t “need” much additional work. Dozens of articles on this site have tips, and you can get even more details in the IB Interview Guide.

For the online tests, we recommend JobTestPrep and the packages they offer for the verbal, math, logic, personality, and other tests (yes, this is an affiliate link, so I earn a small amount if you buy something through it).

For the case studies and group presentations, I recommend the following:

• Complete 3-4 solo practice case studies on company profiles, acquisition recommendations, debt vs. equity, and evaluations of recent deals. It’s worth spending 10 – 15 hours on this, but I don’t think you need to spend 40+ hours on it.
• There are several examples of AC-style case studies in the Interview Guide, but you can also create your own case studies based on news and recent deals.

For example, if you see that Company X recently raised debt or issued equity, download the company’s most recent annual report, give yourself 60 minutes, and write a quick evaluation of whether this was the right decision.

• Speed and simplicity are crucial. It’s much better to be 50% correct and 100% finished rather than 100% correct and 50% finished.

For the group dynamics, one option is to join a student investment club or case competition and go through the required teamwork there.

The best way to practice, though, is to keep doing assessment centers until you see the same scenarios repeatedly.

By the end, you’ll wonder why they seemed scary – as they become repetitive rather than intimidating.

The post The Full Guide to Investment Banking Assessment Centers appeared first on Mergers & Inquisitions.