Search Results for “india” – 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.

The CFA for Investment Banking: Do the New Changes Make It Worthwhile?

M&I - Brian — Wed, 15 Nov 2023 19:38:18 +0000

I’ve now been writing about finance careers for almost 20 years, and the topic of the CFA for investment banking never seems to die.

I first criticized the CFA in a 2009 article, which generated a lot of angry comments.

Not much has changed since then.

People online still argue about the merits of the CFA, whether they “need it” to win various roles, and its usefulness compared with an MBA, high grades, additional internships, or becoming a Twitch gaming superstar.

I got so tired of these debates that I never planned to cover this topic again.

But earlier in 2023, the CFA Institute announced the biggest changes to the program since it started.

The website 300 Hours has a detailed analysis, but here’s my quick summary:

Expanded Eligibility: You can now register if you have 2 years remaining in university (rather than 1 year previously).
Financial Modeling or Python / Data Science / AI: Starting in 2024, you must complete a “Practical Skill Module” on one of these topics for Levels I and II of the exam.
Reduced Study Volume: They’re reducing the amount of material, so you “only” study for 300 hours per level. And they’re moving to shorter online Learning Modules with spreadsheets and videos rather than lengthy readings.
Specialized Pathways: For the Level III exam, you can focus on portfolio management, private wealth, or private markets.

On the surface, these changes address some big problems with the CFA:

The lack of relevance to many finance careers and the limited practical skills tested.
The huge time commitment required to pass the exams.
The timing – The CFA is not very helpful in your last year of university due to the IB recruiting timeline.

So, should you make the CFA part of your recruiting strategy?

The TL;DR About the CFA for Investment Banking

I’ll go into “consultant mode” so I can sum up the traditional problem with the CFA via a 2×2 matrix:

The additions of financial modeling, Python, or data science/AI and the reduction in study materials shift it in a more positive direction:

But it’s an incremental shift because you’re still looking at 300 hours just for Level I.

Your time is still better spent on everything else in the “High Potential Benefit” column.

A total study time of 300-400 hours is approximately 10-15 hours per week for 6 months.

In that same time, you could:

Contact 100 bankers and conduct informational interviews with at least 10-15 of them.
Complete an Excel or financial modeling course or the most relevant parts of one (see our 10- and 20-hour study plans). Don’t spend 100+ hours on this, but 10-20 is fine, especially since you’ll learn technical questions simultaneously.
Significantly improve your resume through several drafts.
Complete a part-time internship at a local private equity firm, venture capital firm, or search fund.

Even with the announced changes, the CFA is still not more useful than everything above.

These points go back to the flawed concept of “investment banking certifications.”

In this field, certifications barely matter vs. work experience, academics, interview preparation, and networking.

Certifications exist mostly because they’re easy to sell, and the benefits take a long time to measure – so they often go unmeasured.

The CFA for Investment Banking: Counterarguments

Whenever I point out these issues, people who just studied for hundreds of hours tend to respond violently.

I’ll address here the most common objections and acknowledge the ones that have some validity:

“But I’m a career changer! I can’t do another degree or an MBA, so I need the CFA to get in.”

Please read the articles on lateral hiring and MBA-level recruiting.

If you’re unwilling to do an MBA, you do not have many paths into investment banking past a certain age.

The key problem is that unlike an MBA or even a Master’s degree, the CFA does not give you direct access to recruiters and on-campus recruiting.

In this case, you should focus on finding related jobs in adjacent, less competitive industries (see the lateral hiring article).

“I’m a liberal arts major, so I need the CFA to demonstrate my interest in finance.”

No. You need early finance internships in university to put yourself in the running for an internship at a large bank later, as the recruiting timeline starts ridiculously early.

If you’re starting early, it would be far more useful to take an accounting or finance class, do some self-study, and leverage these skills to win internships.

We even have a finance internship resume template if you have no real work experience.

“The CFA goes far beyond the skills required in investment banking.”

I agree. The CFA covers plenty of material that goes beyond the job of an IB Analyst or Associate… which is exactly why you don’t need it.

For example, they won’t ask about quantitative methods, derivatives, or portfolio management in a standard investment banking interview.

You need to know a wide range of technical and “fit” topics for IB interviews, so don’t bother with material that will not come up.

“But the CFA is useful in my country or region, and many bankers have it.”

This is a fair point.

Especially in many emerging markets, certifications like the CFA or CA (Chartered Accountant) can be more valuable.

In countries like India and South Africa, the CA can even be a pathway into IB roles (but note that this is the “CA,” not the “CFA”).

So, if you’re in a country where the CFA is highly valued, and many bankers have it, passing Level I at some point may make sense.

“I need the CFA to exit the back office.”

Nice idea, but this plan is unlikely to work. See our article on the front vs. middle vs. back office.

In this case, it’s best to use lateral hiring to move into more relevant jobs over time; you could also focus on S&T or markets-facing jobs for a higher chance of making the change.

And if you can afford it, a top MBA or Master’s in Finance would help you more than the CFA.

“I have a low GPA or attend a non-target school. The CFA will help me stand out.”

The CFA might provide a boost, but not enough to erase a 2.5 GPA (for example).

If you’re at a non-target school, the most important point is to start very early – and the CFA won’t help you overcome a late start.

Even with the new eligibility rules, you still can’t complete Level I until you have two years of undergrad left.

But IB recruiting for Year 3 internships takes place in Year 2 (at least at many banks in the U.S.), so this point is irrelevant for students.

If you really want to cite the CFA, you can always write that you’re “studying for it” and plan to take it on a certain date (and if you don’t pass, remove it).

“But I’ve already networked a lot, have good work experience, and am well-prepared for interviews. I don’t want to spend those 300 hours networking, so the CFA is a better option.”

If you’ve already done everything required to win IB interviews and job offers, I agree there are diminishing returns to networking and interview prep past a certain point.

But do you need the CFA if you’re in this position?

You’d be better off learning a new skill, joining a new activity, or doing anything more interesting than studying for another exam.

When is the CFA Useful?

I am trying to be fair and balanced, so here are the best use cases for the CFA:

1) Roles in Portfolio Management (and Some Equity Research and Hedge Fund Jobs)

There’s no question that it matters in many industries outside of IB, such as portfolio management.

If you go into this field, you’ll probably complete several levels of the CFA at some point.

Some equity research teams and hedge funds will also be impressed if you’ve passed it while working long hours.

But I still wouldn’t recommend it as your #1 priority for winning these roles – the quality of your stock pitches and your ability to discuss investment ideas matter much more.

2) Emerging Markets or Regions That Greatly Value It

It can be difficult to judge work experience in emerging markets, and the CFA offers a standardized way to assess skills, which is useful.

But this one depends heavily on where you’ll work and its importance there.

Also, in many smaller/emerging markets, having good work experience in a financial center like London or New York can be enough to get you a job.

**3) You Want to Make a Big Career Change Without an MBA**

There are some situations where the CFA, or at least studying for the CFA, might make sense.

For example, if you’ve worked in corporate law for several years and cannot quit to complete an MBA, the CFA could be a helpful signaling tool.

But I don’t think this strategy would work in most fields; it must be something related to IB but lacking technical skills.

4) You’ve Already Done Everything Else, You Have a Good Job, and Your Firm is Paying for It

Finally, if you’re already in the finance industry, you’re not changing careers, and you’re at a firm that pays for the exam prep and gives you time to study, sure, go ahead.

Passing the CFA will never hurt you.

It’s just that it might not help you all that much for the time and effort invested in it.

The Bottom Line on the CFA for Investment Banking and Other Finance Roles

The 2023 changes from the CFA Institute do make the exam more appealing and relevant for many roles.

Studying for it is easier, the “Learning Modules” are much better than long readings, and the expanded eligibility and specialized paths are nice.

However, these changes don’t solve the fundamental problem: If your goal is getting into investment banking, you could spend these 300+ hours on more useful tasks.

This applies to students and professionals at all levels, but the Return on Time Invested (ROTI) is particularly bad for university students.

If you missed IB internship recruiting, please do not think studying for the CFA will save you.

You need to get work experience ASAP, and if you’re too late for IB roles, you should focus on areas like corporate banking, corporate finance, Big 4 firms, and business valuation firms.

In fields outside IB/PE, the CFA ranges from “potentially useful” to “near requirement,” so it’s impossible to make a universal statement about its relevancy.

If you’re interested in a career where it’s important, sure, go ahead.

Within deal-based roles, the CFA has its uses for certain candidates and in certain regions – but it still wouldn’t make my “Top 5 Things to Do to Get into Investment Banking” list.

The post The CFA for Investment Banking: Do the New Changes Make It Worthwhile? 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?

Is Finance a Good Career Path?

M&I - Brian — Wed, 18 Jan 2023 16:30:36 +0000

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But will this continue going forward? Is finance a good career path?

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

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

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

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

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

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

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

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

The advancement side is a mixed bag.

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

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

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

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

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

In other words, will the high compensation and exit opportunities continue? Is finance a good career path?

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

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

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

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

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

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

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

A few major trends explain this shift:

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

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

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

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

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

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

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

Why the Macro Environment is Now Much Less Favorable for Finance

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

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

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

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

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

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

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

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

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

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

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

The Counterarguments and Why I Might Be Wrong

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

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

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

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

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

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

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

My “2020 to 2040” Predictions

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

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

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

The short, simple answer is:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2022 End-of-Year Reader Q&A: Bank and School Rankings, the “New Normal” Environment, Twitter and Other Bad Deals, and Plans for Next Year

M&I - Brian — Wed, 21 Dec 2022 18:18:11 +0000

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

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

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

…but I found myself not caring that much.

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

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

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

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

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

Bank, School, Dragon, and TV Rankings

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A: First, note that “target schools” do not apply quite as readily to PE/HF jobs because these firms focus on hiring people with full-time work experience (though some firms have been moving into undergrad recruiting).

The list would be nearly the same for private equity, but you might see more variability for hedge funds.

Larger/established firms still care about brand names, but smaller/newer firms care more about performance than pedigree, similar to prop trading firms.

And in fields like corporate finance, much of the recruiting happens at schools that are “semi-targets” for investment banking, such as ones in the #30 – #50 range in the U.S.

Q: Forget ranking banks and schools. What about House of the Dragon vs. Rings of Power?

A: Did ChatGPT write this question?

If you watched both shows and have a functional brain, I don’t understand how you could think they’re even close to comparable.

To me, House of the Dragon was a 6 or 7 out of 10, while Rings of Power was more like a 3 or 4. It wasn’t the worst show I’ve ever seen, but it was a huge disappointment considering the franchise and the budget.

Putting aside all the controversy over the casting and other “woke” elements, the characters in RoP were bland and terrible, and most of the narrative, such as the “origin story” of Mordor, made no sense.

House of the Dragon had issues, such as jarring time skips and some actions lacking logical consequences (e.g., everything Criston Cole does), but I still cared about what was happening and wanted to see the next episode each week.

Q: Other TV recommendations/rankings?

A: Of the new shows/seasons this year, my favorite was the final season of Better Call Saul. The show was a bit slow in the early seasons, but it picked up over time, and the last few seasons are just as good as Breaking Bad.

Andor was also a pleasant surprise and easily the best series on Disney+, with the best writing in the Star Wars franchise since 1980.

I also continued to like Cobra Kai, despite the many contrivances and ridiculous plots, but the show needs to end before it gets even more ridiculous.

Internships and Jobs in the New, Terrible Macro Environment

Interest rates and inflation are up, and deals and bank hiring are way down. What could possibly go wrong?

Q: I’m set to start a BB summer internship next year. With news of hiring freezes, layoffs, and declining deal activity, how can I prepare to win an offer?

Should I learn programming in addition to Excel, PowerPoint, and accounting/finance?

A: All you can do is assume that banks will award fewer full-time offers to interns and plan accordingly (i.e., do some networking for “Plan B” options afterward).

Unfortunately, doubling down on technical skills is unlikely to help much.

You need some proficiency in Excel, PowerPoint, and accounting/finance to do the job, but learning real programming languages such as Python or R is overkill for an IB internship.

Save the technical prep until close to your internship start date (within 1-2 months), and focus on getting to know your group.

Knowing about the Associates and VPs to avoid and the ones to work with will be far more useful than knowing several extra Excel tricks.

Remember that you usually need at least one strong advocate and 0 “no” votes to win a return offer, and plan your time around that.

Q: I’m in a Big 4 Transaction Services group in London, and I want to move into IB.

But all my contacts at banks are saying that they’ve frozen hiring or are preparing to make cuts. How should I change my networking approach? Should I switch to our internal M&A advisory team?

A: This one depends mostly on how long you’ve been there.

If it’s 1-2 years or less, you could stay and see if things improve next year and start networking more aggressively then.

If you’ve been there longer than that, I recommend switching to the M&A group sooner rather than later so you get more relevant experience and don’t get “stuck” in TS.

Having “too much experience” is less of an issue in London because lateral and off-cycle hiring are more common, but there are still some limits, and it always helps to have experience that looks closer on paper.

Q: How will this new environment affect private equity?

On the one hand, fewer deals hurt their returns, but on the other hand, they also have a lot of “dry powder” (committed, unallocated capital).

A: My prediction is that it will be like what happened to many PE firms after 2008.

Yes, they still had plenty of capital, but the funds they raised in 2006 – 2008 performed poorly, and it took years for fundraising and large deals to recover.

Many PE firms bought companies at inflated valuations in 2020 – 2021, which will come back to haunt them over the next few years.

I don’t think PE firms will “fire” many Associates or Analysts, but hiring for new Associates will probably be down for a while.

Q: Does this new environment benefit anyone?

A: The simple answer is that it helps certain hedge funds that trade based on volatility, inflation, or commodities, such as global macro funds. And yes, we will cover commodity trading advisors (CTAs) soon.

I could also see some distressed PE firms and hedge funds benefiting, along with certain infrastructure and real estate funds because of their perception as “inflation hedges.”

Q: What about an updated “Is Finance a Good Career Path?” article?

A: It’s set for January. The short version is that finance is still a fine career, but I expect the outsized pay premium to fall over the next few decades.

The 2020 – 2060 period will be very different than the 1980 – 2020 period, as many of the key trends that boosted tech and finance will diminish or reverse (demographics, interest rates, energy, urbanization, anti-trust, emerging markets, etc.).

Twitter and Other Questionable Leveraged Buyouts

Q: You wrote a skeptical article about the Twitter buyout earlier in the year. Now that the deal has closed, what do you think? Is Elon Musk crazy/unstable?

A: My views haven’t changed much since April – it’s a tough deal because he paid a very high price for a company that will be difficult to turn around:

I was surprised that he fired almost everyone so quickly, but realistically, Twitter didn’t need anywhere close to 7,500 employees to operate.

But the problem is that revenue will also fall if advertisers flee, so even if the company’s margins improve, cash flow, EBITDA, etc., will all decrease in dollar terms.

The biggest problem, though, is that Elon Musk may not be the right person to turn Twitter around.

He’s great at building companies to tackle engineering challenges, such as producing EVs or launching rockets, but Twitter’s challenges are mostly social/legal/ethical.

There’s also something of a contradiction between “free speech” and “advertising revenue,” and I’m not sure how that gets resolved.

Q: Which other large LBOs done in 2022 will turn out poorly?

A: All of them?

Any of the ones on that list with “hung debt” (debt that could not be sold initially and had to stay on banks’ Balance Sheets), such as Citrix, will probably not do well.

But even deals struck before 2022, such as Athenahealth, may not turn out well because PE firms paid insane prices for mediocre assets.

I don’t have the EBITDA multiple for Athenahealth, but it appears to be in the 30-40x+ range for a company growing at 10% (or even declining), which makes the math quite difficult.

Q: Will Microsoft’s acquisition of Activision Blizzard go through? Should It?

A: I think the FTC will probably succeed in blocking it on anti-trust grounds, or it may win concessions that result in much different deal terms (such as guaranteed cross-platform games).

Whether it “should” go through is interesting because Activision Blizzard is a broken company, as anyone who plays games knows.

The culture is terrible, and some of its key franchises are not doing well, so Microsoft could improve the core business.

But Microsoft’s claim that it’s “#3” in games after Sony and Nintendo is also deceptive. While that is true based on market share, MSFT is also around 20-40x bigger by market cap and financial resources.

Unlike its competitors, Microsoft can afford to pour money into unprofitable ventures for years/decades, so most governments will be opposed to these huge deals.

Plans for Next Year

Finally, back to those questions that never go away…

Q: Will you write an updated article on IB in Singapore? What about Australia? India? China? Dubai?

A: There will be updated articles on IB in Singapore, Australia, and Dubai [UPDATE: They’re all here now.]

With other countries and cities, it depends on the overall traffic and interest level. I’m not going to update the old articles for smaller countries, but some larger regions might get new versions.

So, yes, we’ll do something for China and India, but I’m not sure about the others yet.

Q: What about new courses? Venture capital? Project finance / infrastructure? Distressed / restructuring?

A: We added an entire module on venture capital, early-stage companies, and SaaS modeling to the Financial Modeling Mastery (FMM) course earlier this year (see some early feedback below):

It has two full case studies to get you up to speed on the key topics (cap tables, valuation differences, pre/post-money, earn-outs, etc.).

I may also turn it into a separate course in the future, as the current FMM course feels too long and detailed, and these specialized topics should probably be separate.

UPDATE: We decided to split up this entire FMM course, and it’s now available as shorter, separate financial modeling courses.

Other plans for next year include:

New PowerPoint Course – This will arrive in January. It focuses heavily on VBA and macros (10+ hours of training) and will include a custom macro package for PowerPoint, an updated presentation database, 50+ editable templates recreated based on bank presentations, and more.
Insurance / FIG Additions – I plan to update the Bank Modeling course and add insurance models/valuations and case studies on fintech and asset management.
Project Finance / Infrastructure – This will initially be a $100 course based on short case studies, and the price will increase as the content expands.

Q: How long do you plan to write articles for this site? Is there anything new to say?

A: I started this site 15 years ago, so, yes, I am tired of certain topics by now (low GPAs, the CFA, etc.). And most of the core topics have been covered to death.

There is value in updating the articles and covering new areas, such as specific HF/PE strategies, but it is difficult to justify spending 10+ hours per week on it (and some articles take more like 30 hours to research and write).

Also, there’s quite a disconnect between this site’s readership and customers of the courses; in a recent promotion, hardly any sales came from emails sent to tens of thousands of newsletter subscribers.

With all that said, I would like to keep the site going, but the format and frequency are likely to change in the future.

So, I don’t expect to be writing everything for another 15 years, but the site should still exist in some form.

The post 2022 End-of-Year Reader Q&A: Bank and School Rankings, the “New Normal” Environment, Twitter and Other Bad Deals, and Plans for Next Year appeared first on Mergers & Inquisitions.

Oil & Gas Investment Banking: The First Victim of the ESG Cult?

M&I - Brian — Wed, 10 Aug 2022 18:18:07 +0000

With the possible exception of FIG, oil & gas investment banking generates the highest number of panicked emails and questions.

Historically, these panicked questions were usually variations of:

“Will I get pigeonholed? I don’t want to be stuck in oil & gas forever. How do I move around? Help!”

That’s still a concern now, but the panicked questions have shifted to:

“Will ESG kill the energy star? Will oil & gas still exist in 5 or 10 years? Isn’t the entire world going to stop using fossil fuels immediately and switch to solar power for everything?”

I can understand these concerns, but they’re both overblown.

The first one about becoming pigeonholed is more valid, but it depends on your experience and how quickly you move around.

But before delving into the exit opportunities and the long-term outlook, let’s start with the fundamentals:

Table Of Contents

Oil & Gas Investment Banking Defined
Recruiting into Oil & Gas Investment Banking
What Does an Analyst or Associate in Oil & Gas Investment Banking Do?
Oil & Gas Trends and Drivers
Oil & Gas Overview by Vertical
Oil & Gas Accounting, Valuation, and Financial Modeling
Example Valuations, Pitch Books, Fairness Opinions, and Investor Presentations
Oil & Gas Investment Banking League Tables: The Top Firms
Oil & Gas Investment Banking Exit Opportunities
The Future: Will ESG Kill the Oil & Gas Industry?
For Further Reading and Learning
Final Thoughts on Oil & Gas Investment Banking
For Further Reading

Oil & Gas Investment Banking Defined

Oil & Gas Investment Banking Definition: In oil & gas investment banking, professionals advise companies that search for, produce, store, transport, refine, and market energy on raising debt and equity and completing mergers and acquisitions.

In this article, we’ll assume that there are 5 major verticals within oil & gas:

Exploration & Production (E&P or “Upstream”) – These companies explore and drill for oil and gas in different locations; once they find deposits, they produce the energy.
Storage & Transportation (“Midstream”) – These firms transport oil and gas from the producers to the refiners via pipelines, ships, and other methods.
Refining & Marketing (R&M or “Downstream”) – These firms turn crude oil and gas into usable products, such as gasoline for cars and jet fuel for planes.
Integrated Oil & Gas – These companies do everything above and are diversified across geographies. Many are owned in whole or in part by governments (“national oil companies” or NOCs).
Energy Services (“Oilfield Services” or OFS) – These firms “assist” the companies above, typically by renting out drilling equipment (rigs) or offering engineering/construction services. They do not own oil & gas deposits directly.

If you work in oil & gas investment banking, you’ll normally specialize in one of these verticals, which could be good or bad depending on market conditions and your long-term goals.

Different banks classify their oil & gas groups differently.

For example, Morgan Stanley has an “Energy” group that includes oil & gas, while Goldman Sachs and BofA both put it in “Natural Resources.”

Oil & gas may also be grouped with mining, power/utilities, or renewable energy, but these sectors are all quite different in practice.

Recruiting into Oil & Gas Investment Banking

Oil & gas is highly specialized, so you have a substantial advantage if you enter interviews with industry experience or technical knowledge (e.g., petroleum or geophysical engineering).

It’s not “required,” but it can act as a tiebreaker for 2-3 otherwise very similar candidates.

And regardless of your experience, you do need a demonstrated interest in the industry to have the best shot at getting in.

This could mean anything from an energy-related internship, club, or activity to additional classes you’ve taken or some type of family background.

It’s also worth noting that many banks have “coverage” oil & gas investment banking teams and separate “acquisition & divestiture” (A&D) teams.

The A&D teams focus on asset-level deals (e.g., buying or selling one specific oil field rather than an entire company), and they tend to hire people with technical backgrounds, such as reservoir engineers, to assess these assets.

So, if you have a technical background, you will have a much easier time getting into this industry if you target A&D teams rather than traditional IB coverage roles.

Other than that, banks look for the same qualities in candidates that they do anywhere else: a good university or business school, high grades, previous internships, and solid networking/preparation.

You do not need to be an “expert” in the technical details of oil & gas, but you should know the following topics:

The different verticals and how the business models, drivers, and risk factors differ.
Valuation, especially the NAV Model for Upstream companies and the slightly different metrics and multiples (keep reading).
A recent energy deal (ideally one that the bank you’re interviewing with advised on).
An understanding of MLPs (Master Limited Partnerships), including why many Midstream companies use this structure and why some have switched away from it.
Different basins or production regions in your country. For example, if you’re interviewing in Houston, you should know about the Permian Basin, Eagle Ford Shale, and Barnett Shale and how they differ in production and expenses.

Finally, if you are interviewing for a role outside a major financial center – such as Calgary in Canada or Houston in the U.S. – it’s important to demonstrate some connections to that area.

These groups don’t want to hire bankers only to have them run off to Toronto or New York after 1-2 years.

What Does an Analyst or Associate in Oil & Gas Investment Banking Do?

Most people are drawn to the Upstream or E&P segment because they believe it has more real activity.

They’re partially correct; E&P has the most corporate-level M&A activity of all the verticals.

I searched for all oil & gas M&A and capital markets deals worth over $1 billion USD over the last 3 years (worldwide) and got the following results:

Upstream: 88 (mostly corporate M&A with a mix of the other deal types)
Midstream: 85 (mix of asset deals, M&A, debt, and even some private equity activity)
Downstream: 31 (mix of everything, but no private equity activity)
Integrated: 79 (almost all equity and debt offerings and a few asset deals)
Services: 18 (mix of everything, with one notable PE deal)

If you want a more traditional investment banking experience, Upstream is your best bet – assuming that commodity prices have not crashed recently.

Integrated Oil & Gas can also work, but at the large banks, you’ll mostly advise huge corporations on prospective asset deals and the occasional financing.

The Downstream and Services segments tend to have lower deal activity, with many engagements taking the form of “continuous advice” to large companies.

Also, there are few “independent” Downstream companies in major markets like the U.S., meaning there are few sell-side M&A targets.

Many people overlook the Midstream vertical or assume it’s “boring” since storage and transportation companies operate more like utilities.

There is some truth to that, but:

This vertical arguably has the greatest variety of deals.
It’s less sensitive to commodity prices than the others.
And it may be the best bet if you want to get into energy private equity since there is more PE activity, and Midstream buyouts are very specialized.

Oil & Gas Trends and Drivers

The most important drivers for the entire sector include:

Commodity Prices – Higher oil and gas prices benefit most companies in the sector, but not always directly. They encourage companies to spend more to find new reserves and enhance their existing production; lower prices do the opposite. Higher prices also drive demand for supporting infrastructure, drilling, and engineering services.
Oil and Gas Production, Reserves, and Capacity – Upstream companies are in a race against time to replace their reserves as they get depleted, but even if they find additional supplies, it usually takes 12-18 months for them to come online. This time lag means that disruptions to production capacity (wars, sanctions, natural disasters, etc.) can significantly impact prices.
Finding and Development Costs – Also known as F&D Costs, these refer to the total expenses required to discover new reserves and turn them into usable commodities. These generally rise and fall with commodity prices, and higher F&D costs hurt E&P firms but help Energy Services firms by making their services more lucrative.
Capital Expenditures – How much are companies spending to find new reserves and to maintain their existing production? CapEx spending has a ripple effect through the entire oil & gas market, as it affects demand for Energy Services and the volumes of resources processed by Midstream and Downstream firms.
Interest Rates and Monetary Policy – Similar to utility companies, Midstream firms are often viewed as a “safe investment” alternative to bonds. Therefore, higher interest rates tend to make them less attractive; higher rates also make it more difficult for E&P and other firms to raise debt to finance their operations.
Taxes, (Geo)Politics, and Regulations – Has the government increased taxes on oil and gas production or consumption? Did Russia invade another country? Have politicians imposed a “windfall tax” on energy companies? Even the mere hint that governments will encourage or discourage certain activities can change companies’ strategies.

Oil & Gas Overview by Vertical

I’ll walk through the market forces and drivers here and save the technical details for the section on accounting, valuation, and financial modeling.

Exploration & Production (E&P) or Upstream

Representative Large-Cap Public Companies: ConocoPhillips, Canadian Natural Resources, EOG Resources, Pioneer Natural Resources, Devon Energy, PJSC Tatneft (Russia), Ovintiv, INPEX (Japan), Southwestern Energy, Chesapeake Energy, APA (Apache), EQT, Vår Energi (Norway), Aker BP (Norway), and Woodside Energy (Australia).

U.S. companies dominate this list because oil & gas production in countries such as Russia and China is the domain of state-owned Integrated Oil & Gas companies (see below).

Non-state-owned E&P companies have a simple-but-challenging task: expand production while maintaining or increasing their reserves.

Dedicated E&P firms are highly sensitive to commodity prices because they do not have other business segments to reduce the impact if prices fall.

Many smaller E&P companies use hedging instruments such as three-way collars and basis swaps to “lock in” prices, but most only hedge short-term prices.

Because the risk of searching for new energy sources and experimentally drilling is so high, many E&P firms set up joint ventures to distribute the risk.

And even when an E&P firm finds something, there’s significant uncertainty associated with oil and gas deposits.

Companies may classify these deposits as resources (more speculative) or reserves (confirmed by drilling, accurately measured, and economically recoverable using current technology).

There are also different reserve types, such as Proved (1P), Proved + Probable (2P), and Proved + Probable + Possible (3P).

Depending on the company, region, and technical details, its “reserves” might have to be discounted or risk-adjusted by some factor.

Almost every M&A deal in this vertical is motivated by reserve expansion, geographic diversification, and OpEx or CapEx reduction.

For a good example, check out the presentation for Chevron’s acquisition of Noble Energy:

“BOE” is “Barrel of Oil Equivalent,” a metric used to convert the energy produced by natural gas into the energy produced by oil to make a proper comparison.

The key problem for E&P companies is doing everything above while maintaining decent cash flow, which has historically been… a bit of a challenge.

ONE FINAL NOTE: In addition to offering the highest risk and highest potential returns, E&P is also important because it tends to dominate the earnings of Integrated Oil & Gas companies:

In theory, companies like ExxonMobil, Shell, and BP are “diversified,” but if 60-80% of their earnings come from E&P, they’re not that diversified.

Storage & Transportation or Midstream

Representative Large-Cap Public Companies: Energy Transfer LP, Plains All American Pipeline LP, Enterprise Products Partners LP, Enbridge (Canada), Cheniere Energy, Ultrapar Participações (Brazil), Targa Resources, ONEOK, Kinder Morgan, Global Partners LP, Transneft (Russia), DCP Midstream, Petronet LNG (India), and Pembina Pipeline (Canada).

Outside the U.S. and Canada, most storage and transportation assets are provided by the Integrated companies, which explains this list.

Midstream companies act as the “middlemen” between the producers, distributors, and end users.

This vertical is less affected by commodity prices than the others because revenue is based on fees charged * volume transported – and the fees are often based on long-term contracts, as shown in this Evercore presentation to TransMontaigne Partners:

Therefore, if these companies want to grow substantially, they must spend to build, acquire, or expand their pipelines, ships, or storage terminals.

But it’s tricky to do this because most Midstream companies in the U.S. are structured as Master Limited Partnerships (MLPs), which are pass-through entities that do not pay corporate income taxes and distribute a high percentage of their available cash flows (e.g., 80-90%).

So, MLPs do not have high cash balances, and they rely on raising outside capital (mostly debt), similar to real estate investment trusts (REITs).

If Midstream companies want to grow beyond the fee increases written into their contracts and possible volume growth, they need to spend on Growth CapEx and estimate the incremental EBITDA from that spending:

Further adding to the complexity is the GP (General Partner) / LP (Limited Partner) structure used at most MLPs.

The GP is normally a larger energy company that controls the MLP management and operations and owns ~2% of the MLP’s “units.”

The Limited Partners own the remaining ~98% of the partnership but have a limited role in its operations and management, similar to the LPs in private equity.

Complications arise because the dividend payouts do not necessarily follow this 2% / 98% split; there’s usually a set of “tiers” with performance incentives, and the split changes in each tier, similar to the real estate waterfall model.

Many Midstream companies have been consolidating into C-corporations to simplify their structures and reduce potential unitholder conflicts (and because corporate tax rates in the U.S. have declined).

Refining & Marketing or Downstream

Representative Large-Cap Public Companies: Marathon Petroleum, Valero Energy, Phillips 66, ENEOS (Japan), Idemitsu Kosan (Japan), Bharat Petroleum (India), Hindustan Petroleum (India), World Fuel Services, Sunoco, SK Innovation (South Korea), Raízen (Brazil), PBF Energy, and S-OIL (South Korea).

This list is more geographically diverse because not every country has strong oil and gas production, but they all need distribution.

Downstream tends to be the least profitable segment for Integrated Oil & Gas companies because the margins for refining and selling petroleum-based products are usually slim.

The main drivers are each company’s refining capacity and refining margins.

In other words, how many barrels of oil per day can it turn into useful products (gasoline, diesel, heating oil, propane, jet fuel, etc.), and how much can it charge for those products above the price of the crude oil?

Almost every M&A deal in this sector is about improving refining capacity or margins or diversifying the company’s suppliers and geographies, as seen in the Marathon / Andeavor deal presentation below:

If Downstream companies want to grow, they have several options:

Build new refineries – But this is increasingly difficult due to politicians and the ESG crowd; the last brand-new refinery in the U.S. was built in 1976 (!).
Expand or enhance existing refineries – This one explains how refining capacity grew in the U.S. for several decades after 1976, despite no new refineries.
Acquire new refineries or retail locations – Companies can expand existing refineries only so much, so M&A has become a key growth strategy.
Hope for higher refining margins or volume – But most refineries already run at 90%+ of their capacity, so there’s limited room for volume growth.

The most interesting part of this vertical is that higher commodity prices often hurt Downstream companies.

That’s because Downstream firms purchase crude oil from E&P companies, so higher commodity prices translate directly into higher expenses.

For this reason, Integrated Oil & Gas firms have a “natural hedge” when commodity prices increase or decrease, as their Downstream results may offset (some of) their Upstream results.

One Final Note: Some Downstream companies report blowout earnings in periods of high oil prices, but it’s not because of the high oil prices.

Instead, it’s usually because there’s constrained refining capacity, which allows the refining margin to increase, more than compensating for higher crude oil prices.

Integrated Oil & Gas

Representative Large Companies (Public or State-Owned): Saudi Aramco, China National Petroleum Corporation (CNPC), China Petroleum & Chemical Corporation (Sinopec), China National Offshore Oil Corporation (CNOOC), ExxonMobil, Shell (U.K.), TotalEnergies (France), Chevron, BP (U.K.), Gazprom (Russia), Equinor (Norway), PJSC LUKOIL (Russia), Eni (Italy), Rosneft (Russia), Petrobras (Brazil), PTT (Thailand), Repsol (Spain), and Oil and Natural Gas Corporation (India).

Finally, we arrive at the most geographically diverse list of companies.

I had to drop the “large-cap public” part because the world’s biggest oil and gas producers are state-owned or state-backed.

For example, Saudi Aramco is technically a “public company,” but it’s 98% owned by Saudi Arabia.

These companies are like combinations of the Upstream, Midstream, and Downstream verticals – but the Upstream results still tend to dominate earnings and cash flow.

Many of these companies even operate in other industries, such as chemicals and basic materials, so the Sum of the Parts (SOTP) Valuation is critical when analyzing them.

The most important point here is that the incentives for state-owned/backed companies are quite different.

A publicly traded oil & gas corporation owned by a broad set of shareholders in the U.S. has every incentive to increase its production while maintaining decent cash flow.

But state-owned companies do not necessarily want to do this because their goal is to support an entire country and enable certain geopolitical and military goals (e.g., Russia).

So, if they’ve determined that lower production and higher prices support these goals, they will cut production to make it happen (see: OPEC).

Finally, these companies are so big and geopolitically sensitive that significant corporate-level M&A deals are rare.

Instead, expect many asset deals, financings, and smaller buy-side M&A deals.

Energy Services

Representative Large-Cap Public Companies: Schlumberger, Baker Hughes, Halliburton, China Petroleum Engineering, Sinopec Oilfield Service Corporation, Tenaris (Luxembourg), Saipem (Italy), Technip Energies (France), Worley (Australia), John Wood Group (U.K.), TechnipFMC (U.K.), CNOOC Energy Technology & Services (China), PAO TMK (Russia), and NOV.

Energy Services companies depend on the underlying demand from the E&P and Integrated companies that use their drilling, equipment, and other services to find new reserves and produce energy.

The two broad categories are oil & gas drilling and energy equipment & services.

Drilling firms are tied directly to the E&P segment because they own the rigs that E&P firms rent to explore for and produce oil and gas deposits.

Equipment & services firms provide “everything except the rigs,” such as the parts needed to maintain existing wells, transportation services, and even construction for the energy infrastructure.

Key drivers include Upstream CapEx, worldwide rig counts, dayrates, and rig utilization.

Drilling firms’ profits depend on factors such as supply and demand – the # of rigs operating worldwide vs. the # that E&P companies could potentially rent – and the average daily rates they can charge for the usage.

Also, there are different types of rigs, with some firms focusing on offshore or deepwater regions and others focusing on conventional or unconventional (shale and oil sand) resources.

The entire Energy Services vertical is like a “high Beta” play on oil and gas prices.

When prices surge, this segment benefits even more than E&P firms, and when prices fall, this segment takes a beating because rig, equipment, and construction demand plummets.

Oil & Gas Accounting, Valuation, and Financial Modeling

The technical side of oil & gas is quite specialized, but I would argue that it’s less different than something like FIG (especially banks and insurance firms).

The main differences are:

Lingo and Terminology – Particularly in the E&P vertical, a lot of jargon is used to describe the process of exploring, drilling, and operating wells.
Metrics and Multiples – The metrics and valuation multiples also differ because of accounting differences and the importance of a company’s reserves and production.
New or Tweaked Valuation Methodologies – The obvious one here is the NAV (Net Asset Value) Model in the E&P segment, but there are a few differences in the others.

E&P / Upstream Differences

At a high level, when analyzing and valuing E&P companies, you do the following:

Split the company into “existing production” and “undeveloped regions.”
Assume that the existing production declines over time until these reserves are no longer economically feasible.
In the undeveloped regions, assume the company drills X number of new wells per year until its current inventory is exhausted (this will be based on factors like the average well spacing in each area).
Assume that each new well starts producing at its “IP Rate” (Initial Production Rate) and declines over time until total cumulative production reaches the average EUR, or Estimated Ultimate Recovery, for wells in the region.
Build in scenarios for commodity prices, such as high/mid/low for oil, gas, and liquefied natural gas (LNG), and use these to forecast revenue based on production volume * average commodity price.
CapEx and OpEx differ based on the well type and region, with most CapEx linked to “Drilling & Completion” (D&C) Costs and OpEx consisting of items like Production Taxes, Lease Operating Expenses (LOE), and other G&A.
Aggregate the cash flows from all the wells in all the regions to create a cash flow roll-up. Cash Taxes may be complicated because of rules around deductions for different types of depreciation (intangible vs. tangible drilling costs) and depletion.

Other important concepts include working interests and royalties.

“Working interests” are agreements to split both revenue and expenses with another company to reduce the risk of new exploration and production, while “royalties” are percentages of revenue owed to the landowners.

Both need to be factored in to properly calculate revenue, expenses, and cash flow.

Then there are type curves, which are mathematical models used to predict the decline rate of wells based on curve fitting and various inputs:

The NAV Model commonly used for E&P companies extends directly from the projection methodology above.

Essentially, the NAV Model is a super-long-term DCF without a Terminal Value.

The Terminal Value doesn’t make sense in this vertical because oil and gas resources are finite; you can’t assume that a company will keep producing “forever.”

So, you follow the steps above, project the company’s cash flows over several decades, and discount everything to Present Value.

The NAV Model output is split into different regions and reserve types and sensitized based on expected commodity prices, as in this E&P valuation presentation from Evercore:

Finally, a few common metrics and multiples for E&P companies include:

EBITDAX and TEV / EBITDAX: EBITDAX is like EBITDA, but it also adds back the “Exploration” expense because under U.S. GAAP, some companies capitalize portions of their Exploration, and others expense it. EBITDAX normalizes for these accounting differences.
TEV / Daily Production and TEV / Proved Reserves: These remove commodity prices from the picture and value E&P companies based on how much they are producing in Mmcfe (Million Cubic Feet Equivalent of Natural Gas Equivalent) or BOE (Barrels of Oil Equivalent) and how much they still have in the ground.
Reserve Life Ratio and Reserve Replacement Ratio: The Reserve Life Ratio equals the company’s Proved Reserves / Annual Production, and the Reserve Replacement Ratio is the Annual Increase in Reserves vs. the Annual Reserve Depletion from Production. Both measure how effectively an E&P company is discovering or acquiring new hydrocarbons.

Midstream Differences

Projecting Midstream companies is not difficult: assume a gathering capacity, utilization rate, and average gathering fee (usually in a unit like $ per million British thermal units) and base revenue on these drivers:

Expenses can be linked to the revenue, gathering capacity, or volumes processed, and CapEx is split into maintenance and growth (to expand or build new facilities).

The tricky part is understanding the MLP structure and the tax, dividend, and capital structure differences that it creates.

You can still use EBITDA, TEV / EBITDA, and the DCF Model to value Midstream companies, but you’ll also see some additional metrics:

Yields: These are important because MLPs have high and stable Dividend Yields, so they can be compared to other “fixed income-like” equities such as utilities and REITs.
Cash Available for Distribution (CAFD): You can also turn this into an Equity Value-based valuation multiple (P / CAFD) since this cash is available only for the GPs and LPs in the MLP (i.e., it’s after the interest expense and preferred dividend deductions).
Discounted Distribution Analysis: This one is similar to the Dividend Discount Model, but it includes the impact of different “tiers” for the GPs and LPs and differentiates between the cash flow available and the cash flow distributed.

This Goldman Sachs presentation to Arkose has a good summary calculation:

Other Verticals

Some of the metrics and drivers differ in the other verticals, but the accounting and valuation methodologies are all fairly standard: EBITDA, TEV / EBITDA, the Unlevered DCF, and so on.

I’ll link to bank presentations and Fairness Opinions for the other segments below, but they’re not worth expanding on here.

Example Valuations, Pitch Books, Fairness Opinions, and Investor Presentations

Many companies operate across multiple verticals, so I haven’t done a strict screen for pure-play companies in each vertical.

Also, I’m not listing Integrated Oil & Gas companies as a separate category because they’re a combination of the other verticals.

You can find plenty of football field charts and other valuation examples in the links below:

E&P (Upstream)

ConocoPhillips / Concho Resources – Corporate Acquisition (CS, JPM, and GS)
- Deal Presentation
- Fairness Opinions – CS | GS | JPM
Woodside / BHP – Australian Company’s Acquisition of BHP’s Petroleum Business (Barclays, JPM, GS, UBS, MS, Gresham, Rothschild, and KPMG)
Devon Energy / WPX Energy – Merger of Equals (JPM and Citi)
- Deal Presentation
- Fairness Opinions – JPM | Citi
EQT / Rice Energy – This was an “activist campaign” run from within the company in which the Rice brothers gained control of the Board after EQT acquired Rice
- “Activist” Investor Presentation

Midstream

Antero Midstream Corporation / Antero Midstream Partners – “Simplification” deal in which the company turned into a C-corporation (GS, MS, TPH, JPM, and Baird)
Tallgrass Energy / Tallgrass Energy Partners – Financing discussion for a “buy-in” deal, followed by a Blackstone-led leveraged buyout (Evercore, Barclays, and Citi)
- Citi – Discussion of Financing Alternatives
- Evercore – Fairness Opinion for Blackstone LBO
Equitrans Midstream / EQM Midstream Partners – Another MLP “buy-in” deal (Evercore, Guggenheim, and Citi)
- Deal Presentation
- Guggenheim and GS – Preliminary Analysis and Presentation
- Fairness Opinions – Guggenheim | Evercore

Downstream

Marathon / Andeavor (Tesoro) – Corporate Acquisition (Citi, GS, and Barclays)
- Deal Presentation
- Fairness Opinions – Barclays | GS
Idemitsu Kosan / Showa Shell Sekiyu – Corporate Merger in Japan (Daiwa, GS, JPM, Mitsubishi UFJ, Lazard, and Mizuho)
- Deal Presentation
- Fairness Opinions (starting on page 26; very high-level)
Hartree Partners / Sprague Resources – Acquisition of the remaining 25.5% stake; Sprague is a combined Downstream / Midstream company (Evercore and Jefferies)
- Valuation Discussion – Jefferies
- Comparison of Valuation Approaches – Evercore

Energy Services

Enerflex / Exterran – U.S./Canada Cross-Border Deal (RBC, Scotia, TD, and Wells Fargo)
- Deal Presentation
- Fairness Opinion – Wells Fargo (search for “Opinion of the Financial Advisor to Exterran – Opinion of Wells Fargo Securities, LLC”)
Parker Drilling – Bankruptcy/Restructuring Deal (Houlihan Lokey)
- Valuation Discussion – HL
Ensco / Rowan – Merger of Offshore Drilling Companies (GS, Citi, HSBC, and MS)
- Deal Presentation
- Fairness Opinions – MS and GS (starting on pg. 94 of PDF)

Oil & Gas Investment Banking League Tables: The Top Firms

You can get a sense of the top banks in this sector by looking at the lists above, but in short: banks with large Balance Sheets tend to do well.

Oil & gas is very dependent on debt and equity financing, so the bulge brackets have a distinct advantage over smaller/independent firms here.

This is why you repeatedly see firms like JPM, Citi, and Barclays in the deal lists above.

Less Balance Sheet-centric firms such as GS and MS also perform well due to brand and relationships.

In other regions, such as Australia, you’ll find firms like UBS advising on high-profile deals because UBS still has regional strength there.

The same applies to Canadian deals and Big 5 Canadian banks like RBC, Scotia, TD, and BMO.

Evercore is the clear standout among the elite boutiques, and Jefferies is easily the strongest middle market bank and one of the overall strongest for asset-level deals (A&D).

Moelis advises on a smaller number of more complex deals, so you won’t necessarily see them in the league tables, despite a solid team.

Other names worth noting include Intrepid, Tudor, Pickering, Holt & Co. (TPH), and Houlihan Lokey for restructuring deals.

Simmons & Co. was another strong independent in this sector, but it was acquired by Piper Sandler.

Oil & Gas Investment Banking Exit Opportunities

The short answer here is that exit opportunities are good if you stay within oil & gas and not so good otherwise.

Even if you work in a more “generalist” vertical, such as oilfield services, recruiters do not take the time to understand your experience, so they’ll always funnel you into O&G roles.

Another issue is that few private equity firms focus on oil & gas, partially due to commodity price volatility.

There’s a decent amount of hedge fund activity in the sector, especially since many smaller E&P names are poorly covered, but it’s not enough to compensate for the lack of PE firms.

My general advice here is:

If you want to stay in oil & gas, try to work on Upstream or Midstream deals; Midstream is arguably the best for PE roles because Midstream PE funds are very, very specialized, and there’s more activity from financial sponsors.
If you want to move into a generalist role, leave as soon as possible and be prepared to move “down-market” if necessary (e.g., bulge bracket to lower-middle-market PE fund). Another option might be to transfer into a generalist IB industry group

If you want to stay in energy, pretty much anything is open to you: private equity, hedge funds, corporate development, corporate finance, etc.

The main point is that you must decide quickly whether you want to stay or switch sectors.

The Future: Will ESG Kill the Oil & Gas Industry?

You’ve probably seen all the hype about ESG, the “Energy Transition,” “Net Zero” by 2050, and so on.

I am very skeptical of “ESG,” and while I don’t want to delve into my specific problems with it here, Damodaran and Lyn Alden both have good summaries.

That said, you might wonder if oil & gas is still a good sector since it seems like many people want to destroy it.

The short answer is that, if anything, this ESG pressure will increase deal activity in the short term as large companies seek to divest their assets to smaller operators.

And even in the long term – say, several decades into the future – oil and gas will never “go away” for several key reasons:

Lack of Proper Substitutes – For example, in the U.S., 1/3 of oil is used for non-transportation purposes and cannot be easily electrified. Natural gas is even harder to replace because the majority goes to sources other than electricity generation.
Lack of Grid-Scale Storage for Renewables – As long as solar and wind are “intermittent,” they cannot replace fuel sources like coal, nuclear, and natural gas for electricity generation. Technology could change this, but not anytime soon.
China and India Don’t Care – Other emerging markets also fall into this category. Yes, maybe the U.S., Europe, and Japan will attempt to switch off oil and gas, but these places have small and declining populations vs. the rest of the world.
Fossil Fuels Are Required to Build Renewables – To dig up and process the key metals used in solar panels and EV batteries, you need… oh, that’s right, fossil fuels. Google it and look up the processing steps if you don’t believe me.

If you go 500 or 1,000 years into the future, we’ll probably be on different energy sources by then, but that’s not relevant to your career planning.

The bigger issue with O&G is that the sector is always highly cyclical, and the ESG pressures further increase that cyclicality.

For Further Reading and Learning

Yes, we used to offer an Oil & Gas Modeling course but have discontinued it.

I like the sector, but the course needed a complete revamp (~2,000 hours of work), and it wasn’t selling enough to justify it.

We may reintroduce it in the future if I can find an easier/faster way of creating a new version.

In terms of other resources:

News: Oil & Gas Journal, Upstream Online, World Oil, Rigzone, Oil & Gas Today (Australia); sites like the WSJ and FT also have dedicated energy sections.
Industry Research: Search for the Deutsche Bank or Credit Suisse “Energy Primers” for good starting points (I don’t like to link to banks’ internal, non-public materials here); also, check out the coverage from Big 4 firms like Deloitte and PwC. The Alerian MLP Primer is quite good as well.
Books: I’ve never found great books on valuation and financial modeling in this sector, but you can find a few references on Amazon. I’ve heard that Energy Trading & Investing is a useful overview, and the Fisher volume is also a decent introduction.

Final Thoughts on Oil & Gas Investment Banking

If you specialize in oil & gas and stick with it, you can earn and save a lot of money while living in low-cost locations like Houston.

I would also argue that the technical and deal analysis, at least for Upstream and Midstream companies, is more rigorous and interesting than the typical process in a generalist group.

More than ESG or the “Energy Transition” or “Net Zero,” the biggest downsides to oil & gas investment banking are the cyclicality and the specialization.

If you don’t like it, get out early – even if it means trading down to a smaller firm.

The cyclicality matters because you might get poor deal experience for several years and worse exit opportunities for reasons beyond your control.

It won’t matter if you stay in the industry for 10-15 years, but if you’re in it for 2-3 years, it could hurt you.

And yes, if we look 100-200+ years into the future, the oil & gas industry might be completely different or not exist at all.

But by then, we’ll all be dead, cryogenically frozen, or implanted in robots.

So, I’m not sure it matters as long as the cryonics and robots are powered by solar panels.

For Further Reading

Energy Investment Banking in Houston: Pathway into Private Equity, or Another Reason to Move to New York?

The post Oil & Gas Investment Banking: The First Victim of the ESG Cult? appeared first on Mergers & Inquisitions.

Power & Utilities Investment Banking: How to Turn Yourself into an Electrified ESG Warrior

M&I - Brian — Wed, 01 Jun 2022 17:00:22 +0000

The power & utilities investment banking team has a reputation for being “boring.”

Traditionally, the sector was viewed as a defensive play for investors who wanted stable dividends and no drama.

That is still true for the average company in the industry: it is more defensive than something like technology or financial institutions.

But over time, trends like market liberalization, deregulation, the shift to renewables, and the ESG religion “movement” have shaken up a sleepy sector.

We’ll get into these fun developments, but I want to start with the basic definitions:

Table Of Contents

Power & Utilities Investment Banking Defined
Recruiting into Power & Utilities Investment Banking
What Does an Analyst or Associate in Power & Utilities Investment Banking Do?
Power & Utilities Trends and Drivers
Power & Utilities Overview by Vertical
Power & Utilities Accounting, Valuation, and Financial Modeling
Example Valuations, Pitch Books, Fairness Opinions, and Investor Presentations
Power & Utilities Investment Banking League Tables: The Top Firms
Power & Utilities Investment Banking Exit Opportunities
- For Further Reading
Is the Power & Utilities Investment Banking Group Right for You?
Want more?

Power & Utilities Investment Banking Defined

Power and Utilities Investment Banking Definition: In power/utilities IB, bankers advise companies that produce, transmit, and distribute electricity, natural gas, and water on raising debt and equity and completing mergers and acquisitions.

If you’re wondering about “transmission” vs. “distribution,” transmission is the part of the process where electricity is sent from power generation sites over long distances at high voltage levels to substations that are closer to people and businesses.

In the distribution process, the voltage is “stepped down” by transformers and sent to homes and businesses.

The “classification tree” is simple because this sector is quite narrow:

Of these verticals, electricity is easily the most important one; ~90% of publicly traded utility companies are involved in electricity in some way.

Power companies generate power (from fossil fuels, renewables, and nuclear) and sell it wholesale to utilities companies and other customers. They are often unregulated and do not focus on the transmission or distribution aspects.

Utility companies might generate their own power, but they could also buy some from power companies, and they focus on the transmission and distribution steps. They are also highly regulated and tend to be vertically integrated.

The power & utilities sector has lower volatility than others because electricity, gas, and water are necessities for modern life.

Companies tend to offer high, stable dividend yields, and they finance their massive capital expenditures primarily with debt, with the highest leverage ratios of any industry outside of financial institutions.

It’s also a highly localized industry, with many companies serving specific countries, states/provinces, and cities, and many operating “local monopolies.”

Different banks classify their power & utilities groups differently.

For example, Goldman Sachs puts it in “Natural Resources” or “Public Sector and Infrastructure,” JP Morgan puts it in “Energy,” it’s a separate group at Morgan Stanley, and there’s a “Power, Utilities & Renewables” group at Bank of America.

While there is overlap between power & utilities, infrastructure, oil & gas, and renewables, the industry structure and drivers are quite different, so we’re treating it as a separate group.

Recruiting into Power & Utilities Investment Banking

There’s nothing special to note here because power & utilities investment banking is a moderately specialized group (at best).

You have a small advantage if you have a relevant background, such as experience at a power or infrastructure company or in the public sector, but it won’t make a night-and-day difference.

Most large banks have strong power & utilities groups, so you can’t go wrong with any of them.

If you’re recruiting outside the large banks, there are many boutiques in this sector, but they tend to focus on high-growth renewables companies, so it’s not quite the same industry.

Overall, though, there are fewer industry-focused independent/boutique firms than in sectors like technology or healthcare.

That means that power & utilities is not the best sector to target if you’re trying to get into IB from “off the beaten path.”

What Does an Analyst or Associate in Power & Utilities Investment Banking Do?

The most common deal types in this group are debt issuances and asset acquisitions and divestitures.

To get a sense of this, take a look at the number of debt issuances by NextEra Energy (Florida Power & Electric) in less than one year (click the image to view a larger version):

Investors do not view most power/utility firms as “growth companies,” so initial public offerings (IPOs) are fairly rare.

Follow-on equity offerings occur, but they’re usually motivated by concerns such as complying with a debt / total capital ratio set by the government.

Larger M&A deals also happen, but they’re less common than in other sectors because of factors like regulation, which may limit companies’ expansion into new regions.

Asset acquisitions are very common because they’re one of the few growth strategies available to these companies.

Regulators might block large corporate-to-corporate M&A deals and might not allow a company to raise its rates, but they’re less likely to block the acquisition of a single power plant or a smaller transmission network.

Also, the push for renewables has led to many firms divesting oil/gas/coal assets and acquiring ones with less of a carbon footprint.

Leveraged buyouts of entire power & utility companies are not common for similar reasons (regulations, infamous failure stories like TXU, etc.); asset-level deals are more frequent.

Finally, except for one-off scenarios like the Pacific Gas & Electric bankruptcy, restructuring deals are not common in this sector.

If they were, lenders wouldn’t accept 50% debt / total capital ratios.

Power & Utilities Trends and Drivers

Some of the most important drivers include:

Economic Growth – Strong economic growth tends to result in higher electricity usage, but people don’t necessarily use more water or gas when growth is higher. Utilities often benefit when economic growth weakens because a recession hurts them less than other industries.
Demographics – Population growth and demographics are the most important long-term drivers that affect utility demand. For example, is the birth rate rising or falling? What about the new household formation rate? Are people moving to areas where more or less electricity, gas, and water will be required?
Interest Rates and Monetary Policy – Loose monetary policy, such as lower interest rates and expansion of the money supply, tends to benefit utility companies because they can finance their capital expenditures at lower rates. However, when interest rates rise, this financing becomes more expensive, and utilities’ dividend yields become less attractive relative to higher-yielding bonds.
Inflation – Inflation makes fuel and other operating costs more expensive, but regulatory mechanisms sometimes allow utilities to pass on rising costs to customers. Sometimes their “authorized revenue” is even linked to the inflation rate. So, the impact of inflation depends on the regulatory scheme and whether it is expected or unexpected. Unregulated power companies often benefit from inflation because they can react and increase their prices more quickly.
Technological Change (Shift from Oil/Gas/Coal to Nuclear and Renewables) – Government mandates, tax credits, and subsidies have shifted the typical fuel sources for both power and utility companies, and the effects vary widely based on investor sentiment and the policies supporting these changes. It’s safe to say that they have encouraged more deal activity.
Regulation – This affects everything from firms’ capital structures to their revenue, margins, and favored fuel sources, so the impact could be minimal or very large in either direction, depending on what the government changes.

Power & Utilities Overview by Vertical

Electric utilities are the biggest segment, so we’ll focus on them here.

Water is the smallest, so we’ll group water and gas utilities and discuss multi-utilities and power firms separately.

There are very few “pure-play” firms in any of these categories because most firms do a bit of everything.

Electric Utilities

Representative Large-Cap Public Companies: Fortum (Finland/Europe), Enel (Italy), Electricité de France, Korea Electric Power Corporation, Iberdrola (Spain), Tokyo Electric Power Company, EnBW Energie Baden-Württemberg (Germany), Exelon, NRG Energy, Endesa (Spain/Portugal), and Duke Energy.

The biggest electric utility companies tend to have unregulated power generation assets that span multiple states/provinces or even countries (ex: Duke Energy in the U.S. or Fortum/Uniper in Europe).

The smaller players usually operate as vertically integrated “local monopolies” and more closely resemble the traditional view of the utilities sector.

Since electricity cannot be stored or controlled easily but can travel great distances almost instantly, electric utility companies need delivery systems with significant spare capacity to deal with rapid demand fluctuations.

They divide demand into the “base load,” “intermediate load,” and “peak load,” and they manage their networks based on the load factor (peak load minus average load) and the load composition (the weights of different customers, such as residential vs. industry).

These load metrics matter because companies tend to use different fuel sources to meet each type of demand.

The ideal “base load” fuel sources include those with high fixed costs and low variable costs, such as coal, nuclear, and hydroelectric power.

For intermediate and peak loads, companies prefer sources such as oil and natural gas, with lower fixed costs and higher variable costs (since these loads comprise much less time).

Wind and solar might also be used in the intermediate range if they’re available.

Regulated utilities follow the cost of service rules, in which the government sets allowable electricity rates so that utilities can cover their expenses and offer a “reasonable” return for investors.

Lazard’s presentation to the Tennessee Valley Authority on its possible privatization sums up the mechanics quite well on slide 118 (click the image to view a larger version):

All regulated utilities have a “Rate Base,” which represents the total value of their power plants, transmission lines, distributions, and other infrastructure (Net PP&E on the Balance Sheet with some adjustments, such as deductions for unregulated power assets in regulated regions).

Regulators then set the allowed Debt / Total Capital ratio that can fund these assets and the authorized Return on Equity (ROE).

For example, let’s say the company’s Rate Base is $1,000, as in the Lazard example above.

The allowed Debt / Total Capital Ratio is 50%, so the company has $500 of Equity and $500 of Debt to fund its assets (ignoring non-PP&E assets for simplicity).

(Note that the $500 of Equity here refers to the book value of Equity on the Balance Sheet or the Statement of Owner’s Equity, not the market value.)

The Authorized ROE is 10%, so the allowable Net Income is $500 * 10% = $50 (you focus on REO for power/utilities rather than “total capital metrics” like ROIC).

At a 25% corporate tax rate, its Pre-Tax Income is $50 / (1 – 25%) = ~$67.

Regulators then work backward and add the standard Income Statement expenses to determine the Base Revenue Requirement.

Maybe the company’s Pre-Tax Cost of Debt is 5%, so the lenders earn $500 * 5% = $25 in interest.

The company also has $200 in Operating & Maintenance Expenses and $40 in Depreciation.

Adding those up, $67 in Pre-Tax Income + $25 in Interest + $200 in O&M + $40 in Depreciation = $332 for the Base Revenue Requirement.

If the company sells 4 GWh of energy, its “allowable rate” is $0.083 per kWh.

You can already see one major problem with this method: what if the company’s costs suddenly change due to inflation, a fuel shortage, or high demand?

To deal with this issue, some regulators allow “enhanced cost recovery mechanisms” that allow utilities to increase their rates without formally requesting a rate increase.

Another issue is regulatory lag, as power plants and infrastructure can take years or decades to develop – and while that is happening, utility firms may not be allowed to earn more.

Some regulators allow “Construction Work in Progress” to be counted in a firm’s Rate Base to deal with that.

Because of cost-of-service rules, regulated utilities have 3 main growth options:

Cut expenses and boost the actual ROE as close to the Authorized ROE as possible.
Ask the regulators to increase their Authorized ROE, reduce regulatory lag, or permit a different capital structure.
Develop or acquire more power plants and transmission/distribution infrastructure, i.e., increase the Rate Base.

These factors explain why all power & utilities investor presentations have references to the company’s “strong projected Rate Base growth”:

One Final Note: The terminology and calculations differ by region, but the principles are always the same.

For example, in Australia, the Rate Base is called the “Regulated and Contracted Asset Base” (RCAB), but it’s the same idea:

Independent Power Producers (IPPs) or Non-Utility Generators (NUGs)

Representative Large-Cap Public Companies: Uniper (Germany/Europe), Huaneng Power International, RWE Aktiengesellschaft (Germany/Europe), GD Power Development (China), Edison (Italy), NTPC (India), Datang International Power Generation (China), Huadian Power (China), Vistra (U.S.), AES (U.S.), Drax (U.K.), Enel Generación Chile, and Meridian Energy (New Zealand).

Many of these companies are subsidiaries of larger utility/power companies, and most of the biggest ones operate in China.

Power generation is the most complex and expensive part of the electricity delivery system, which explains why many companies doing it operate as unregulated entities (higher prices).

When analyzing these companies, the split of fuel sources and the availability of each one matter a lot:

And apologies to the faithful ESG warriors out there, but each fuel source, including renewables, has its advantages and disadvantages.

For example, coal power plants are expensive, emit the most carbon, and require high upfront spending for their infrastructure, but their variable costs are low since coal is cheap.

Gas plants are smaller and cheaper to build, and they emit less carbon, but their variable costs are higher – so gas tends to be used for intermediate and peak demand.

Renewables like solar and wind also have higher upfront capital costs because the power generation sites are far from populated areas, which means more infrastructure.

And yes, they do not emit carbon once operational, but they’re also less dependable until storage technology gets much better.

Since fuel is the biggest expense for power companies, one of the most important metrics is the gross utility margin, or the revenue generated by the sale of electricity minus the fuel costs.

This margin goes by different names based on the fuel source as well (“spark spread” in natural gas, “dark spread” in coal, and “quark spread” for nuclear).

Other important metrics include the dispatch curve (power supplied vs. the variable costs of power generation), the capacity and utilization of individual plants, and the reserve margin (total generation capacity minus peak demand).

Finally, you need to understand the basic units that allow you to calculate revenue.

For example, if a solar installation has a 20 MW capacity, a 15% net capacity factor (due to weather, the day/night cycle, peak power periods, etc.), and power prices are currently $50 per MWh:

Capacity = 20 MW
Annual Energy Production = 20 MW * 24 hours * 365 days * 15% = 26,280 MWh
Annual Revenue = 26,280 MWh * $50 per MWh = $1.3 million

In the projections, you’d apply an escalation factor to the power prices and operating expenses and a “degradation factor” to the capacity because of wear and tear.

Gas & Water Utilities

Representative Large-Cap Public Companies: Naturgy Energy (Spain/Latin America), Korea Gas, ENN Natural (China), Tokyo Gas, AltaGas (Canada), Sabesp (Brazil), American Water Works, Southwest Gas Holdings, Beijing Enterprises Water Group, and Rubis (France/Europe).

Some of the key drivers and metrics for electric utilities are also important here.

For example, regulated water and gas companies focus heavily on their Rate Base, capital structures, and CapEx, often using these factors to justify deals:

The key differences are as follows:

There are very few publicly traded water companies because in many countries, such as the U.S., 90% of water and waste management is managed by municipal governments. Most of the biggest water companies are part of the larger, diversified companies in the Multi-Utilities segment (see below).
In the U.S., many gas utilities operate as regional monopolies called “Local Distribution Companies” (LDCs) that serve specific geographies. Multi-state and multi-country companies with some unregulated assets are less common than in electric utilities.

Gas and water can be stored more easily than electricity, so the distribution networks don’t need as many special features.

That makes the companies operationally simpler, at least if you focus on pure-play firms.

Multi-Utilities

Representative Large-Cap Public Companies: E.ON (Europe), ENGIE (France), Veolia Environnement (France), National Grid (U.K.), Centrica (U.K.), A2A (Italy), DTE Energy (U.S.), Hera (Italy), Dominion Energy (U.S.), Consolidated Edison (U.S.), Sempra (U.S.), Abu Dhabi National Energy Company, and AGL Energy (Australia).

Many companies in this sector do a bit of everything because there’s significant overlap between different types of utilities or, in banker speak, “synergy opportunities.”

For example, gas and electric utilities both need to install meters to measure customers’ usage and bill them, so why not combine the functions into a single device that one technician can install?

Also, since rising fuel prices represent a major risk factor for both, an electric company that relies on natural gas might be able to hedge some of the risk by acquiring a gas utility and selling gas when prices rise.

When analyzing these companies, you need to divide them into their respective segments and consider which ones are regulated vs. unregulated.

The Cost of Capital, Rate Base, Authorized ROE, and even the Debt and Equity percentages may differ for different segments:

Power & Utilities Accounting, Valuation, and Financial Modeling

There are some differences on the technical side, but this group is not nearly as specialized as real estate, FIG, or oil & gas.

Most operational/projection differences relate to the concepts already discussed above, such as the Rate Base, Authorized ROE, and Capacity/Production calculations (something like Return on Assets (ROA) could also come up, but is much less important than ROE).

As a result of these points, you often make CapEx and the Rate Base the key drivers and then “back into” revenue based on allowed price increases.

It is 100% possible to use standard valuation multiples, such as P / E and TEV / EBITDA, to value power/utility companies, and you’ll see many examples in the Fairness Opinions below.

However, there are a few industry-specific or specialized multiples as well:

Enterprise Value / Rate Base (TEV / RB): The Rate Base represents all investors in the company and determines its allowable revenue and earnings, so it’s perfectly valid to turn it into a valuation multiple.
Equity Value / Book Value (P / BV) or Equity Value / Tangible Book Value (P / TBV): Since Book Value, or Common Shareholders’ Equity, is a percentage of the Rate Base for regulated utilities, you can also split off this equity portion and turn it into a valuation multiple. As with banks, utilities with higher ROEs tend to trade at higher P / BV multiples.
Enterprise Value / Capacity ($ per MW): Finally, for power generation companies, capacity is the key top-line driver that determines revenue. It affects all investors, so TEV / Capacity multiples are sometimes used.

You can see an example of an industry-specific multiple (EV / RCAB in Australia) if you look at APA’s presentation used in an attempt to outbid Brookfield for AusNet:

The Sum of the Parts Valuation is a very important methodology in this sector, and you see it in all types of valuations and Fairness Opinions because so many companies operate across multiple segments.

For example, take a look at these valuations for a complex reorganization of Enel Group in Chile:

Example Valuations, Pitch Books, Fairness Opinions, and Investor Presentations

Since many of these companies and deals involve multiple verticals, I’m not splitting up this list like that.

Instead, I’ll make a short note of the deal type and banks involved.

You can find plenty of valuation football fields in the links below:

Tennessee Valley Authority (TVA) – Potential Privatization or Spinoff (Lazard)
- Strategic Assessment Presentation – This is the most detailed presentation you will find in this sector (139 slides!).
- Article with Background Information
Exelon / Constellation Energy – Spinoff (MS and Centerview)
- Investor Presentation
National Grid / PPL – Divestiture of U.K. Utility Business (Barclays, GS, and JPM)
- PPL Investor Presentation
Brookfield and Other Investors / AusNet (Adara Partners, Citi, and BAML) – Heavily contested utilities deal in Australia
JPM Infrastructure Investments / South Jersey Industries (Centerview and BAML) – Primarily a natural gas utility
- BAML – Fairness Opinion
- Earnings Presentation with Note About the Deal
Aqua America (nka: Essential Utilities) / PNG Companies (GS, Moelis, RBC, and MS) – A water utility acquiring a gas utility to diversify
- Investor Presentation
Algonquin Power & Utilities (BAML and Wells Fargo as joint bookrunners) – $750 million in Subordinated Notes
- Prospectus
Veolia Environnement / Suez (BAML, Credit Agricole, HSBC, Messier Maris, MS, Perella Weinerg, and FINEXSI) – Huge merger in France in the waster/wastewater management space
Pacific Gas & Electric (PG&E) (JPM, BAML, Barclays, and Citi) – Bankruptcy and Debtor-in-Possession Financing
Enel Chile / Enel Generación (Banchile, Econsult, LarrainVial, and Asset Chile) – This was a complicated reorganization deal with a combined merger and public tender offer
Avangrid / PNM Resources (BNP, MS, and Evercore) – Power generation and electric utility merger
- Investor Presentation
- Evercore – Fairness Opinion

Power & Utilities Investment Banking League Tables: The Top Firms

It’s tricky to determine the “top banks” in this sector because many deals are asset acquisitions that do not show up in the league tables since the deal sizes are undisclosed.

Also, there are classification issues because power & utilities investment banking overlaps with other groups such as renewables and natural resources.

However, if you ignore all that and focus on the league tables by deal value, you’ll see names like Bank of America, JP Morgan, RBC, Goldman Sachs, Morgan Stanley, and Barclays as leaders.

Some of these focus on larger corporate-level deals (GS), others are stronger in conventional energy (Barclays), and others are stronger in renewables (BAML).

Citi is also quite active in the sector but tends to work on asset-level deals more than corporate ones.

Among the elite boutique banks, Evercore and Lazard are quite active, as are Moelis, Centerview, Guggenheim, and Robey Warshaw (more of an “up and coming” elite boutique?).

Some of the Big 5 Canadian banks are also well-represented on these deals, and “good but not quite elite boutique firms” such as PJ Solomon also show up.

There’s also Nomura Greentech, which is very active but only on renewable deals.

Similarly, most boutique banks in the space focus on renewables: Marathon, CohnReznick, Onpeak, and Green Giraffe are some examples.

Power & Utilities Investment Banking Exit Opportunities

Contrary to what you might think by reading this article, the exit opportunities out of power & utilities investment banking are quite broad.

Yes, you have an advantage if you aim for something highly relevant, such as an infrastructure private equity firm or corporate development at a power company, but you’re not precluded from more generalist opportunities.

You’re probably not a great candidate for venture capital and growth equity roles except for those focusing on the renewables sector, but the other standard opportunities are all feasible (hedge funds, private equity, corporate development, etc.).

On the other extreme, you probably wouldn’t be a great candidate for distressed investing roles because most debt issuances in this sector are investment-grade.

For Further Reading

Some good information sources include:

News: Utility Dive, S&P Energy News and Research, Power Mag, Energy & Utilities, Transmission & Distribution World Magazine, and FT Utilities
Industry Research: Deloitte, KPMG, PricewaterhouseCoopers, and Ernst & Young
Books: Fisher Investments on Utilities, Principles of Utility Corporate Finance, and a metric ton of books on renewables

Is the Power & Utilities Investment Banking Group Right for You?

So, you get solid exposure to many debt, M&A, and asset deals, fairly broad exit opportunities, and you can specialize without becoming overly specialized.

What’s the downside of power & utilities investment banking?

Some would say that it’s “boring,” but with all the tech trends, policy changes, and ESG craze, I don’t think that’s necessarily true.

The biggest real downside is that you often work on the same types of deals repeatedly – even in different verticals – so there is less variety than in a healthcare or consumer/retail group.

But if you don’t mind that, or you can find a group with more varied deal types, this might not be a downside at all.

Just remember to reduce your carbon emissions before applying, or your ESG score might stop you from getting a job – even if your GPA is fine.

Want more?

Real Estate Investment Banking: The Best Way to Make Yourself Indispensable?

M&I - Brian — Wed, 21 Jul 2021 17:29:16 +0000

Talk to anyone looking to move into investment banking, and they’ll have one big, overriding fear.

No, not the hours, the psychological and physical abuse, or the extreme difficulty of breaking in.

They’ll be worried about the exit opportunities – specifically, working in a group that doesn’t offer many.

This explains why many prospective bankers avoid overly specialized groups, with financial institutions and oil & gas at the top of the list.

But there may be one exception to this rule: real estate investment banking.

If you work in REIB, you’ll most likely stay in a real estate-related role afterward.

But the difference is that there are far more finance roles in and around real estate than in the other sectors.

You can go into commercial real estate and work with individual properties, join a real estate private equity firm, work in real estate lending, go to a commercial mortgage-backed securities (CMBS) group, and more.

But before putting the exit-opportunity cart before the breaking-in horse, let’s start with some key definitions:

Investment Banking Industry Groups: Real Estate

Real Estate Investment Banking Definition: In real estate investment banking (REIB), professionals advise entire companies in the REIT, gaming, lodging, homebuilding, development, and real estate services segments on raising debt and equity and completing mergers, acquisitions, and asset sales.

You have to be careful with this definition because many firms, such as CBRE and Jones Lang LaSalle (JLL), also have “real estate investment banking groups.”

In most cases, however, these groups help raise debt and equity for individual properties, not entire companies – so it is not actual “investment banking.”

(Note that this point has changed over time due to deals such as JLL acquiring HFF, a real estate IB firm, which strengthened JLL’s investment banking capabilities.)

Similarly, banks such as Goldman Sachs might have separate “Real Estate Financing” teams, but these groups raise capital for deals involving individual properties.

If the group advises entire companies on equity and debt issuances and M&A deals, it is REIB; otherwise, it’s more like a brokerage role.

The main verticals within REIB are usually:

Real Estate Investment Trusts (REITs) – These entities constantly raise debt and equity to acquire and develop properties, and they’re subject to special rules that eliminate or greatly reduce their corporate taxes. There are also mortgage REITs that invest in loan portfolios rather than property equity, but they operate more like commercial banks and may be covered within FIG.
Gaming – Casino companies, but “gaming” sounds more sophisticated. Restaurant and live-event operations may also be included.
Lodging – Hotels, resorts, and cruise lines.
Home Builders – These firms construct and sell homes, often focusing on specific geographies, price ranges, or home types.
Real Estate Operating Companies (REOCs) and Developers – REOCs are similar to REITs but do not comply with the same rules and restrictions; in exchange, they also pay corporate taxes and may not need to issue debt and equity as frequently. Developers are similar to home builders but operate across all property types, often focusing on commercial rather than residential buildings.
Real Estate Service/Leasing Companies – These are “miscellaneous” companies that offer other services in the sector. One infamous example is WeWork, which attempted to make a business out of leasing office space and re-leasing it at higher rates – until it imploded in a mix of cocaine, MDMA, and cult-like behavior.

Sometimes, RE bankers also advise on the property portfolios of non-RE companies, such as a consumer/retail company that wants to acquire space and build more stores.

Recruiting: Who Gets Into Real Estate Investment Banking?

The same types of candidates who are competitive for other investment banking roles at bulge brackets, elite boutiques, and middle market firms are also competitive for real estate IB roles.

So, it mostly comes down to the quality of your university or business school, your GPA, your previous work experience, and your networking efforts and technical preparation.

You have an advantage if you’ve had previous industry experience, and you probably have an even bigger advantage here because real estate is specialized.

But you’re probably wondering about this question: Can you use other RE roles, such as lending or brokerage, to break into REIB “through the side door”?

The best answer I can give is: “Maybe, but don’t hold your breath because it’s harder than you might expect.”

The problem is that the skill sets are quite different because in most other RE roles available to university graduates, you don’t work with corporate entities the same way bankers do.

So, it’s possible to use one of these RE-related roles to move into IB, but it’s more realistic to use them as an entry point into something like real estate private equity.

If you want to use this strategy to get into banking, you should look for a RE-related role at a large bank; it will be easier to transfer once you’re already inside a big firm.

What Do You Do as an Analyst or Associate in Real Estate Investment Banking?

You can expect to work on the standard transactions: follow-on equity issuances, debt issuances, the occasional IPO, and M&A deals.

But there are a few differences:

Asset Disposals / Spin-Offs – Asset-level deals are far more common among REITs and gaming/lodging operators because it’s much faster and easier to acquire a few properties than an entire company.
Highly Variable M&A Deals – It’s not that common to work on REIT-to-REIT M&A deals because there aren’t that many publicly-traded REITs. Acquisitions of entire companies tend to be more common in the non-REIT verticals.
More Deal Variety – Since real estate is specialized, you’ll be more likely to contribute more to deals like IPOs and debt restructurings that are handed off to other teams (ECM or Restructuring) when they come up in other industry groups.

At most large banks, the model is to cover a few of the largest companies in each vertical and be “on call” for their transaction needs.

But huge M&A deals are not that common among REITs and a few of the other company types, so you’ll spend a fair amount of time pitching and working on follow-on equity offerings, debt issuances, and asset deals.

Real Estate Trends and Drivers

The trends and drivers depend heavily on the sector, even within a specific area such as REITs.

For example, a nursing-home REIT is influenced by different forces than a multifamily (apartment) REIT or an industrial (warehouse) REIT, even though they’re all “real estate investment trusts.”

And once you go outside of that vertical, a high-end casino operator is even more different from, say, an affordable home builder.

Real estate is all about location, which means: “How many people/businesses are moving into an area vs. moving out of it?”

For example, companies like home builders and multifamily REITs are driven by demographics, average income levels, and rent vs. homeownership costs in specific areas.

If younger, higher-income people move into an area at a high rate, and new homes are relatively inexpensive next to renting, new home demand will be higher.

Sectors such as office REITs are driven by business activity in the region and whether companies are expanding, shrinking, or telling employees to work from home.

In the gaming and lodging verticals, consumer discretionary spending drives growth.

These areas are tightly linked to economic conditions and income levels, and they suffer disproportionately when there’s a downturn.

They’re also affected by factors like barriers to entry (licensing and regulations for gambling) and the areas surrounding their key properties.

Finally, technological shifts play an increasingly important role in real estate.

For example, consider the impact of more white-collar professionals working from home:

Offices tend to suffer because fewer employees will be in the office, which reduces demand for space, drives down rental rates, and reduces the probability of existing tenants renewing their leases.
Multifamily properties and home builders benefit because people want larger, separate spaces if they’re working from home.
Industrial assets, i.e., warehouses, also benefit because people working from home tend to shop online, and all those orders are aggregated and distributed from warehouses.
Gaming and lodging companies experience a mixed impact. Casinos near suburbs and exurbs might benefit because they’re closer to peoples’ homes, but fewer people will be inclined to take cruises and fly to distant locations.

Real Estate Sector Overview by Vertical

Banks divide their real estate groups in many different ways, but we’ll continue with the categories above:

Real Estate Investment Trusts (REITs)

Representative Large-Cap, Global, Public Companies: Weyerhaeuser Company (Timber), American Tower Corporation (Cell Towers), Equinix (Data Centers), Prologis (Industrials), Simon Property (Retail), Welltower (Senior Housing), Ventas (Healthcare), Public Storage, Boston Properties (Offices), Equity Residential (Multifamily), and AvalonBay (Multifamily).

There are thousands of REITs worldwide, but fewer than 100 are public companies with over $1 billion USD in revenue.

The largest REITs are based in the U.S., but countries like Australia, the U.K., France, and Canada also have a good number.

REITs allow “normal people” to invest in the property sector without buying entire properties.

So, if someone wants exposure to hotels, apartment buildings, or healthcare facilities, they can just buy a few shares in REITs that invest in them.

REITs tend to specialize in certain geographies and property types, and some even focus on core, value-add, or opportunistic strategies.

But their unique feature is that they pay little to nothing in corporate income taxes if they comply with certain requirements:

Dividend Distributions – A “high percentage” of Net Income must be distributed as Dividends. The percentage varies, ranging from 90% in the U.S. to 75% in South Africa to 100% in some countries.
Revenue or Net Income – High percentages of these must come from real estate sources. It’s 75% of Revenue in countries such as Canada and Germany and 75% of Net Income in the U.S. and U.K.
Real Estate Assets – A high percentage of assets, such as 75% in the U.S. and U.K. and 80% in India, must be real estate-related.

Since REITs are always buying, selling, and developing properties and issuing Dividends, there are several consequences:

Constant Debt and Equity Issuances: REITs cannot build up huge Cash balances because of their high Dividends and acquisition/development spending, which creates the need to issue debt and equity all the time. More fees for bankers!
Alternate Metrics: Selling properties results in Realized Gains and Losses on the Income Statement, which distorts Net Income, and U.S.-based REITs also record huge Depreciation figures on their Income Statements. IFRS-based REITs mark properties to market value, which results in large Fair Value Gains and Losses on the Income Statement, also distorting Net Income.

As a result, you’ll see metrics such as Funds from Operations (FFO) that reverse Gains and Losses and add back Depreciation under U.S. GAAP (some non-U.S. REITs also use this metric but calculate it differently):

Many European REITs use EPRA Earnings, which reverses Fair Value Gains and Losses and adjusts for Deferred Taxes.

Gaming

Representative Large-Cap, Global, Public Companies: Flutter Entertainment (Online), Entain Plc (U.K.), Caesars Entertainment (U.S.), MGM Resorts (U.S.), Tabcorp (Australia), Penn National Gaming (U.S.), Las Vegas Sands (U.S.), International Game Technology (U.K.), Wynn Resorts (U.S.), and Genting Berhad (Malaysia).

Casinos operate worldwide, but activity is concentrated in a few hot spots, such as Las Vegas and Atlantic City in the U.S. and Macau in Asia.

Online gaming companies are now major players in the market as well, but sometimes they are considered technology or media companies, depending on the bank.

Like retail companies, offline casino operators care a lot about the # of square feet or square meters and the $ per sq. ft. or $ per sq. m figures.

They also manage metrics such as the # of slot machines, # of table games, # of hotel rooms, and # of food and beverage outlets for each property:

Accounting and valuation are fairly standard in this sector because companies do not have to follow the special rules for REITs unless they happened to be structured as REITs.

Since gaming companies are heavily dependent on leases, it’s critical to understand the rules for lease accounting.

EBITDA under U.S. GAAP is not the same as EBITDA under IFRS due to these rules!

M&A deals in the gaming sector are often motivated by geographic expansion, especially since gambling is heavily taxed and regulated by most regions and cities.

Lodging

Representative Large-Cap, Global, Public Companies: Accor (Europe), Marriott International, InterContinental Hotels, Huazhu Group, Hilton, TUI Group (Germany), H.I.S. (Japan), Shangri-La Asia (HK), and Shanghai Jin Jiang Capital.

You could also include companies like Expedia and Airbnb in this list, but they don’t own or lease properties directly, so we’re not listing them here.

The lodging sector is, in some ways, the opposite of areas like office and industrial properties with long-term leases: there’s almost no revenue visibility because hotels stays are short-term, and the rates are highly variable.

Therefore, hotel operators are much closer to “normal companies without recurring revenue” in terms of risk and potential returns.

Key drivers here include the occupancy rate, the average daily rate (ADR), and Revenue per Available Room (RevPAR, which equals the ADR * Occupancy Rate).Each company’s business model also differs slightly. For example, does a hotel company own its hotels directly, or does it franchise them out to independent operators? Or does it do a mix of both?

Ownership means more control, brand consistency, and pricing power, but it also incurs higher costs.

Also, does the company simply own/operate/franchise hotels, or does it offer other services, such as guided tours and travel agents?

The more a company depends on these other services, the closer it is to a “normal” services company rather than a real estate-specific company.

As with almost everything in real estate, geographic expansion often motivates M&A deals here:

Home Builders

Representative Large-Cap, Global, Public Companies: Lennar Corporation, D.R. Horton, Sekisui House (Japan), Iida Group (Japan), PulteGroup, NVR, Toll Brothers, HASEKO (Japan), PIK-specialized homebuilder (Russia), Barratt Developments (U.K.), KB Home, Persimmon (U.K.), Meritage Homes, and Taylor Wimpey (U.K. and Spain).

These firms construct and sell homes, usually specializing in a specific home type or geography.

For example, a company might focus on luxury condominium units in the Southeast U.S., while another might build townhomes in the suburbs of the Northeast.

These firms may also offer financing services, so they effectively become lenders in addition to developers.

Demand for new homes is the most important driver in this sector, and it’s affected by everything from the unemployment rate to the family formation rate, wage growth, and the costs of renting vs. owning.

The biggest difference in this sector vs. lodging, gaming, and REITs is that home builders do NOT own or lease their properties for the long term – they build to sell.

Home builders put the homes they’re developing on their Balance Sheets as Inventory, usually split into the “Under Construction” vs. “Finished” categories.

When they sell the homes, they record the sales as Revenue and show the development costs under Cost of Sales or COGS on the Income Statement.

As a result, they cycle through Inventory far more slowly than companies in most other sectors, and the “Change in Home Inventory” may even be a separate line item in a DCF model.

If the company also provides financing, the associated mortgages will appear on the Assets side of the Balance Sheet.

If these operations are significant, banks might even use a Sum of the Parts Valuation or a NAV Model to capture the company’s lending and development activities separately.

For the most part, though, accounting and valuation are fairly standard, so traditional multiples like TEV / EBITDA and methodologies like a DCF based on Unlevered FCF still work.

If you want to see a few differences, take a look at this home builder valuation presentation from Morgan Stanley, based on Brookfield Asset Management’s acquisition of the remaining 30% of Brookfield Residential:

Real Estate Operating Companies, Developers, and Service/Leasing Companies

Representative Large-Cap, Global, Public Companies: Greenland Holdings (China), China Evergrande, Daiwa House Industry (Japan), CBRE, China Fortune Land Development, KE Holdings (China), Jones Lang LaSalle, Cushman & Wakefield, Vingroup (Vietnam), CapitaLand (Singapore), Vonovia (Germany), Leopalace21 (Japan), IWG, Deutsche Wohnen, and Colliers International.

Everything “miscellaneous” goes in this category, ranging from real estate operating companies to companies that develop all sorts of properties, provide title services, and offer property management and brokerage services.

Most of the big companies in this sector are in China because the construction needs in a country of 1.4 billion people are so vast.

It’s more diversified outside of developers, with representation from countries across North America, Europe, and Asia.

It’s difficult to generalize the analytical differences in this sector because they depend on the company type.

Developers are similar to home builders, while REOCs are similar to REITs but with more flexibility around capital raises and dividends (see our dividend yield tutorial).

Meanwhile, leasing, title, brokerage, and property management firms are closer to “normal companies” driven by transaction volume and fees.

Real Estate Accounting, Valuation, and Financial Modeling

Except for REITs, standard modeling practices, valuations, and transaction models apply to most verticals.

This explains why we have an entire course on REIT finanical modeling, but no such courses on casino companies or home builders.

We also have a full course on individual property modeling, though they are quite different from REITs (still good to know, but less important than entire companies in most investment banking roles):

We’ve touched on some of the differences for REITs above, and we even have a crash-course video on REIT valuation.

My short summary would be:

1) Model Drivers and Flow – You start by projecting the company’s “same-store” (existing) properties and then build in acquisitions, developments, and asset sales and forecast the associated revenue and expenses.

2) Key Metrics – As a result of the high Gains and Losses for all REITs and the high Depreciation for U.S.-based REITs, you use alternative financial metrics, such as Funds from Operations (FFO), Adjusted Funds from Operations (AFFO), and EPRA Earnings.

3) Valuation – You also use multiples based on these metrics, which are all linked to Equity Value. For U.S.-based REITs, the Net Asset Value (NAV) Model is a useful way to value the company based on its Balance Sheet:

It’s less useful for IFRS-based REITs because they mark their properties to market value periodically and do not record Depreciation on them.

You could use a standard DCF model based on Unlevered FCF for any REIT, but a DCF based on Levered FCF and a Dividend Discount Model are also acceptable, given the specific requirements to qualify as a REIT:

4) M&A Modeling – Since all REIT-to-REIT M&A deals involve a significant Stock component, you focus on the Contribution Analysis (Will Buyer A and Seller B own the appropriate percentages of Combined Company C?) and the Value Creation Analysis (Could Combined Company C trade at higher multiples than Buyer A or Seller B separately?).

You also care more about accretion/dilution for metrics such as FFO per Share and AFFO per Share than traditional Earnings per Share (EPS)

5) LBO Modeling – Since REITs constantly issue Debt to acquire and develop properties, the traditional “repay Debt over 5 years” framework doesn’t quite work. Instead, most REIT LBOs depend heavily on EBITDA Growth and Multiple Expansion, and they assume that the company’s Debt load will increase over time.

Outside of REITs, there are some minor differences in the other sectors, but nothing huge; you can get the main ideas from the examples in the next section.

One final note: we are considering only entire companies in this section.

If you want to learn about asset-level analysis, please see our guide to real estate financial modeling.

Example Valuations, Pitch Books, Fairness Opinions, and Investor Presentations

Here are some examples:

REITs

Brookfield / GGP – Goldman Sachs

Ventas / New Senior Investment Group – Centerview and Morgan Stanley

Investor Presentation

Brookfield / Rouse Properties – BAML

Equity Commonwealth / Monmouth Real Estate – Goldman Sachs, JPM, and CSCA Capital Advisors

Investor Presentation

Gaming

Crown Resorts / Star Entertainment Group (Australia) – UBS and Credit Suisse

Bally’s / Gamesys (U.S. and U.K.) – Deutsche Bank and Macquarie

Lodging

Hilton Grand Vacations / Diamond Resorts International – BAML, PJT Partners, and Credit Suisse

Marriott / Starwood – Deutsche Bank, Citi, and Credit Suisse

Home Builders

Lennar / CalAtlantic – JPM and Citi

Brookfield Asset Management / Brookfield Residential – Morgan Stanley

Presentation – Deal Analysis, Valuation, and Transaction Updates

Galliford Try / Bovis Homes (U.K.) – Lazard, Numis, HSBC, Rothschild, and Peel Hunt

Investor Presentation

Real Estate Investment Banking League Tables: The Top Firms

Banks with large Balance Sheets tend to perform well because so many real estate deals are financing-related.

So, you’ll see firms like Bank of America Merrill Lynch, Citi, JP Morgan, and Deutsche Bank at or near the top of the league tables.

Goldman Sachs and Morgan Stanley are also among the top performers, and you can add RBC, Wells Fargo, and Barclays to the top 10-15 list.

MS and GS tend to be comparatively stronger in M&A and advisory work, and the others are stronger in equity and debt.

Among the elite boutiques, both Evercore and Lazard perform well, focusing on M&A advisory work.

In terms of other boutiques in the sector, everyone likes to mention Eastdil Secured.

Wells Fargo used to own the entire firm, but they sold the private division while retaining the “public market real estate investment bankers.”

As a result, the current iteration of Eastdil Secured, while a top real estate firm, is not a true “real estate investment bank” that advises entire corporate entities.

On that note, there aren’t many true boutique banks that specialize in real estate; many firms that call themselves “real estate investment banks” are more like debt and equity brokers for property deals.

A few legitimate names include CS Capital Advisors (healthcare and commercial real estate), Ziegler (senior living, among other verticals), and Browns Gibbons Lang & Company (healthcare real estate).

Exit Opportunities

Real estate investment banking offers a good number of potential exit opportunities: REITs, real estate private equity, gaming/lodging/development companies in corporate finance or corporate development, RE-focused hedge funds, and more.

Also, there are vastly more REPE firms than private equity firms are specializing in financial institutions or energy if you compare real estate to the other “specialized” sectors.

You could potentially even move into a real estate lending, real estate debt fund, or CMBS role.

The bad news is that your options are still more limited outside of real estate, even if you happen to have worked with “standard companies” in the sector.

Industry-focused firms and groups still like to recruit candidates with matching experience, so a healthcare PE firm will always prefer healthcare IB Analysts.

The other bit of bad news is that real estate investment banking doesn’t necessarily set you up for all real estate-related opportunities.

For example, property development would be a stretch coming from REIB because the skill sets are so different; you don’t learn the “nuts and bolts” of construction when you work in Excel and PowerPoint all day.

Pros and Cons of Real Estate Investment Banking

This article has been long and detailed, so I’ll make it even longer by including this pro/con list at the end:

Pros

It’s a fairly stable sector in which different verticals always come in and out of favor, meaning that overall deal activity stays in a similar range from year to year.
Since REIB is very specialized, you’re more likely to contribute to all aspects of deals than in other sectors with more “standard” companies.
The group also gives you access to more exit opportunities than other specialized sectors, such as FIG. That said, it’s still worse for exits than a truly “general” group such as healthcare or technology.
You’ll get exposed to a wide variety of deal types because real estate companies frequently raise debt and equity and buy and sell individual assets.

Cons

You could get stuck working on a lot of capital markets deals, especially at the bulge bracket banks; these deals tend to be less interesting than M&A and Restructuring work.
If you’re at a smaller firm, you will do more M&A advisory work, but you’ll also be less likely to work on the biggest, most complex deals.
Since real estate is a more specialized group, it’s not the ideal place for exits into traditional private equity firms and hedge funds (only ones that focus on real estate).

So, you may not quite become “indispensable” after working in real estate investment banking.

But of the more specialized groups, it’s the best option if you like the sector, but you’re not 100% certain you want to commit to it for the long term.

In other words, your career will be a lot more “mobile” than the assets you work with.

MBA Investment Banking Recruiting: How to Use Business School to Break In

M&I - Brian — Wed, 28 Apr 2021 16:47:09 +0000

A long time ago, people argued that MBA programs would decline in popularity as students and career changers switched away from finance and consulting and moved into tech.

There has been a movement toward tech, and business school admissions have trended downward – but it hasn’t been the “collapse” that many predicted.

The main difference is that students now use MBA programs to find jobs in a wider variety of industries.

This guide, though, is all about how to use an MBA degree to get into investment banking at the Associate level.

The most important question here is also the most obvious one: Can you do this?

As you’ll see, the MBA is not always a viable path into the finance industry:

The MBA Investment Banking Path: Can You Do It?

If you’re thinking about this path, you probably fall into one of these categories:

You got started late with undergraduate internships and had no chance to recruit for IB roles.
You changed your career midway through university or after graduating.
You knew little to nothing about investment banking until you were already working full-time but then became interested in it.

As a result, your work experience is too far removed for you to break in as a lateral hire, or you’re overqualified for Analyst roles.

So, you decide to attend an MBA program to get into the industry as a “career changer.”

It sounds like a simple and effective plan – but only if you do it correctly.

The recruiting process for Associate roles in investment banking is the most developed, by far, in the U.S.

There is some MBA-level recruiting in Europe, but direct promotions fill a higher percentage of roles.

In other regions, MBA-level recruiting ranges from “nonexistent” (Australia) to “quite different” (such as in India, where banks recruit Analysts out of the top IIMs) to “it’s there, but relatively small” (Canada, Hong Kong, others?).

Besides your region, you also need to consider the quality of the schools you can get into.

Breaking into investment banking from a “non-target” MBA program (i.e., one that banks do not recruit at) is an uphill battle that’s even more difficult than breaking in from a non-target university.

Why?

First, there are many fewer spots at the Associate level.

Second, a certain percentage of these spots are reserved for students from target schools and Analyst to Associate promotions.

Finally, many senior bankers want to show “loyalty” to their MBA alma maters (primarily the top schools) by hiring students from those schools.

So, if you want to maximize your chances, you should attend an M7 business school in the U.S. or a similar, top program that sends many students into IB (e.g., Stern), or one of the top programs in Europe (LBS, HEC, INSEAD, etc.).

After region and school quality, you also need the right type of work experience to recruit effectively.

Ideally, you’ll have around 2-3 years of full-time work experience in a field that’s somewhat related to investment banking (e.g., consulting, Big 4 transaction services, corporate banking, corporate finance, etc.).

If you don’t, it is possible to “fix” this or make it less of a problem if you complete a pre-MBA internship or if you can win a more relevant job before starting the program.

It’s a bigger problem if you have no full-time work experience, as banks will not take you seriously for Associate roles in that case.

Finally, if you have too much pre-MBA experience, such as 10+ years in a mid-level management role at a normal company, you might be perceived as “too experienced,” though there are ways around this.

In short, to maximize your chances of success in MBA investment banking recruiting, you should:

Plan to work in the U.S. after graduating, with Europe as the next-best option.
Apply for and win admissions to a top program that sends many students into investment banking each year.
Have the right type of full-time work experience (2-3 years up to ~5-6 years in a somewhat related field).

MBA Investment Banking Recruiting: What If You Don’t Meet All These Requirements?

It depends on which requirement(s) you don’t meet.

For example, if you have no chance of getting into the top programs based on your GMAT scores, grades, recommendations, and work experience, it’s best to drop the idea and pursue other paths into the finance industry.

On the other hand, if you can get into the top programs, but your experience isn’t closely related (engineering, marketing, healthcare, etc.), the pre-MBA internship is a potential fix.

Before the program begins, you can cold email boutique PE and VC firms and banks and ask about completing an informal internship there.

If it’s not possible to do this, you could also aim for a “steppingstone role” that serves the same function but in the format of a full-time job for a year or two before business school.

And if you want to use an MBA degree to break into banking in a region with no MBA-level recruiting, sorry, but you’ll have to move or reconsider your plans.

How Do You Get Into Top MBA Programs?

At a high level, you need good grades from university, good GMAT scores, solid work experience at brand-name companies (or a unique activity that makes you stand out), good recommendations, and personalized applications and essays.

The top schools are all extremely competitive, so if you don’t measure up in one or more of those areas, you need to be realistic about your options.

For example, if you don’t perform well on standardized tests, that’s fixable with enough practice.

But if you’ve already been working for 3-4 years in an “average” job (e.g., IT consulting at Accenture), you probably can’t fix that at the last minute.

You can get into *a* business school with that type of experience, but your chances may not be great at the top programs unless you have something unique outside of work.

If you look at your profile and cannot tell where you’d have a good chance, I would recommend contacting an MBA admissions consultant for a reality check.

One final bit of advice: apply as early as possible.

You have a big advantage if you apply and win admission in the first round because:

There’s less competition, so your chances are higher – especially at the top schools.
If you get in, you’ll have more time to network with alumni.
You’ll also have more time to find a pre-MBA internship (if you need one), and you’ll get higher response rates due to the school’s brand name.

What’s the Recruiting and Networking Process Once You Get In?

Many schools will tell you that “recruiting starts after you arrive on campus” or that networking with alumni beforehand offers no advantages.

Do not believe them. Recruiting for MBA investment banking roles starts the minute you confirm your attendance at a specific business school.

You need to do the following once you confirm your plans:

Decide whether or not you need a pre-MBA internship, and if you do, start reaching out to nearby firms to set one up.
Start preparing for interviews and technical questions at least several months in advance.
Figure out your focus in terms of industry/product group and geography. If you float around too much, you will not come away with offers.
Determine your weaknesses and bankers’ likely objections to your candidacy and figure out how to address them.
Network with alumni – if your school doesn’t allow this before the term begins, at least research alumni, make a list, and start contacting them once you arrive on campus.

You should start with the pre-MBA internship point because it’s best to set it up early.

Next, you should do some “basic” technical preparation, especially if you have limited accounting and finance knowledge.

For example, learn or review what the three financial statements are, how they link together, and how to build a 3-statement model and basic DCF model.

You don’t need to go all-out because you only need to know enough to sound well-informed when networking.

Once you’ve done that, figure out your industry/product group and geographic focus and your key weaknesses.

At the MBA level, you can’t afford to spread yourself thin by applying to 5-10 different groups in different cities.

All your communications with recruiters and bankers should be consistent, and focus is the best way to ensure consistency.

Your industry or product group should ideally match your pre-MBA background (e.g., enterprise software sales to technology investment banking or commercial real estate brokerage to real estate investment banking).

Once you’ve finished, you can start networking with alumni via informational interviews and complete more in-depth technical preparation.

How Much Preparation and Networking Time is Required?

It depends on your profile and how much you already know.

For example, if you already have a strong accounting and finance background, you might just need to spend 1-2 months reviewing and completing a few practice case studies and modeling tests.

But if you’re entering business school from a completely different career, you might need closer to 6-9 months of study to absorb the concepts.

With networking, the appropriate start date varies based on the timing of on-campus recruiting at your school, but some approximate guidelines would be:

# of Informational Interviews: You’ll likely need 50+ networking calls across all the banks to get a significant boost.
Time Required: Expect 3-4 months because you have to research alumni, reach out, follow up, send thank-you notes, etc., while working or studying full-time.

When conducting this outreach, you should focus on Associates and VPs initially and get referrals to the senior bankers above them once you’ve spoken.

MBA Investment Banking Interviews: What to Expect for Associate Candidates

The question categories do not differ in MBA-level interviews, so everything in the investment banking interview questions article still applies.

The main differences are:

Deals – Deal knowledge is more important, so you need to know at least one of the bank’s recent deals quite well. This doesn’t mean “memorize all the multiples and financial stats” but rather “Understand and be able to explain the rationale.”
Ethics – You’re also more likely to get “ethical dilemma” questions about how you would respond to clients and teammates in certain situations.
Case Studies – Finally, “verbal case studies” are more common at this level. They might also give you an on-site or take-home test, but many interviews turn into informal case studies where you discuss a specific company.

As with Analyst-level interviews, technical questions tend to be easier at the bulge bracket banks and more difficult at the elite boutiques.

You want to come across as “informed but humble” in interviews.

For example, if they ask whether you can build a certain type of model, don’t immediately say, “Yes” or “I’ve practiced that one a lot.”

Instead, be slightly self-deprecating and try something like, “I can try.”

If they want to probe your skills further, answer the questions you can, but don’t get in arguments or appear too confident.

Overall, about 30-40% of candidates in the top MBA programs who apply for investment banking roles will win at least one IB summer internship offer, and 10-15% of candidates will win an offer at their top choice.

So, it’s reasonably competitive and requires a good amount of time and effort, but it’s also not impossibly difficult.

Performing Well in Associate Summer Internships and Receiving the Return Offer

If you win a summer internship offer, the key strategies for performing well and receiving a full-time return offer are similar to those at the undergraduate / Analyst level.

In other words, be reliable, win at least one strong advocate, make a positive first impression, and fix your flaws over time.

Even if you’re an Associate-level intern, your day-to-day work won’t necessarily be much different from an Analyst intern’s.

You’re still there to make bankers’ lives easier by saving them time and completing repetitive or annoying tasks they don’t want to think about.

And since you’re also new, you probably won’t be “supervising” the other interns or Analysts.

People like to obsess about which banks have the highest full-time offer conversion rates, but winning a full-time return offer is mostly about common sense.

You could always get unlucky if there’s a hiring freeze or the group shuts down, but if you are reliable and make bankers’ lives easier without annoying people, you will probably win the return offer.

MBA Investment Banking Recruiting: Special Cases and Plan B Options

And now we arrive at the fun part: exceptions, special cases, and “Plan B” options if you don’t get into a top MBA program:

Non-Target MBA Programs

In this case, your best bet is to focus on boutique banks that hire Associates.

By “boutique bank,” I’m referring to regional boutique banks that advise on smaller deals and have fewer than 5 offices – not the elite boutiques.

At these firms, sales skills matter a lot more, and you’ll get better hours and more responsibility but also highly variable compensation and reduced exit opportunities.

If you don’t want to do this, you could still win offers at the large banks if you have great work experience before the MBA, all your other stats are in-line, and you network like crazy.

Of course, if that’s you, you could have gotten into a top MBA program, so…

Part-Time / Evening MBA Programs

If the overall quality of your MBA program is high, completing the part-time / evening / weekend version rather than the full-time one shouldn’t make a huge difference.

You just need to make your timing clear to recruiters and bankers (e.g., 3 years to finish the degree with internship availability in Year X).

As much as possible, you want to “act like a full-timer” and still participate in the same events and activities.

The biggest problem might be winning permission to complete an IB internship from your current company.

It’s best to say that you’re doing it to gain directly relevant experience and bring new skills to the table.

You could even frame it as you wanting to work in banking and then return to this company in the future (whether or not that’s true…).

You Have No Full-Time Work Experience Before the MBA

This one is tricky because even boutique banks are unlikely to hire you if you’ve somehow gotten into a legitimate MBA program without any full-time work experience.

Your best bet might be to target industries that are willing to hire candidates without full-time work experience (e.g., corporate finance or commercial real estate) and use one of them to move into IB later on.

You Have Too Much Full-Time Work Experience Before the MBA

With this one, it depends on what you mean by “too much.”

If you have 20+ years of work experience, you’re not going to win post-MBA Associate roles anywhere because you’re overqualified, so the answer is “target other industries.”

But if you have, say, 10 years of work experience, and other candidates have only 3-5 years, there are options.

Once again, you could target boutique firms where sales and client skills matter more than the number of hours you can grind away.

Another idea might be to try “side paths” into the industry, such as working at PE or VC portfolio companies and moving in from there.

For more ideas, see our article on How to Break into the Finance Industry as an Older Candidate.

You’re in a 1-Year MBA Program

With 1-year programs, you need to start the program at the right time so you can complete a summer internship (which is critical to winning a full-time offer in IB).

For a place like INSEAD, that means “start in January.”

The problem is that you’ll need to network and do all the other prep before the term even begins because applications are due within the first month or so.

That’s a bit inconvenient, but it’s still better than the alternative of not being able to complete an internship.

You’re In a 100% Online or Distance MBA Program

This one is another tricky case, and it mostly depends on the reputation of the program.

(And yes, I realize that the distinction between “traditional” and “online” programs has blurred in the current environment.)

The problem with most of these programs is that the large banks do not recruit from them, so the alumni base is very small, and there’s no established recruiting funnel.

Effectively, the “non-target” part matters more than the “online” part.

So, once again, you’ll probably have to target other industries or smaller banks.

MBA Investment Banking Recruiting: What Else?

These are the most important points about investment banking recruiting at the MBA level.

The biggest mistake, by far, is assuming that you can use an MBA degree to “explore your career options” or “figure out your life.”

If you’re interested in other industries or you are not using the degree to earn more money, that might work to some extent.

But if you want to do investment banking, you need to be laser-focused on your goal before the program even begins.

Do that, and the degree will pay for itself within your first few years on the job.