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Project Finance vs. Corporate Finance: Careers, Recruiting, Financial Modeling, and More

M&I - Brian — Wed, 29 May 2024 17:16:12 +0000

With the craze over renewable energy and infrastructure over the past few years, we’ve received more and more questions about Project Finance vs. Corporate Finance.

This article will focus on careers and recruiting, while the accompanying YouTube video will discuss the technical/modeling aspects in more detail.

And yes, coincidentally, we have a new Project Finance & Infrastructure Modeling course.

This article is a sample/excerpt/preview from the full course:

Project Finance vs. Corporate Finance: The Video and Files

You can get the presentation, the simple Excel file, and the video version of this article below:

Video Table of Contents:

0:00: Introduction
1:22: Part 1: The 2-Minute Summary
3:47: Part 2: Assets and Legal Structures
4:59: Part 3: Time Frame and Model Structure
6:17: Part 4: Debt Usage and Terminal Value
9:25: Part 5: How the “Deal Math” Works
12:21: Recap and Summary

What is Project Finance?

Project Finance Definition: “Project Finance” refers to acquisitions, debt/equity financings, and new developments of capital-intensive infrastructure assets that provide essential utilities and services.

Sectors within infrastructure include utilities (gas, electric, and water distribution), transportation (airports, roads, bridges, rail, etc.), social infrastructure (hospitals, schools, etc.), energy (power plants and pipelines), and natural resources (mining and oil & gas).

Many of these assets last for decades, have stable/predictable cash flows, use substantial Debt (50 – 60%+ of the total price), and use sized and sculpted Debt.

The term “Project Finance” at large banks refers to a group that operates like Debt Capital Markets or Leveraged Finance but for infrastructure rather than normal companies.

However, many people also use the term more broadly to refer to equity, debt, and advisory for infrastructure assets.

Like groups such as Leveraged Finance, DCM, and Direct Lending, the bulk of the analytical work involves assessing the downside risk.

In other words, if you lend $500 million to fund a new offshore wind development, what are your chances of losing money?

What if there’s a budget overrun or construction delay? What if market rates for electricity fall?

You’ll assess these questions and then indicate the terms you’d be comfortable with, from the Interest Rate to the Tenor (loan life) to the covenants (e.g., requirements such as maintaining a minimum Debt Service Coverage Ratio of 1.50x or 2.00x).

Project Finance vs. Corporate Finance: Careers

From a career perspective, “corporate finance” roles are generalist and exist at normal companies, investment banks, and many investment firms.

“Corporate finance” is a broad term that could refer to anything from managing a company’s internal budget (e.g., in FP&A roles) to advising clients on M&A deals in investment banking.

The unifying factor is that you work at the company level in corporate finance.

Even if you’re budgeting for a specific division or creating forecasts for one segment, your work affects the entire company.

By contrast, Project Finance roles are more specialized and “siloed.”

You analyze specific assets that operate independently, and if something goes wrong with one asset, the lenders only have a claim on that asset and its debt due to the special purpose vehicle (SPV) created for each asset.

You may still consider the entire portfolio when making decisions, but there’s less of a direct connection than in corporate finance roles.

One way to think about these roles is this analogy (if we limit “corporate finance” to just deal-based roles such as investment banking and private equity):

Infrastructure Investing : Project Finance :: Private Equity : Large Bank Lenders

If you view it this way, the comparison is as follows:

Pay tends to be lower in PF/Infra roles because the targeted returns are lower, the upside is more limited, and many funds are smaller than traditional PE firms. Expect a ~20-30% discount to compensation in traditional IB/PE roles.
The hours in PF/Infra are better because there’s less “hustle culture,” deals are sometimes simpler to evaluate, and senior bankers are less likely to abuse junior staff.
The skill set in PF/Infra is more specialized because modeling Power Purchase Agreements (PPAs) for a solar plant doesn’t translate that well into valuing a consumer/retail company.
Stability is higher in PF/Infra roles because the underlying assets are essential, and the holding periods are very long.
The exit opportunities in PF/Infra roles are more specialized, and moving to a generalist role would be difficult after significant time in the field. Credit, lending, and corporate development roles at client companies are possible.

Project Finance vs. Corporate Finance: Recruiting

We’ve covered investment banking recruiting, private equity recruiting, and even “corporate finance at normal company” recruiting many times on this site, so I’ll refer you to those articles.

The big difference in Project Finance is that they strongly prefer candidates with credit experience in LevFin, DCM, mezzanine, direct lending, and related fields.

You can win PF roles right out of undergrad, but recruiting for undergrads and recent graduates is less common and structured than in fields like investment banking, corporate banking, or wealth management.

And if you do this, you’ll probably need highly relevant internships, such as ones in credit, energy, renewables, or other infrastructure-related fields.

Interviews are more specialized, and you can expect everything from infrastructure modeling tests and case studies to questions about the deal execution process.

Because most of these assets are private, finding substantial information for deal discussions can be very difficult.

Therefore, you’ll probably have to focus on high-profile assets that operate more like normal companies, such as large airports – or research funds or large companies in the sector.

You should also expect technical questions about concepts unique to Project Finance, such as Debt sizing/sculpting based on future cash flows and how to use Goal Seek and VBA to resolve circular references in models.

See the sample Excel file included here for very simple examples of this.

We don’t have space in this article to cover technical questions, but we may publish a separate feature on this topic.

Project Finance vs. Corporate Finance: Financial Modeling

Here’s a chart summarizing the key modeling and analytical differences:

Types of Assets and Legal Structure

The “Types of Assets” category should be obvious if you’ve made it this far in the article.

The Legal Structure category is important because the special purpose vehicle around an infrastructure asset reduces the risk for the owner.

The Debt is also non-recourse, which means the lenders can seize only the collateral if something goes wrong.

So, the asset is “isolated” from the rest of the company, and the lenders cannot seize other assets if something goes wrong with the one specific asset they’ve funded.

Lenders see this feature not as “risk reduction” but “risk reallocation” – to them.

This is partially why they often require strict covenants linked to numbers like the Debt Service Coverage Ratio (DSCR), defined as Cash Flow Available for Debt Service (CFADS) / Debt Service.

(Debt Service = Interest + Scheduled Principal Repayment; CFADS = EBITDA – Cash Taxes +/- Change in Working Capital – Maintenance CapEx +/- various Reserve line items.)

For example, a relatively safe asset, such as a power plant that sells electricity according to fixed rates and escalations, might be subject to a 1.50x minimum DSCR on the Debt used to fund the deal.

In other words, lenders want a 50% buffer to ensure the asset always has enough cash flow to pay them – and that’s for a “safe” asset!

In riskier verticals, such as mining, the required DSCR is much higher to account for the added risk of commodity prices.

Time Frame and Model Structure

The time frame and model structure also differ in Project Finance.

Since many of these assets last for decades, you could potentially set up a financial model that extends 20, 30, or even 50+ years into the future.

This would never happen in corporate finance because forecast periods rarely extend beyond 3 – 5 years.

The cash flows of normal companies are less predictable, so it’s rarely worthwhile to go far into the future.

Even if you create a far-in-the-future forecast for a tech startup that takes 20 years to reach maturity, the distant forecasts will become less detailed.

Technically, you can set up a 3-statement model for both corporate finance and Project Finance deals, but it’s far more common in corporate finance.

Normal companies have significant overhead and are so affected by timing differences in cash receipts/payments that it makes sense to track these items in detail on the Income Statement, Balance Sheet, and Cash Flow Statement.

For Project Finance, though, cash flow is king.

Yes, assets like toll roads, wind farms, and lithium mines have full financial statements, but you mostly care about the cash flow – the amount available for Debt Service and the amount remaining to distribute after Debt Service:

Building a full 3-statement model does not add much because most line items outside the PP&E, Debt, Equity, and Cash are small.

There are usually supporting schedules for the CapEx, Debt Service, Reserves, and other elements, but these are separate from the financial statements.

Debt Usage and Terminal Value

In a standard leveraged buyout model, the Debt funding is usually based on a multiple of EBITDA or a percentage of the Purchase Enterprise Value (i.e., the value of the target company’s core business operations in the deal).

Lenders lend based on a company’s recent and near-term performance, not what it might look like in 5 or 10 years.

And in the final period of an LBO model, you assume an Exit Value for the company, which is also based on an EBITDA multiple.

This Exit EBITDA Multiple is based on the company’s performance at that time, such as its growth rates, margins, and Return on Invested Capital (ROIC).

Outside of LBOs, this Exit Value or Terminal Value concept is widely used in other corporate finance analyses, such as the DCF model.

The assumption is that the company will continue to operate “forever,” or at least for many decades, even if it no longer grows substantially.

In Project Finance, the model setup and underlying assumptions are completely different.

First, while the Debt could be based on an EBITDA multiple, it is often sized and sculpted to match the asset’s future cash flows.

In other words, the initial Debt balance is linked to the Present Value of the asset’s cash flows over the Debt Tenor and the type of “coverage” or “buffer” the lenders want.

Here’s an example in the simple model:

Meanwhile, the Terminal Value or Exit Value may not exist for infrastructure assets because they have limited useful lives and cannot operate “forever.”

For example, energy assets such as solar plants, wind farms, and nuclear plants eventually wear down and stop producing energy in an economically feasible way.

And something like an oil/gas field or gold mine will eventually run out of economically feasible resources to extract.

Including a Terminal Value may still be reasonable in some contexts, such as if the asset lasts for 30 years and you plan to sell it in Year 10.

However, if you do that, the Exit Multiple should be lower than the Purchase Multiple to reflect the shorter useful life (and it should be linked to the estimated remaining cash flows).

Most Project Finance models assume the holding period equals the asset’s useful life, meaning the cash flows stop after ~20 – 30 years.

Wait, How Does Project Finance Math Work?

Reading this description, you might think:

“Wait a minute. How can infrastructure private equity firms earn acceptable IRRs if there is no exit value or the exit value is greatly reduced? That’s a critical part of any LBO model.”

It’s a 3-part answer:

Expected returns are lower – They’re often in the high-single-digit-to-low-double-digit range (e.g., an equity IRR of 7% to 13%).
There’s substantial leverage in each deal – It’s not unusual to use Debt for 50 – 60% (or even more) of the purchase price or development costs.
High margins and cash-flow yields make the math work – Many infrastructure assets have EBITDA margins of 50 – 60% or higher, with cash-flow yields above 10%. At these levels, the equity IRR can also be above 10% without an exit if the holding period is long enough.

Point #3 is never true in corporate finance because ~99% of companies do not have margins or cash-flow yields in these ranges.

Therefore, leveraged buyouts of traditional companies depend on making the company more valuable, repaying Debt, and exiting for a higher value.

But Project Finance deals are more about paying the right upfront price, using the right amount of initial Debt, and not screwing up the asset’s mostly-predictable cash flows.

Project Finance vs Corporate Finance: Final Thoughts

With the hype over EVs, renewables, and the “energy transition,” Project Finance has become a hot field.

While there are some downsides, such as lower pay and more limited exit opportunities, I think it does have more growth potential than traditional IB/PE careers at this stage.

Even the private equity mega-funds agree about the need to move into new areas: Rather than doubling down on standard leveraged buyouts, they’ve been expanding into private credit, infrastructure, and other fields.

In a world of 5%+ interest rates, the traditional LBO might not be a grand slam anymore – but a power plant could always be a solid double or triple.

The post Project Finance vs. Corporate Finance: Careers, Recruiting, Financial Modeling, and More appeared first on Mergers & Inquisitions.

Sports Private Equity: Bright Spot in a Troubled PE Landscape or an Emerging Bubble?

M&I - Brian — Wed, 10 Apr 2024 15:13:11 +0000

Amidst the miserable deal environment of the past few years, there has been one bright spot: sports private equity.

Even as deal activity, fundraising, and exits have slowed everywhere, billionaires and PE firms backed by billionaires continue to acquire and invest in sports teams.

Over two-thirds of NBA teams have a private equity connection or investment, and all major U.S. leagues except the NFL now allow PE firms to own minority stakes in teams.

In Europe, 35% of football clubs have been funded via capital from PE/VC firms, sovereign wealth funds, or private consortiums.

So, why have PE firms suddenly gotten interested in sports?

And if you’re interested in working in the sector, should you enter the draft?

Table Of Contents

Sports Private Equity Defined
Why Did Private Equity Suddenly “Get Interested” in Sports?
The Top Sports Private Equity Firms
How Do Sports Private Equity Deals Work?
On the Job in Sports Private Equity
Recruiting for Sports Private Equity Roles
Should You Enter the Draft for Sports Private Equity?
- Sports Private Equity: Further Reading and Listening

Sports Private Equity Defined

Sports Private Equity: In sports private equity, firms raise capital from outside investors (Limited Partners) and invest in teams in football, baseball, basketball, hockey, racing, and other major sports, typically via minority stakes, with the aim to sell their stakes for a profit within 3 – 7 years.

The broader world of “sports investing” includes more than traditional private equity firms.

For example, many sovereign wealth funds in the Middle East have also gotten involved, as have holding companies and consortiums led by people such as Josh Harris (Apollo co-founder and now a famous sports investor).

But this article will focus on dedicated sports PE firms and some mega-funds that have made sports investments.

Why Did Private Equity Suddenly “Get Interested” in Sports?

If you look at a sector like technology private equity, the interest developed gradually over time, with top firms like Silver Lake and Vista being founded 20+ years ago.

By contrast, the interest in sports went from 0 to a 100-mph fastball quickly, with dozens of sports-focused firms now (vs. only a handful a decade ago).

This happened for a few reasons:

1) Soaring Valuations – Many sources say that sports team valuations “outperformed” the S&P 500 over the past 20 years, which is a polite way of saying that many teams are now valued at extremely high multiples.

And as with Bitcoin and AI, soaring valuations always attract new buyers who expect even greater fools in the future.

Also, these very high valuations have created a need for liquidity, as older owners may want to sell their stakes – but face a limited pool of buyers.

2) Perception of Sports as an “Uncorrelated Investment” – Even when a recession or market downturn occurs, the franchise still generates cash flows, and fans keep attending games.

Also, even if the team performs poorly, the hardcore fans keep spending money like drunken sailors.

Sports teams have emotional connections that function like “moats” for traditional businesses.

3) Revenue Growth – Besides ticket and merchandise sales, sports teams can grow revenue with broadcast/licensing deals, partnerships, and newer routes like augmented reality (AR) / virtual reality (VR) experiences and e-gaming.

When the fans are passionate, there are infinite ways to milk the brand’s value.

4) Poor Financial Management—Despite these positives, many teams are poorly managed and still lose money, creating an opportunity for PE firms to improve their efficiency.

A great example is how many European football clubs became distressed during COVID and were forced to seek private capital.

5) Regulatory Changes – Finally, many sports leagues have loosened their ownership rules over time and now allow private equity firms to own minority stakes.

For example, in 2021, the NBA started allowing institutional investors to own up to 20% of single teams, which led Arctos to invest 5% in the Golden State Warriors (they later increased this stake to 13%).

The MLB started allowing PE ownership in 2019, and the NHL followed suit in 2021.

Here’s a handy chart with the allowed PE ownership by league, created by Vetted Sports and Sports Pro Media:

Another factor is that many sports franchises offload some of their biggest OpEx and CapEx, such as stadiums, to cities.

It’s a great business model because the team can threaten to leave unless the city pays for the stadium… and when the city pays for it, the team can collect the ticket, licensing, broadcasting, and merchandising revenue.

Finally, sports investing allows wealthy individuals to gain influence and prestige.

Sure, they could keep making money by acquiring random unknown businesses, but if they want visibility, nothing beats sports (or media?).

The Top Sports Private Equity Firms

The list of sports PE firms was short in 2015, but it has exploded over time.

I’ll divide this into 5 main categories: Sports-focused PE firms, large/diversified funds, sovereign wealth funds and pensions, conglomerates, and family offices/individuals.

Sports-Focused Private Equity Firms

A few of the highest-profile firms here are Arctos Sports Partners (Golden State Warriors, Houston Astros, LA Dodgers, Utah Jazz, Paris Saint-Germain, etc.), RedBird Capital (AC Milan, Alpine Formula 1, Fenway Sports, etc.), MSP Sports Capital (McLaren Racing), and 777 Partners (Sevilla FC, Genoa FC, Red Star FC, etc.).

Other firms focusing on “sports-adjacent” companies (analytics, media, tech services, etc.) include Bruin Capital, Clearlake, and Shamrock Capital.

Newer names include Bluestone, Dynasty Equity (Liverpool FC), and LBK Capital (Triestina).

Others with a broader “entertainment” focus include Atairos, Causeway, The Chernin Group, Elysian Park (more of a VC), Fiume Capital, and Zelnick Media.

Larger, Diversified Funds That Also Invest in Sports

As sports investing became more popular, many firms with a traditional TMT or media/entertainment focus also got involved.

Examples include Ares (now with a $3.7 billion sports/media/entertainment fund), Blue Owl (Dyal HomeCourt Partners), CVC (invested in the Women’s Tennis Association), Elliott Management (yes, more of a hedge fund, but they took over AC Milan after a debt default), and Sixth Street (National Women’s Soccer League, San Antonio Spurs, Real Madrid, etc.).

Firms like Silver Lake, Providence, and TPG have also made sports-related investments.

Sovereign Wealth Funds and Pension Funds

Various sovereign wealth funds and SWF-related firms in the Middle East, such as Qatar Sports Investments (QSI) and Saudi Arabia’s Public Investment Fund (PIF), have also done deals for football clubs and sports holding companies (see below).

PIF has also expanded outside of football (soccer) with investments in golf, cricket, horse racing, boxing, tennis, wrestling, and more.

And then there’s OMERS, a Canadian pension fund that now holds a minority stake in the holding company that owns various teams in Toronto.

Conglomerates and Holding Companies

Outside of traditional PE firms, many sports holding companies and conglomerates also invest in the space.

Examples include Monumental Sports (Washington Wizards and Washington Capitals), Harris Blitzer Sports & Entertainment (Philadelphia 76ers and New Jersey Devils), Eldridge Industries (LA Dodgers), and Fenway Sports Group (Boston Red Sox, Liverpool FC, Pittsburgh Penguins, etc.).

Fenway is backed by RedBird Capital, so there’s some PE involvement here as well.

A firm like Liberty Media could also be in this category due to its ownership of Formula One.

Family Offices and Individuals

Finally, many wealthy individuals and their family offices have gotten involved in sports investing.

A few family offices in the space include Certuity, GMF Capital, and Tricor Pacific (Treaty United FC in Ireland).

Besides Josh Harris, other individual sports investors include Jeff Vinik, Dan Gilbert, Mark Mateschitz, and Mukesh Ambani (who owns multiple cricket teams via Reliance Industries in India).

And yes, I’m aware of Steve Cohen, David Tepper, and Steve Balmer, but they’re all single-team owners, which is a bit different than owning a portfolio of sports teams.

How Do Sports Private Equity Deals Work?

The short answer is: “A lot like growth equity deals.”

Many sports leagues do not allow teams or franchises to be highly levered or majority-owned by private equity firms, so the main returns sources are:

Revenue Growth – From more ticket sales, merchandising, license/broadcast rights, live events, and real estate plays.
Margin Improvement – While some sports teams are run efficiently (many NBA teams have ~30% margins), plenty of others are not. European football clubs are notorious for losing money, and PE firms are allowed to own some countries’ teams in full, so they see it as an attractive opportunity to improve efficiency.
Multiple Expansion – This has been the main returns driver as sports teams’ valuations have been bid up, but it’s questionable whether this will continue forever.

If we take Arctos’ £125 million into AMR GP (Aston Martin’s F1 team) at a £1 billion valuation as an example deal:

The team had revenue of £230 million (roughly a 5x revenue multiple based on the most recent Balance Sheet). You can see the previous year’s financials here.
The team was losing tons of money, with (25%) operating margins.
But its sales were growing briskly, with 20 – 25% growth in the two previous years.

In a situation like this, Arctos will focus on revenue growth and attempt to set up new partnerships and licensing deals to “grow past” these losses (which may or may not work, depending on the team’s operating leverage).

It’s only a minority owner, so it has limited power to force management changes or cut specific costs.

However, if it can keep the team’s revenue growing at 15 – 25% per year and exit at a 4x revenue multiple, it could still earn a ~15% IRR over 5 years:

It’s unclear how well this will work because Arctos was only founded in 2020.

Exits seem dependent on finding another PE firm or consortium willing to pay more, and options like IPOs and acquisitions by “strategics” (normal companies) are less viable due to league rules on ownership.

On the Job in Sports Private Equity

If you work at a firm that makes “sports-adjacent” investments, such as Bruin Capital or Shamrock, it’s normal private equity: Read a lot of CIMs, reach out to companies, conduct due diligence, and execute the occasional deal.

But if your firm focuses on acquisitions or minority stakes in sports teams, the modeling and analytical work becomes far more speculative, like growth equity.

How much revenue could the Chicago Bulls generate if they started offering an AR/VR experience based on Michael Jordan?

What if the Dodgers launched a line of merchandise based on Shohei Otani?

Or what if Real Madrid expanded into e-sports and launched a spinoff title from the FIFA series via Electronic Arts?

You need to buy “the story” for the numbers to work, and the job is more about coming up with these ideas than evaluating the downside cases.

On balance, it probably is more fun than traditional PE firms that buy boring HVAC installation companies or accounting firms, but you also develop a more niche skill set.

Many of these newer, sports-focused firms are also quite small, which means that compensation is more in-line with lower-middle-market PE firms, and promotion opportunities are less clearly defined.

Recruiting for Sports Private Equity Roles

If you’re targeting mega-funds or upper-middle-market PE firms that invest in sports, expect the usual on-cycle recruiting process, with timed LBO modeling tests, fast interviews, and extremely early start dates in the U.S.

However, if you go for roles at the smaller, sports-focused firms, recruiting is all off-cycle, and headhunters are not heavily involved.

Working at a top bank or consulting firm always helps, but you could probably get the attention of these firms if you had “sports finance” experience via other means (e.g., corporate development for a sports/entertainment company).

Overall, expect interview questions more like those in venture capital or growth equity because many of these PE firms operate like that: Minority stakes, structured equity, and occasional hybrid debt/equity deals.

Should You Enter the Draft for Sports Private Equity?

So, if you’re interested in both sports and private equity, should you go for sports PE roles?

I think it’s quite risky to join a newer PE firm that invests mostly in sports teams.

Yes, it’s more interesting work than standard PE, and yes, it is a new/hot area that will continue to see more deal activity.

However, the long-term performance outlook is completely unknown, firms like Arctos have only had a few exits, and you don’t necessarily develop a transferable skill set since sports are quite niche.

If you’re interested in this field, I would recommend gaining some TMT or entertainment experience at a diversified firm and then moving to a group that does both sports-team and sports-adjacent deals.

That way, you can get the best of both worlds and give yourself the option to specialize without committing to anything too early.

It’s a bit like being a talented college football player: Yes, maybe you want to go pro and enter the NFL draft, but if you do it too early, you could end up on the wrong team or with an inferior skill set.

Sports Private Equity: Further Reading and Listening

The post Sports Private Equity: Bright Spot in a Troubled PE Landscape or an Emerging Bubble? appeared first on Mergers & Inquisitions.

Single-Manager Hedge Funds: The Best Way to Get a Recurring Guest Spot on CNBC?

M&I - Brian — Wed, 31 Jan 2024 16:49:40 +0000

If you think about the most “public” investors – the likes of Bill Ackman and David Einhorn – many of them have something in common: they operate single-manager hedge funds.

In other words, they’re the public face and brand of their fund, and all investment decisions flow through them.

They might have separate teams for specific strategies or markets, but everything is run under a single Profit & Loss statement (P&L).

This setup creates many differences with multi-manager (MM) hedge funds, from investment styles to recruiting and careers.

Interestingly, some well-known hedge funds are also tricky to classify, as they combine elements of SM and MM funds.

Depending on your personality, skill set, and long-term goals, these single-manager funds or “hybrid funds” could be perfect or far from ideal:

What Are Single-Manager Hedge Funds?

Single-Manager Hedge Fund Definition: A single-manager (“SM”) hedge fund is run by one individual Portfolio Manager (PM) with one Profit & Loss Statement (P&L) rather than multiple teams with multiple P&Ls; it aims to earn high absolute returns, often with concentrated portfolios and very specific strategies, and it may have periods of overperformance and underperformance.

There are very few real “requirements” besides the single PM / single P&L one above and the standard Limited Partner / General Partner structure that all hedge funds use.

But one rule of thumb is that nearly all single-manager funds are smaller than the biggest multi-managers, as one person could not manage $100+ billion in assets.

Here’s a quick run-down of the other differences:

Performance Targets: Like all hedge funds, single-manager funds aim for high absolute returns (e.g., a double-digit percentage regardless of what the S&P does), but their real internal targets may vary based on their strategies, lock-up periods, and more.
Portfolio Structure: Unlike MM portfolios, SM portfolios do not have to be market–neutral or based on pair trades; many SM funds also tend to run much more concentrated portfolios (e.g., 10 – 15 positions rather than 100+).
Leverage: Unlike MM funds, which all use significant leverage to boost their modest returns, SM funds span a wide spectrum. Some use no leverage, while others use decent amounts (but less than the multi-manager giants).
Drawdown Limits: Most SM funds do not have strictly enforced drawdown limits, such as “no more than a 3% drop in a month.” They’ll tolerate monthly/quarterly losses if they’re confident of the longer-term outlook, such as the 1-year performance.
Ease of Getting Fired: With some exceptions (see below), job stability tends to be higher at SM funds because they want to retain talented people, even if they don’t perform well in one quarter.

A Day in the Life of a Single-Manager Hedge Fund Analyst

At most single-manager hedge funds, an average day is like the one described in the Hedge Fund Analyst article:

Market research on specific companies and assets.
Speaking with customers, suppliers, management teams, and market participants.
Internal meetings where you discuss new ideas and your current positions with the rest of the team.
In-depth analysis that might take days or weeks, such as a financial model with 1,000 rows in Excel to assess a biopharma company’s valuation.
“Putting out fires” when emergencies arise, such as unexpected company announcements.

You still pay attention to catalysts and investor sentiment, but the job is more about forming a long-term view of asset prices – not predicting what will happen on the earnings call next week.

“Quick analyses” could still come up, especially when catalysts are triggered, so there is some overlap between the multi-manager and single-manager investment styles.

This is especially common in areas like distressed debt investing that depend heavily on catalysts.

Single-Manager Hedge Fund Performance

The multi-manager hedge fund article described how MM funds grew faster than the overall industry between 2018 and 2023.

But that doesn’t necessarily mean that SM funds “performed poorly”; they simply didn’t get the same attention.

I found a useful Substack article from Joachim Klement (with a separate study) that addresses this point:

“Single hedge fund managers tend to have higher abnormal returns on average than team-managed funds.

But these higher average returns come at the price of higher tail risks and higher variance of returns.

In other words, while the average single-manager hedge fund has better performance, individual funds can be at the very top or at the very bottom, depending on the decisions of the fund manager.

Team-managed funds are in the murky middle, neither particularly good nor particularly bad.”

As a notable example, here’s Pershing Square’s performance vs. the S&P 500 from 2004 through 2017:

Yes, Pershing Square outperformed the S&P on an annualized basis over this entire period, but it also underperformed for multi-year periods!

Also, most of its outperformance came from strong results in 2004 – 2010, which is why it struggled and lost AUM and investor support in the 2011 – 2019 period.

By contrast, a top multi-manager hedge fund would post more consistent results but probably wouldn’t outperform the S&P by 5% annually over 14 years.

(One notable exception is Citadel’s Wellington fund, which has delivered 19% annualized net returns since 1990 – but that is just one fund there.)

The Top Single-Manager Hedge Funds

Single-manager funds far outnumber multi-manager funds, but they’re also much smaller.

Think: “Hundreds of millions in AUM up to a few billion” – a lot of money, but tiny by the standards of the largest hedge funds and asset managers.

If we focus on the larger single-manager funds, i.e., those with $1 billion up to $10 billion+, a representative list might look like this (please see the important notes below before leaving a comment or question):

Many of these funds were spun off from Tiger Global (hence the “Tiger Cubs” moniker).

Some have stayed relatively small, while others have expanded significantly beyond the traditional single-manager size and strategy.

As I mentioned at the top, the classification here is tricky, which explains why I’ve added the stars (“*”) to certain names.

Some of these, such as Pershing Square, Egerton, and TCI, are clearly single-manager funds because they only have a few dozen employees, and everything runs through the Famous Person in Charge.

However, others – such as Coatue, Maverick, Viking, and even Baupost – are more questionable because they’re much larger.

Some of these funds have 100+ employees; Viking has 275+ with 45+ investment professionals.

That’s much too big for a single team, so they have multiple teams with different Portfolio Managers and Analysts separated by sector and strategy.

Tiger Global is another example of this issue: It started as a hedge fund but later expanded into private equity and venture capital, with different teams for each one.

However, many people still consider all these funds “single managers” because of their investment styles.

Specifically, they have looser drawdown limits, they’re not betting on quarters, and they don’t necessarily run market-neutral portfolios.

So, if you go by the size and separate teams, the larger funds here are more like MM funds, but if you go by investment style, they’re more like SM funds.

Recruiting and Interviews at Single-Manager Hedge Funds

Most hedge fund recruiting is “off-cycle,” and that’s even truer at single-manager funds.

In other words, you’ll have to do your own legwork by networking with the right people, monitoring job postings, and pushing your case aggressively.

Some of the larger funds here, such as Viking, may have structured recruiting, but they are very specific about the types of candidates they prefer.

Specifically, they often hire people who have followed “the path” by working at a top investment bank for 2 years and then joining a private equity mega-fund for another 2 years.

Teams are small, so these funds don’t offer many entry-level seats – meaning that you need a great pedigree, luck, or both.

Also, unlike multi-manager funds such as Point72 that offer direct recruitment and training for undergrads, it’s rare for any of these SM funds to recruit university students directly.

If you have the right background – IB/PE at top firms or possibly equity research or CFA / asset management experience – the interviews and case studies are fairly standard.

Expect 3-statement modeling or valuation tests, stock pitches, and combined exercises where you do both (e.g., “Read the filings, build a model, and make a long/short pitch”).

The biggest difference is that you’re more likely to get an open-ended exercise without much time pressure at a single-manager fund, such as:

“Take a week, find a company in Sector X, build a valuation, and pitch us on a long/short/other investment in the company.”

There’s no quick/simple way to do this, but you’d probably start by screening for companies with out-of-line valuation multiples and go from there.

For specific examples, see our stock pitch guide and the templates there.

Careers and Compensation at Single-Manager Hedge Funds

Teams are very small at “true” single-manager funds – perhaps 7 – 15 investment professionals potentially managing billions of dollars.

Since teams are small and want to retain talent, turnover tends to be much lower than at the MM funds.

That’s nice for career stability, but it’s a double-edged sword because it means that promotions are more difficult; entry-level recruiting is tougher since no one wants to leave.

And if there is only one Portfolio Manager, you will only be promoted to PM if the existing one expands the firm by raising capital and creating more teams.

The good news is that if you don’t get promoted, you could move to a multi-manager fund or even back into IB or PE if you came from one of those.

In terms of compensation, most single-manager funds charge lower effective fees than MM funds because most stick to the traditional “2 and 20” (more like 1.75% and 17.5% now) structure.

Multi-managers, by contrast, have adopted a pass-through structure that makes the LPs pay for expenses, including compensation.

This results in effective management fees of 3 – 10% for many MM funds vs. the much lower 1 – 2% for SM funds.

However, the AUM per head is also much higher at SM funds, meaning they are more “efficient” than MM funds, so the lower fees don’t necessarily result in lower pay.

In practice, year-end bonuses at single-manager funds are more variable and arbitrary, which can result in surprises in both directions.

For example, if you have a “bad year,” but the PM sees potential in you, he might award you a solid bonus anyway to retain you.

But sometimes, if you had a “great year,” your bonus might be less than expected if the PM feels that other team members made bigger contributions.

The average compensation levels are similar (low-to-mid six figures at the entry-level, rising to high six and low seven figures after that), but the progression and link to the current year’s P&L are less direct.

Are Single-Manager Hedge Funds for You?

Here’s how I’d sum up everything above:

Pros:

The earnings potential is still very high, especially as you become more senior (even if you’re not an official PM).
There’s more job stability since most SM funds do not fire people for a 4% drawdown in one quarter.
The work is arguably more interesting/appealing because you focus on the longer-term outlook rather than quarterly beats and misses.
The lifestyle is more sustainable since there’s less stress and reduced hours.

Cons:

It’s difficult to recruit for these roles due to the dearth of openings, low turnover, very specific requirements, and off-cycle processes.
The advancement path and compensation are arbitrary; even if you perform well, you won’t necessarily be rewarded as expected.
You won’t have much brand-name recognition if you ever leave the industry or change careers.
Fund variability is very high, which means that the stability and stress may not be so great at places like Viking or Coatue (yes, they’re great funds, but they also have a reputation for long hours and stress).

The average banker or private equity investor would probably feel more comfortable at a single-manager fund.

But in the long term, it may not be the best career option unless you perform so well that you could leave and start your own hedge fund.

If you’re more in the “solid but not spectacular” category, it might be more useful to gain experience at an SM fund and then move to a multi-manager or another firm with a clearer advancement path.

You may earn less than a PM at a single-manager hedge fund, but you also won’t get stuck in the murky middle.

Want more?

Wealth Management vs. Investment Banking: Career Deathmatch

M&I - Brian — Wed, 10 Jan 2024 15:24:27 +0000

If you want to read angry comments and long threads with plenty of insults, you can’t go wrong with the wealth management vs. investment banking debate.

It’s one area where people on both sides tend to talk past each other:

Bankers say that wealth management roles pay less, offer less interesting work, and lack good exit opportunities.
Wealth managers say that investment banking requires crazy hours, has mostly dull work, and is ridiculously competitive to get into; also, the “compensation ceiling” may be similar in both fields, so why kill yourself in banking?

The truth is that both claims are correct but incomplete.

To illustrate the problem, I’ve created two “career ladders” for these fields:

Now let’s dig in:

Table Of Contents

Wealth Management vs. Investment Banking: Job Functions
The Nature of the Work: Markets, Analysis, Sales, and Interpersonal Skills
Recruiting in Wealth Management vs. Investment Banking
Wealth Management vs. Investment Banking: Careers and Promotions
Wealth Management vs. Investment Banking: Compensation and Hours
The Top Firms in Wealth Management vs. Investment Banking
Wealth Management vs. Investment Banking: Exit Opportunities
Final Thoughts on Wealth Management vs. Investment Banking
For Further Reading

Wealth Management vs. Investment Banking: Job Functions

Wealth managers advise individuals on their investments and may provide other services, such as tax and estate planning.

These individuals are usually “high net worth” (HNW), meaning an average of $5 – $10 in assets, but it could be as low as $1 million. And wealth managers at large banks may advise people with as little as a few hundred thousand to invest.

Some of these client differences relate to the distinction between private wealth management and private banking; for more on that, you should review the the private banking article.

By contrast, investment banking is more about advising companies on transactions such as M&A deals, equity and debt deals, and restructuring.

In wealth management, you advise the same clients over long periods, but in IB, you hop from deal to deal – though some groups do operate on more of a “client service” model.

When a deal becomes “active” in IB, you dive into it and go in-depth into all aspects, from the financials to the buyer/seller outreach to the presentations and more.

You can think of it like this:

Wealth Management: Broad and long-term/continuous client coverage.
Investment Banking: Deep and short-term coverage (just until the deal is done!).

There is some overlap because at the large banks, wealth management clients often get early/privileged access to investment banking products, such as upcoming IPOs, equity/debt offerings, or new investment products.

The Nature of the Work: Markets, Analysis, Sales, and Interpersonal Skills

Wealth management (WM) requires broader knowledge of the financial markets since you may have to advise clients on everything from their portfolio allocations to upcoming tax changes.

(Note that the scope is more limited in “pure” WM roles; you’ll do more non-portfolio work in private banking.)

Wealth management also requires more sales and interpersonal skills even at the entry level because it is a sales job from Day 1 – and you need to start bringing in clients early to succeed.

There’s much less technical work because your analysis tends to be very high-level. Think: benchmarking portfolios rather than modeling companies.

You will very rarely get exposed to the type of financial modeling that bankers complete: 3-statement models, DCF models, M&A models, LBO models, and so on.

Investment banking eventually turns into a sales job, but only when you reach the VP level or above (roughly 7-8 years into the IB career path).

At the Analyst level, it’s more about grinding away in Excel and PowerPoint.

As you move up in the early years and become an Associate and early VP, it turns into “project management” and making sure your team delivers.

Knowledge of the financial markets is helpful, but you don’t need it like wealth managers do because you just need to understand the deals you’re currently working on.

One final note is that in wealth management, there’s a split between relationship managers and investment professionals.

This split doesn’t exist in quite the same way in IB, so you can get a very different experience in WM depending on your role.

Recruiting in Wealth Management vs. Investment Banking

You should know all about IB recruiting from reading this site, but it’s insanely competitive and starts very early.

To get an IB internship that leads to a full-time return offer, you need to get “pre-internships” in Years 1 – 2 of university, prepare for recruiting by the middle of Year 2, and do a good amount of technical prep – while earning high grades and doing something to make yourself look interesting.

If you miss undergrad recruiting or change careers, you can also get into IB via lateral hiring or from a top MBA program, but these paths take more time (and money!), and your odds are not spectacular.

By contrast, wealth management is much less competitive to get into.

If you have good sales skills, you could break in with a middling GPA (3.0 – 3.5) and without a target school or great internships.

Like any sales job, they hire lots of candidates because it’s impossible to know in advance who will succeed.

The philosophy is to hire many candidates and let them “sink or swim.”

Interviews are broader than IB interviews and require knowledge of asset allocation, economics, and and financial markets, but far less specific technical knowledge.

For example, they might ask you how to use a DCF, what bond yields are, or the trade-offs of debt vs. equity – but but they won’t ask you to build a DCF model or calculate Unlevered Free Cash Flow.

As with the job itself, the theme is breadth over depth.

Wealth Management vs. Investment Banking: Careers and Promotions

At a high level, the IB and WM career paths seem similar: it might take 10 – 15 years to reach the top (Managing Director), and you start out doing analytical work but shift to sales as you advance.

However, the “sales shift” starts much earlier in wealth management, as it’s pretty much a sales job from Day 1 (with some analytical work mixed in).

The first few years are very tough because you start from nothing – but if you build a decent book, the job gets easier since you’ll have consistent revenue from long-term clients.

By contrast, the first few years in investment banking are tough in a different way: tons of work, crazy hours, and an unpredictable schedule.

You don’t need to be good at sales to make it to the VP level; you can grind your way up if you’re good enough at executing tasks and following instructions.

To advance and move beyond the VP level, you do need sales skills, which not everyone has – this is why the more analytical candidates often leave for private equity and hedge funds in the early years.

Investment banking careers are also less stable than wealth management ones, and mid-level bankers often get laid off because they’re expensive and do not yet directly generate revenue.

I would summarize the careers like this:

IB: Tough-but-grindable early years; the mid-level roles become less stable and require more real-world skills to advance.
WM: The early years are painful because you need real results to advance, but it gets easier as you move up and gain “sticky” long-term clients.

Wealth Management vs. Investment Banking: Compensation and Hours

Salaries and bonuses change each year and depend on the firm and group, but in both careers, you’ll start in the low-six-figure range (e.g., $100K to $200K) and advance from there.

Expect something on the lower end of that range for WM roles at large banks and something in the mid-to-upper-end (or above) for IB roles.

At the mid-levels, VPs and Directors in IB also earn significantly more than the equivalent positions in WM (it’s maybe a ~30 – 50% discount in WM).

At the top, MDs in wealth management can theoretically earn $1 million+ year, just as many investment banking MDs do.

However, it might be more realistic to expect “high-six-figure pay” if you make it to that level and have a good base of long-term clients.

There’s less money to go around because the fees are lower, as most groups charge 0.5% – 1.0% on assets under management (AUM).

Investment banks also charge fees in that percentage range, but they’re charged on deals worth hundreds of millions or billions of dollars.

Some wealth managers eventually amass $100+ million in assets under management, but it’s a very slow process, and there’s a limit to how much in AUM any one group can manage.

As a result, the dollar volume of fees ends up being higher for a similar headcount in investment banking.

Compensation is also more individualized in wealth management, especially as you advance – if your clients generate significant fees, you should still do well even if others in your group perform poorly.

This is not the case in IB until you reach a very senior level (for more on all these points, see the article on investment banker salaries).

Finally, the hours are significantly better in wealth management because you don’t do that much work outside of normal business hours.

So, you won’t pull all-nighters to finish pitch books, and you won’t be called in over the weekend to make last-minute changes to a model.

It’s usually a 50-hour-per-week job, which is significantly better than the 60, 70, or 80+ hours required in IB.

The Top Firms in Wealth Management vs. Investment Banking

Most people would say the top investment banks are the bulge brackets and elite boutiques, at least for entry-level roles.

They do larger, more complex deals and offer better experience, compensation, brand-name recognition, and exit opportunities.

Even as you advance, there isn’t necessarily a reason to leave one of these firms and move to a smaller one outside of very specific lifestyle/personal issues.

In wealth management, some people argue that it’s best to start at the bulge bracket banks for the brand name, compensation, and network…

…but they might also say that the better long-term roles in the industry are at the pure-play firms and boutiques, especially on the “private banking” side.

These firms tend to work with higher-end clients, and the work tends to be more varied and interesting, with less cold-calling and cold-emailing to chase leads.

I could not find data to confirm this one, but I would also assume that the compensation ceiling is higher at these firms because they do not necessarily use a standard fee schedule.

Wealth Management vs. Investment Banking: Exit Opportunities

There are some huge differences here, and it’s tough to argue with the quality of investment banking exit opportunities: private equity, hedge funds, corporate development, corporate finance, venture capital, startups, equity research, and more.

It offers the broadest set of possible exits within the finance industry if you leave early (in your Analyst years).

As you advance, your exit opportunities narrow because PE firms and hedge funds don’t want to pay for expensive VPs or Directors with no direct investing experience.

The corporate finance/development options and a few others remain, but you’re unlikely to exit into a PE mega-fund – or any sizable PE firm – as a seasoned VP in investment banking (for example).

The exit opportunities in wealth management are much more limited because it is an exit opportunity.

In other words, people don’t go into WM to leverage it into another job: They go in it to build up a client book and eventually earn a high income with a good lifestyle.

If you decide it’s not for you, you might be able to move into investor relations, fundraising, or sales jobs, but deal-based roles are highly unlikely.

Even hedge fund and asset management roles are unlikely unless you’ve had a lot of experience analyzing individual companies or doing very technical analysis.

You might have a shot at sales & trading if you’ve had experience with relevant products, such as FX hedges for international clients, but even that is a stretch.

Final Thoughts on Wealth Management vs. Investment Banking

The basic issue is that investment banking “wins” for entry and mid-level roles due to the higher optionality, higher pay, and the ability to grind your way up the ladder.

Yes, IB is far more difficult to get into, and the hours and lifestyle are much worse – so these points count against it.

But if you’re an ambitious student or you’re early in your career, you shouldn’t care too much about these issues.

At the top levels, WM and IB roles are arguably similar, and wealth management might even offer advantages in terms of reduced stress and shorter hours.

But it’s tough to get there, and the burnout/quit rate is very high.

In the past, many students used WM roles at large banks to get solid brand names on their resumes and become competitive for IB internships.

But I’m not sure how well this works anymore because of hyper-accelerated recruiting, at least in the U.S.

It would be smarter to get more relevant internships – anything involving deals, modeling, or individual investments – even if they’re at boutiques or other, smaller firms.

That said, I think the sheer hatred directed toward wealth management in some online forums is quite exaggerated.

From my perspective, yes, IB is “better” for most ambitious/analytical people, but not everyone has the same personality, skill set, or goals.

If you’re very sociable but not the most analytical person, wealth management could easily be a better option for you.

Similarly, if you do not want to work more than 50 hours per week, and you’re in it for the cushy lifestyle after 10+ years, wealth management could also be better.

But remember that it is a different career ladder – and you don’t want to change your mind and fall off when you’re midway up it.

For Further Reading

From Regional Audit to Investment Banking: How to Break in *Without* the Big 4 Pedigree
From Valuation Advisory to Investment Banking: How to Make the Lateral Leap
How to Cold Email for an Internship: Investment Banking Cold Email Templates and Guide
M&A Investment Banking: The Best Group Ever?
How to Move from Accounting to Investment Banking and Leave the Audits Behind Forever
From Wealth Management to Investment Banking: How to Make the Leap

The post Wealth Management vs. Investment Banking: Career Deathmatch appeared first on Mergers & Inquisitions.

The Full Guide to Healthcare Private Equity, from Careers to Contradictions

M&I - Brian — Wed, 01 Nov 2023 15:17:14 +0000

When you hear the words “healthcare private equity,” two thoughts probably come to mind:

Wait a minute, isn’t healthcare a risky/growth-oriented sector? Why do PE firms operate there? Don’t they need companies with stable cash flows?
In most of the world, healthcare is either government-run or a mixed public/private sector. Are there many private healthcare companies for PE firms to acquire?

The short answer to #1 is that healthcare private equity firms operate in specific verticals with stable-ish cash flows, such as healthcare services, nursing facilities, medical devices, equipment, and healthcare IT.

They do not invest in risky biotech startups attempting to cure cancer (at least not within their traditional PE portfolios).

On #2, the government controls healthcare in many countries, but not everything in healthcare – there are still private healthcare firms even in Canada and the U.K.

For example, Medicare in Canada does not always cover services like prescription drugs, eye care, and dentistry, so there is room for the private sector.

That said, there is far more healthcare PE activity in the U.S. since it has some of the biggest healthcare companies and less government control.

Before delving into these nuances, we should take a step back and define the sector:

Definitions: What is a Healthcare Private Equity Firm?

Healthcare Private Equity Definition: A healthcare private equity firm raises capital from outside investors (Limited Partners), acquires companies in the healthcare services, devices, and healthcare IT segments, and aims to grow these firms and sell their stakes within 3 – 7 years to realize a return on their investments.

This definition excludes life sciences and biopharmaceutical companies because they differ greatly from service and device companies.

These firms lie in the territory of life science venture capital firms that invest in high-risk, early-stage companies.

Some PE firms also invest in this vertical, typically via separate groups (see below).

If you compare healthcare to technology private equity, one of the biggest differences is that different verticals in healthcare are more like completely different industries.

Pharmacies are closer to retail companies; nursing facilities are like REITs or real estate; small physicians’ practices are like consulting firms; and HCIT companies could be more like software or IT services firms.

For more on this, please see our healthcare investment banking article.

Why is Private Equity Interested in a “Boring” Sector Like Healthcare Services?

This chart of PE deal activity from 2001 to 2022 in the Bain Capital Healthcare Private Equity report sums up the market quite well:

In short, healthcare had never been a huge sector for private equity, but activity ramped up in the late 2010s into the early 2020s, and it’s now one of the top industries by dollar volume (right after tech).

It appeals to private equity firms for a few reasons:

Stable/Predictable Cash Flows in Certain Sectors – While these companies do not necessarily have “annual recurring revenue” like a SaaS company, they often have government contracts or subsidies – which are highly likely to be renewed. For example, in the U.S., Medicare and Medicaid are the primary payers for nearly 80% of the residents in nursing homes.
Mispriced Companies and Assets – Some mature healthcare firms trade at low valuation multiples, often because the market misunderstands their contracts, revenue, or track record. PE firms view these companies as especially appealing since low multiples mean they can use higher debt percentages to fund the acquisitions.
Fragmented Markets with Many Add-On Acquisition Opportunities – Private equity firms have been snapping up specialist physician practices in the U.S. to consolidate their market power in specific regions. Critics would say they’re cutting corners, raising prices, and worsening patient care (see below).

Doctors often sell their practices to PE firms because it seems like a better alternative than being acquired by a huge hospital chain.

In both cases, the acquirer is likely to do something bad, but at least with the PE firm, there’s less bureaucracy.

A “typical” healthcare PE deal might resemble Cinven’s acquisition of SYNLAB, a medical diagnostic and testing provider in Germany:

This deal was done at a low 5.3x EBITDA multiple, mostly because the company went public during the COVID testing craze but fell off a cliff after the world moved on.

At the time of the deal, it was expected to grow sales at 3-5%:

Remember that PE deals do not require “growth.”

This deal works because SYNLAB can afford to take on a huge amount of Debt and can likely repay it quickly – since its EBITDA was depressed at the time of this acquisition.

Also, there are plenty of bolt-on acquisition opportunities in the sector, and if Cinven can grow it modestly and increase its margins a bit, the math works even with a lower exit multiple.

The Top Healthcare Private Equity Firms

If you want a good list of healthcare PE firms, check out the Healthcare Private Equity Association (HCPEA) “member firm” page here.

To be more specific, I would divide the sector into these four categories:

Mega-Funds and Large PE Firms – None of these firms specializes in healthcare, but they all have sector teams.
Upper-Middle-Market and Middle-Market Firms with Healthcare Teams – It’s the same idea, but they’re smaller and do smaller deals. Some of these firms might also fall in the “growth equity” category.
Healthcare-Only Middle-Market Firms – They tend to specialize in specific verticals, and many are in the “lower-middle-market” category.
Life Science and Biotech Teams – These are more on the venture capital side, but some large PE firms have internal teams that also do this.

Mega-Funds and Large Private Equity Firms in Healthcare

This list includes names like Apax, Bain Capital, Blackstone, Carlyle, EQT, Hellman & Friedman, Leonard Green, KKR, Thoma Bravo (for healthcare IT), TPG, and Warburg Pincus:

You might have noticed that Apollo is not on this list, even though they are considered a private equity mega-fund – because they’re less active in healthcare than the other firms.

Middle-Market (Upper/Lower) Firms with a Healthcare Presence

Starting with “larger firms” here, names include Audax, Court Square, Friedman Fleischer & Lowe (FFL), General Atlantic, Genstar, GTCR, Harvest, Kohlberg, Madison Dearborn, Nautic, New Mountain Capital, Nordic, Oak Hill, Summit Partners, TA Associates, Thomas H. Lee (THL), and Welsh Carson:

Smaller firms here with some healthcare focus include Arsenal, Gryphon, Vestar, and Vistria.

Dedicated Healthcare Private Equity Firms

Many of these firms are smaller or newer; names include Altaris, Avista, Chicago Pacific Founders, Consonance Capital, Cressey, Frazier, Gurnet Point, Linden, Patient Square, QHP (FKA NovaQuest), Varsity, and Water Street:

On the European side, you can add names like Apposite, Archimed, Astorg, G Square, GHO, and MVM Partners.

Life Science and Biotech Teams

Some PE mega-funds have specific teams that do VC-style investments; examples include Blackstone Life Sciences and Bain Capital Life Sciences.

Other firms that use a similar approach include Frazier, Hildred, Longitude Capital, QHP (FKA NovaQuest), RoundTable, and Vivo.

Some biotech hedge funds also do private placements for life sciences companies, which is effectively the same as VC or growth investing.

Examples include Baker Brothers, EcoR1, Perceptive, and Redmile.

Careers in Healthcare Private Equity

Careers in healthcare private equity have more to do with your firm’s size, strategy, and vertical focus within healthcare than anything else.

For example, if you’re at a firm that’s rolling up local pharmacies, it will be more like retail private equity, while healthcare properties or nursing facilities might be closer to real estate private equity.

Conversely, a smaller firm focused on life sciences or growth investing will be more like a VC role.

Your compensation depends mostly on your firm’s size and performance; healthcare PE pays, on average, about the same as any other PE firm or group.

In terms of mobility, you could easily join a healthcare investment banking team, move to a portfolio company in a corporate development role, or potentially even move into venture capital if you’ve had some life sciences exposure.

However, your chances of moving into early-stage VC are low unless you also have a serious science background, such as an M.D. or Ph.D. in biology.

You could also move into generalist PE firms or groups in other sectors, depending on your deal experience.

Can You Recruit into Healthcare Private Equity and Win Jobs?

As you’ve probably already guessed, there’s nothing “special” about private equity recruitment for healthcare firms or groups.

It’s still the same standard on-cycle or off-cycle process, and you might specify your group at the beginning or be placed after winning an offer, depending on the firm.

The two most common questions are:

Do you need healthcare deal experience in investment banking to have a shot at healthcare private equity?
Can you get in as an D. or Ph.D. based on your industry knowledge and scientific expertise?

The answer to question #1 is that healthcare deal experience helps and is strongly preferred, but it’s not “required” to get in.

Areas like healthcare services and medical devices are fairly generalist and follow standard accounting and valuation.

So, it’s not like real estate, oil & gas, or financial institutions, where you must learn a new set of jargon and accounting rules to have a good shot.

The answer to question #2 is “No, probably not” – if you have a pure medical or academic background, your chances of moving directly into healthcare PE are low.

These roles are for bankers and people with deal experience, such as corporate development professionals; firms care much more about your investment, financial modeling, and due diligence skills than your scientific knowledge.

If you have an M.D. or Ph.D., you should target life science VC roles, biotech equity research, or healthcare IB as a stepping stone.

In the recruiting process, you should expect the same private equity interview questions and LBO modeling tests, but often with a healthcare angle.

We don’t have a dedicated healthcare modeling course, but there are healthcare models and case studies throughout the others:

Core Financial Modeling: There’s an LBO case study based on NichiiGakkan, a nursing facility company in Japan (deal led by Bain Capital).
Interview Guide: There’s a DCF case study based on Attendo AB, a healthcare facility company in Sweden.
Advanced Financial Modeling: There’s a case study on Jazz Pharmaceuticals if you’re more interested in that vertical.
Venture Capital Modeling: There are examples of early-stage and pre-revenue biotech valuations here, including a Sum-of-the-Parts DCF for Ventyx.

The Outlook for Healthcare Private Equity and Possible Regulation and Crackdowns

Every sector has investment risks; for something like technology, most of these risks lie in the macro environment.

In other words, does paying 10x revenue for companies still make sense when interest rates are at 5%? What about when the IPO market is shut down and exits look uncertain?

For healthcare, most of the risks are regulatory.

Specifically, in the U.S., there have been dozens of stories about all the harm private equity does to the healthcare sector, such as this coverage from the NY Times.

Many people argue that PE firms buy up firms to maximize profits by raising prices and cutting costs and do not care about patient outcomes.

They make this argument in other industries as well, but it sounds much worse in healthcare because they argue that these issues are literally killing people.

This issue is now on regulators’ radar, and, like how they’ve cracked down on Big Tech acquisitions, they might also take a much stricter stance on healthcare.

Private equity has traditionally been lightly regulated because it’s limited to institutions and wealthy individuals, but that is starting to change because of its sheer size.

So, you are taking a risk if you join a group that focuses on roll-ups of doctors’ practices, pharmacies, or hospitals.

Areas like medical devices, diagnostics, or equipment are probably safer bets because these companies have a less direct relationship with patient outcomes.

Life science-oriented roles in VC and growth firms will also be fine because there’s always demand for new biotech and pharmaceutical products.

Final Thoughts on Healthcare Private Equity

Unlike tech, healthcare private equity has never been a hyped area; most people have neutral expectations.

That matches my verdict for the sector, which is also in “neutral” territory.

It’s nice because you can get in from various backgrounds and groups, you get a fair amount of mobility, and you can work in any vertical without becoming too specialized.

On the other hand, there’s also significant regulatory risk, at least in certain regions and for certain strategies, and I’m not sure the big increase in PE activity starting in the late 2010s is sustainable.

It’s not enough risk for me to recommend “avoiding” healthcare private equity, but it is enough to say that it’s middle-of-the-pack in terms of desirable PE sectors.

So, go for it if you have the interest and experience, and try to avoid those roll-ups of doctors’ practices and local pharmacies – or be ready to face the wrath of the regulators.

For Further Reading

I recommend these articles and publications if you want to learn more about the sector:

Bain – Global Healthcare Private Equity and M&A Report (Google for the latest version)
Leerink Partners – Podcasts and Research from a Top Healthcare Investment Bank

The post The Full Guide to Healthcare Private Equity, from Careers to Contradictions appeared first on Mergers & Inquisitions.

Private Equity in China: The Worst of Both Worlds?

M&I - Brian — Wed, 16 Aug 2023 11:43:40 +0000

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 Year-Over-Year (YoY) 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:

Domestic vs. International: Was the firm founded in China or another region, such as the U.S. or Europe?
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:

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.
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.
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).
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:

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.
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.
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.

The Complete Guide to Technology Private Equity

M&I - Brian — Wed, 17 May 2023 17:28:49 +0000

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 simlar 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:

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 – and turned SaaS accounting into a major issue.
Industry Maturation – By the 2000s, many technology companies had matured and fallen into the “low-to-moderate growth, with too much corporate bloat” category.
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.
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’ annual recurring revenue (ARR).

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 Year-Over-Year (YoY) 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, Susquehanna Growth Equity (not structured as a traditional PE/VC firm), and Vitruvian in Europe.

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 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:

The post The Complete Guide to Technology Private Equity appeared first on Mergers & Inquisitions.

Investment Banking in Singapore: The Best Gateway to Asia for the Non-Chinese?

M&I - Brian — Wed, 10 May 2023 17:48:19 +0000

I’ve found that two main groups care about investment banking in Singapore:

Students who are from Southeast Asia and are considering whether they want to work in Singapore, NY, London, or other places.
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:

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).
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).
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:

Base salaries are similar to those in NY, but bonuses are slightly lower percentages of the base.
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.

Want More?

You might be interested in reading about Investment Banking In Dubai.

The post Investment Banking in Singapore: The Best Gateway to Asia for the Non-Chinese? appeared first on Mergers & Inquisitions.

Metals & Mining Investment Banking: The Full Guide to Ground Zero for the Energy Transition

M&I - Brian — Wed, 19 Apr 2023 19:13:43 +0000

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:

Table Of Contents

What Is Metals & Mining Investment Banking?
Recruitment: Tunneling Your Way into Metals & Mining Investment Banking
What Do You Do as an Analyst or Associate in the Group?
Metals & Mining Trends and Drivers
Metals & Mining Overview by Vertical
Metals & Mining Accounting, Valuation, and Financial Modeling
Example Valuations, Pitch Books, Fairness Opinions, and Investor Presentations
Metals & Mining Investment Banking League Tables: The Top Firms
Exit Opportunities
For Further Reading and Learning
Is Metals & Mining Investment Banking for You?
Want more?

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:

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.
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.
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:

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.
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.
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 Core 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, P / E, and maybe TEV / EBIT or even TEV / NOPAT).

Most of the differences emerge on the mining side.

As with oil & gas, I’d split the differences into three categories:

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.
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.
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:

Split the company into “developed mines” and “undeveloped/potential mines.”
Assume that the existing mines produce over their lifespans (usually 10-20 years, and sometimes more) until they become economically unviable.
Assume the development of the new mines, which might take years or decades, and estimate the CapEx required for each one.
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.
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.
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.
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.
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)
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 investment banking 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.

Want more?

Investment Banking in Australia: Impossible Barriers to Entry, or the Best Place for a Long-Term Finance Career?

M&I - Brian — Wed, 15 Feb 2023 18:04:31 +0000

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

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

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

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

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

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

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

Investment Banking in Australia: Top Banks

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

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

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

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

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

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

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

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

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

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

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

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

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

Locations, Industries, and Deals

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

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

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

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

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

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

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

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

Investment Banking in Australia: Recruiting and Interviews

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

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

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

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

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

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

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

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

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

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

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

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

Investment Banking Target Schools in Australia and the Top Degrees

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

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

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

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

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

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

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

In most cases, banks want candidates with WAMs above 75%, which is roughly comparable to a 3.7 – 3.9 GPA in the U.S. [NOTE: 75% may be closer to a 4.0 in the U.S. system – see the comments to this article.]

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

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

Investment Banking in Australia: Salaries and Bonuses

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

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

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

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

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

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

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

IB Lifestyle and Hours in Australia

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

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

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

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

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

Investment Banking in Australia: Exit Opportunities

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

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

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

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

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

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

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

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

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

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

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

The most common paths for bankers in Australia include:

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

Investment Banking in Australia: Final Thoughts

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

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

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

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

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

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

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

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

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

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

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

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

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

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