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

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

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

Project Finance vs. Corporate Finance: The Video and Files

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

• Project Finance vs Corporate Finance – Presentation (PDF)
• Simple Project Finance Excel File (XLSM)

Video Table of Contents:

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

What is Project Finance?

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

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

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

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

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

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

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

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

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

Project Finance vs. Corporate Finance: Careers

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

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

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

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

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

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

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

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

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

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

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

Project Finance vs. Corporate Finance: Recruiting

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

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

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

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

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

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

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

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

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

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

Project Finance vs. Corporate Finance: Financial Modeling

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

Types of Assets and Legal Structure

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

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

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

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

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

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

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

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

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

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

Time Frame and Model Structure

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

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

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

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

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

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

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

For Project Finance, though, cash flow is king.

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

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

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

Debt Usage and Terminal Value

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

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

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

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

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

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

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

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

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

Here’s an example in the simple model:

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

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

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

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

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

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

Wait, How Does Project Finance Math Work?

Reading this description, you might think:

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

It’s a 3-part answer:

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

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

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

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

Project Finance vs Corporate Finance: Final Thoughts

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

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

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

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

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

Many people viewed the sector as a short, poorly dressed cousin of oil & gas, but concentrated in places like Canada and Australia.

The two industries have a lot in common, but in the current cycle, different forces are driving mining – such as the demand created by renewable energy, electric vehicles (EVs), and the promised “energy transition.”

The good news is that if you work in mining IB, and your clients produce the cobalt, copper, or lithium that ends up in EV batteries, you can feel good about saving the world.

The bad news is that your clients might also be exploiting underpaid workers and child labor in the Democratic Republic of Congo, which may slightly offset “saving the world.”

But let’s forget about the children temporarily and focus on the verticals, the drivers, deal examples, and the exit opportunities if you escape from the underground mines:

What Is Metals & Mining Investment Banking?

Metals & Mining Investment Banking Definition: In metals & mining investment banking, professionals advise companies that find, produce, and distribute base metals, bulk commodities, and precious metals on debt and equity issuances and mergers and acquisitions.

The concepts of upstream (“find”) and midstream/downstream (“produce and distribute”) still exist, as they do in oil & gas.

For example, an iron ore miner is “upstream” since it extracts the raw materials, and the steel producers that turn that ore into steel and distribute it to customers are downstream.

However, mining companies are usually classified based on their focus metal.

For example, Capital IQ splits up the sector by metal type (aluminum, diversified, copper, gold, precious metals, silver, and steel).

I think this is a bit too complicated, so this article will use these 3 categories:

1. Base Metals and Bulk Commodities – Anything used for energy (coal), as a precursor to other metals (iron ore), or to produce electronics, batteries, and other products (copper, cobalt, lithium, aluminum, etc.) goes here.
2. Precious Metals – Gold is the biggest component here, but metals like silver, palladium, platinum, diamond, and emerald also go in this category. Some of these may be used for non-industrial purposes, such as investment or jewelry, but others, such as silver and platinum, have many practical uses in cars and electronics.
3. Diversified Miners – These companies have a wide global portfolio of mines, and they extract, produce, and distribute just about every metal in the two categories above.

The metals & mining team’s classification varies based on the bank.

Sometimes, it’s in the broad “Natural Resources” group, but it could also be in Industrials, Renewables, or even Power & Utilities.

And in regions where it’s especially important, such as Canada and Australia, metals & mining is often a separate team at banks.

Recruitment: Tunneling Your Way into Metals & Mining Investment Banking

Metals & mining is highly specialized, so you have an advantage if you have a background in geology, geophysics, or mining.

But it’s not necessarily required, and plenty of undergrads join these groups via internships without detailed knowledge of the engineering side.

If you have an engineering background, you might get hired for your ability to read and interpret technical analyses such as feasibility reports and help bankers incorporate them into financial model assumptions.

Aside from that, banks look for the same criteria as always: a high GPA, a good university or business school, previous internships, and networking and interview preparation.

You don’t need to be a technical mining expert to pass your interviews, as all the standard topics will still come up, but you should know the following:

• The main categories of metals and the factors that drive their prices, production, and supply (see below).
• A recent mining deal, especially if the bank you’re interviewing with advised on it.
• Valuation, such as the different multiples used for mining companies and the NAV model in place of the DCF (see below).

What Do You Do as an Analyst or Associate in the Group?

If you’re advising mostly large companies like BHP or Rio Tinto, expect lots of debt deals, occasional M&A mega-deals, and many smaller asset-level deals.

Here’s an example from BHP’s deal activity:

If you’re at a smaller bank that advises growth-stage companies, expect more equity deals, private placements, and sell-side M&A transactions.

Here’s an example from Olympic Steel’s deal activity:

If you’re wondering about the modeling and technical experience, most differences relate to the company type rather than the specific metal.

In other words, a gold miner and a copper miner are slightly different, but they are much closer than a pure-play miner and a pure-play producer.

In practice, you’ll usually work with various companies (miners, producers, vertically integrated, royalty-based, etc.) in your focus area.

Metals & Mining Trends and Drivers

The most important sector drivers include:

• Overall Economic Growth – When the economy grows more quickly, companies need more raw materials for cars, TVs, infrastructure, and everything else in modern life. The sources of growth also matter; emerging markets’ infrastructure spending drove up metal consumption for a long time, but now there’s a rising demand in developed markets due to EVs and renewable energy.
• Commodity Prices – Higher metal prices help upstream mining firms but hurt downstream firms that purchase raw material inputs from other companies. And vertically integrated firms are in the middle since they experience both higher prices and higher costs. Oil, gas, and electricity prices also factor in because most metals are extremely energy-intensive to produce.
• Production and Reserves – All mining companies deplete their resources as they extract more from the ground, so they’re constantly racing to replace them. But new mines take a very long time to come online – years or even decades. As a result, supply and demand shocks tend to make a much greater short-term impact on prices than growth from new projects.
• Capacity and Spreads – Production companies always have a certain amount of “capacity” in their plants and factories, and they earn revenue based on the percentage capacity used to produce finished products and their realized prices. Profits are based on the spreads between the cost of the raw materials (iron ore) and the finished products (steel).
• Exploration and Development (Capital Expenditures) – How much are companies spending to develop new mines and expand existing ones? CapEx spending affects everything in metals, but because of the long lead time required to launch new mines, it’s a greatly delayed effect. On the producer side, you can see how much they spend to build new plants, factories, and processing centers.
• Taxes, (Geo)Politics, and Regulations – Many mining projects are in regions with unstable governments, wars, and other problems. These governments are often eager to charge foreign companies a premium to access their resources, and the rules and taxes around extraction can change at any time.

You might be wondering if “inflation” should be on this list.

It is a driver for precious metals, especially gold, but it’s less of a demand driver for metals with mostly industrial purposes.

Metals & Mining Overview by Vertical

Here’s the list:

Base Metals and Bulk Commodities

Representative Large-Cap Public Companies: ArcelorMittal (Luxembourg), Jiangxi Copper Company (China), POSCO Holdings (South Korea), Nippon Steel (Japan), Baoshan Iron & Steel (China), thyssenkrupp (Germany), Vale (Brazil), Aluminum Corporation of China, Nucor (U.S.), JFE (Japan), Tata Steel (India), Hindalco (India), Hunan Valin Steel (China), Cleveland-Cliffs (U.S.), Freeport-McMoRan (U.S.), and Steel Dynamics (U.S.).

Note that most of these firms are steel producers, not iron ore miners, so they’re closer to “normal companies.”

Also, note that some of these companies, such as Freeport-McMoRan, also mine precious metals, but they’re classified as “copper” since most of their revenue comes from copper.

Finally, some significant companies are missing from this list because they’re state-owned – the best example is Codelco in Chile, the world’s first or second-biggest copper producer.

With those disclaimers out of the way, let’s assume that you’re analyzing a copper mining company. You’ll think about issues such as:

• Production and Consumption: Chile is the world’s largest producer, while China is the largest consumer, which means that shocks in one can greatly impact prices and production.
• Costs: These vary based on the region and metal; for example, some metals are more energy-intensive (aluminum), while others are more labor-intensive. Shipping costs may also be a major factor for some metals, especially those with lower “value to weight” ratios, such as coal and iron ore.
• Key Uses: Since copper is the best conductor of electricity among non-precious metals, it’s widely used in machinery, appliances, batteries, and even electrical wiring for entire buildings.

All mining companies care about their production and reserves and always want to convince investors that they can grow them over time.

Here’s an example from the Capstone / Mantos Copper presentation below:

Companies often go into detail on individual mines, with estimates for their useful lives, annual production, and “all-in sustaining costs,” or AISC.

AISC is usually defined as the cash costs to operate the mine plus corporate G&A, reclamation costs, exploration/study costs, and the required development and CapEx.

Companies often provide long-term production forecasts in their investor presentations, so you don’t necessarily need to make many judgment calls in your models:

Gold and Precious Metals

Representative Large-Cap Public Companies: Zijin Mining (China), Newmont (U.S.), Barrick Gold (Canada), Anglo American Platinum (South Africa), Sibanye Stillwater (South Africa), Zhongjin Gold (China), Shandong Humon Smelting (China), Impala Platinum (South Africa), Sino-Platinum Metals (China), Agnico Eagle Mines (U.S.), and Industrias Peñoles (Mexico).

The big difference here is that the end markets differ – but many precious metals still have industrial uses beyond wealth storage and jewelry (e.g., silver and platinum).

Precious metals miners are driven by many of the same factors as the base metals ones above: reserves, production, all-in sustaining costs (AISC), and the lives of individual mines:

But there are some key differences:

1. Reserves and Extraction – Since metals like gold and diamond are rare, companies usually present their reserves in tonnes and estimate a “grade” they expect to find (in grams or ounces per tonne). On the other hand, gold also requires little to no refining once it is extracted, so at least part of the process is “easier” than the one for base metals such as copper.
2. Global Pricing and Market Dynamics – The value-to-weight ratio of precious metals is high, so the freight costs are insignificant, and they can be shipped anywhere in the world. As a result, they operate in more of a global market, with fewer regional disparities. By contrast, metals like coal, iron ore, and steel are much more localized, and copper and aluminum are in between.
3. Valuation – Since many people perceive gold as a stable, irreplaceable store of value, gold miners often trade at higher multiples than base metal miners (see the examples below).

Precious metals miners earn much less revenue than companies that focus on copper or steel, but the sector gets a disproportionate share of M&A activity because of the factors above.

Diversified Metals & Miners

Representative Large-Cap Public Companies: Glencore (Switzerland), BHP (Australia), Rio Tinto (U.K.), Anglo-American (U.K.), CMOC (China), Vedanta (India), Norilsk Nickel (Russia), Grupo México, Mitsubishi Materials (Japan), Teck Resources (Canada), Baiyin Nonferrous Group (China), Saudi Arabian Mining Company, and Sumitomo Metal Mining (Japan).

These companies are so large and diverse that their performance reflects mostly sector-wide trends rather than regional or metal-specific issues.

This entire vertical is highly concentrated because of the huge barriers to entry and economies of scale at this level.

Companies tend to present their results in a high-level way, rarely going down to the level of individual mines:

So, you tend to create equally high-level forecasts for these firms unless one is a client company sharing much more detailed information with you.

You focus on the mix of different metals, production levels, and long-term prices and use them to project revenue, expenses, and cash flow.

For example, many of these companies have been expecting stronger demand for lithium, nickel, and cobalt to power renewables, so you might tweak your long-term production assumptions based on that:

Metals & Mining Accounting, Valuation, and Financial Modeling

Let’s start with the easy part: there are virtually no differences for “production-only” companies.

One example is Steel Dynamics, which we feature in our 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:

1. Lingo and Terminology – You need to know about different reserve types and resources, mine types (underground vs. open pit), and the extraction and refinement processes used for different metals. Standards like NI 43-101 in Canada or JORC in Australia are also important.
2. Metrics and Multiples – You can use standard multiples, such as TEV / EBITDA, to value mining companies, but you’ll also see a few new ones and some resource-specific metrics.
3. New or Tweaked Valuation Methodologies – As in the E&P segment of oil & gas, there’s also a Net Asset Value (NAV) model for mining companies, and it’s set up similarly (essentially, it’s a long-term DCF with no Terminal Value).

Starting with the terminology, mining companies split their minerals into “Reserves” and “Resources.”

Reserves have a higher probability of recovery, and they’re divided into the “Proved” and “Probable” categories.

Resources are split into Measured, Indicated, and Inferred, with the first two often grouped as “M&I Resources” (I like this name!).

You can see an example of a company’s Reserves and Resources here:

You might build a NAV model based on Reserves if you want to be more conservative or include the Resources if you want to be more speculative (but discounted by some percentage).

The NAV model follows the same steps as the one in oil & gas but uses different inputs:

1. Split the company into “developed mines” and “undeveloped/potential mines.”
2. Assume that the existing mines produce over their lifespans (usually 10-20 years, and sometimes more) until they become economically unviable.
3. Assume the development of the new mines, which might take years or decades, and estimate the CapEx required for each one.
4. Forecast the production levels for each new mine until it becomes economically unviable. There’s usually a ramp-up of a few years in the beginning, a peak, and an eventual decline.
5. Build a price deck with different long-term metal prices. You might assume differences from current levels in the near term, but you’ll set these to long-term assumed averages after the first few years.
6. CapEx will depend on each mine’s reserves and geography, while OpEx and the cash costs to operate the mine will usually be based on a per-unit metric, such as $ per ounce produced for gold miners.
7. Aggregate the cash flows from all the mines, add corporate overhead, and use these to estimate the company’s cash flows over the next few decades. Again, there is no Terminal Value since you forecast production until the mines stop producing at viable levels.
8. The Discount Rate is often fixed at some pre-determined level, such as 5% for gold or 8-10% for copper. You might also add a premium for emerging/frontier markets and mines in the middle of war zones and pirate camps.

I don’t have a great visual of a mining NAV model, but here’s a good example of long-term cash flow projections from TD’s presentation to Turquoise Hill Resources:

And yes, you read that correctly: they forecast cash flow until the year 2100.

In terms of metrics and multiples, this slide from the Gold Fields / Yamana Gold presentation sums it up well:

These multiples are high because gold miners often trade at premium valuations; P / NAV multiples are often below 1x for other miners.

This P / NAV multiple is based on the Net Asset Value methodology output above, but it’s often simplified for use in valuation multiples.

You can still use the TEV / EBITDA multiple, but it’s more appropriate for the diversified miners since their output fluctuates less.

Another common multiple is TEV / Resources or TEV / Reserves, which values a mining company based on its “potential capacity.”

Some banks even combine these metrics and use them to illustrate companies’ relative valuations, as in this example from BMO for Turquoise Hill:

You’ll often see references to metrics like “Au Eq.” and “Cu Eq.”; these stand for “Gold Equivalent” and “Copper Equivalent.”

If a company owns/mines several metals but is dominant in one, you can convert the dollar values of their other metals into this dominant metal to create an “equivalent” metric.

For example, if they have 1,000 ounces of gold and 10,000 pounds of copper, and prices are currently $2,000 per ounce for gold and $4.00 per pound for copper, the “Gold Equivalent” resources are 1,000 + 10,000 * $4.00 / $2,000 = 1,020 ounces.

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

There are many examples here, so I will split these into Base Metals and Bulk Commodities vs. Precious Metals:

Base Metals and Bulk Commodities

• Rio Tinto / Turquoise Hill – Acquisition (CS, Rothschild, RBC, BMO, TD, MS)
  • Deal Process Update (BMO)
  • Deal Process Update and Valuation (TD)
  • Fairness Opinions (starts on page 38)
• Capstone Mining / Mantos Copper – Acquisition (Scotia, CIBC, and GenCap)
  • Investor Presentation
  • Fairness Opinions (go to page 322)
• Westmoreland – Restructuring (Centerview)
  • 13-Week Cash Flow Projections
• Cosan / Vale – Minority Stake (Citi, JPM, Bradesco, and Itaú)
  • Investor Presentation
• Cleveland-Cliffs / AK Steel – Acquisition (Moelis, BofA, CS, GS):
  • Investor Presentation
  • Fairness Opinions – Moelis | GS

Precious Metals

• Gold Fields / Yamana Gold – Acquisition (JPM, BofA, CIBC, Canaccord, Scotia, Stifel)
  • Investor Presentation
• Kinross / Great Bear – Acquisition (BMO, CIBC, GenCap, Canaccord, Trinity Advisors)
  • Investor Presentation
  • Fairness Opinions (page 204)
• Newcrest / Pretium Resources – Acquisition (Lazard, RBC, BMO, Citi)
  • Investor Presentation
  • Fairness Opinions (page 204)
• Impala Platinum / Royal Bafokeng – Acquisition (JPM, Macquarie, Ned Bank, Standard Bank, PSG, BofA, QuestCo)
  • Investor Presentation
• South32 / Sierra Gorda – Minority Stake (UBS and RBC)
  • Investor Presentation

Metals & Mining Investment Banking League Tables: The Top Firms

If you look at the 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?

You might be interested in:

• Investment banking product groups
• Investment banking industry groups
• Industrials Investment Banking: The Complete Guide

The post Metals & Mining Investment Banking: The Full Guide to Ground Zero for the Energy Transition appeared first on Mergers & Inquisitions.

1. Make a lot of money or gain power/prestige.
2. Take little-to-no risk.
3. And work normal, stable hours.

If you’ve read this site before, you know this set of goals is impossible for most finance careers: you take a lot of risk, work long/stressful hours, or both.

But one possible exception lies in sovereign wealth funds (SWFs), which are similar to funds of funds in some ways.

The pitch is that you do a mix of high-level “macro” work and occasional “micro” work, such as direct investments, you may get to live in exotic locations and pay less in taxes, and you work much more normal hours than in other finance jobs.

And while the pay ceiling is lower, it’s not that big a difference until you reach the top levels – especially after factoring in the lower taxes.

I’ll address all these points here and cover the advantages and disadvantages of SWFs, but let’s start with the definitions and overview:

What Are Sovereign Wealth Funds?

Sovereign Wealth Funds Definition: Sovereign wealth funds (SWFs) are state-owned vehicles that invest significant reserves from commodities or foreign exchange assets in various sectors to build up savings, stabilize the government’s revenue during downturns, and diversify wealth and income.

Sovereign wealth funds are the most common in countries with one or more of the following:

1. Commodity Wealth – Oil-producing countries tend to have cash surpluses, especially when oil and gas prices are high.
2. Trade Surpluses – Some countries, like Singapore, are not rich in commodities but serve as trade hubs and generate significant revenue from these activities.
3. Tax Revenues and Pension Contributions – In places like Canada and Australia, the pension or “superannuation” system generates significant funds to invest (but some would call the investment firms there “pension funds” or “superannuation funds” rather than SWFs).

SWFs in places like the Middle East, Norway, and Russia are heavily linked to commodities, while the ones in places like China, Hong Kong, and Singapore have more diversified reserves.

Commodity-linked funds want to diversify and avoid complete dependency on oil, gas, or lithium prices, while other funds are motivated by some combination of diversification and “saving for future generations.”

Sovereign Wealth Fund Strategies

Sovereign wealth funds can invest in almost anything, from equities to fixed income to real estate, infrastructure, private equity, hedge funds, and more.

Some SWFs operate like long-only asset managers (i.e., mutual funds) that allocate their assets top-down and then pick specific indices, companies, and securities that meet their criteria.

Others operate more like funds of funds and delegate much of the investing process to private equity firms, hedge funds, and other asset managers.

More recently, many SWFs have built direct investing teams to pursue minority-stake deals, credit deals, and even control deals for > 50% stakes in companies.

Examples in this last category include GIC and Temasek in Singapore and Mubadala in Abu Dhabi.

Also, many SWFs without official direct investment teams still co-invest with PE firms they’ve invested in, like the private equity fund of funds model.

Some sovereign wealth funds also pursue unconventional strategies.

One good example is the NZ Super Fund in New Zealand, which invests based on “diversifying risk” rather than a traditional asset allocation.

The firm uses passive and active strategies, often deviating from its reference portfolio based on the macro environment.

Sovereign wealth funds have much longer time horizons and more “permanent capital” than traditional PE firms, hedge funds, and funds of funds, and these points create differences in timing, strategy, and willingness to pay.

For example, many SWFs take their time making decisions and are sometimes willing to outbid traditional investment firms in areas like infrastructure assets.

They do not “need” to exit their investments within a specific time frame because they have no Limited Partners, so they can do things that traditional firms cannot.

The Top Sovereign Wealth Funds

You can easily find a list of the “biggest” sovereign wealth funds online: the Government Pension Fund (GPF) of Norway, the China Investment Corporation (CIC), the Abu Dhabi Investment Authority (ADIA), the Kuwait Investment Authority, GIC in Singapore, the Public Investment Fund (PIF) in Saudi Arabia, the Hong Kong Monetary Authority Investment Portfolio, Temasek, the Qatar Investment Authority (QIA), Mubadala, and so on.

Some people would also put CPPIB in Canada (and other Canadian funds) on this list, but these firms are usually classified as pension funds rather than sovereign wealth funds.

But the more relevant question is: “Which of these funds would you want to work at?”

And the short answer is: “Some of the Middle Eastern ones, plus GIC and Temasek.”

These tend to be the funds that pay better, actively recruit new entry-level hires, and do at least some direct investing.

Funds like Mubadala, GIC, and Temasek are good for direct investing work, and ones like ADAI, PIF, and QIA offer competitive pay, even if there’s less direct investing.

Some other large funds might also qualify; unfortunately, there’s little information available on most of them.

I assume you probably need to be a Chinese or Hong Kong national to have a good chance at anything based in China or HK, but I’m not 100% certain of that (feel free to clarify in the comments).

On the Job at a Sovereign Wealth Fund

To understand the nature of the job, you should know what PE Analysts, PE Associates, and HF Analysts do because much of it is similar.

If you compare a junior role at a sovereign wealth fund to these jobs, the work tends to be broader and shallower:

For example:

• Time – Traditional PE: You might dig into 2-3 potential deals each week, build models, and conduct market research. You’ll also spend time supporting existing portfolio companies and reviewing their results. Almost everything you do at the junior level is “micro” in nature.
• Time – SWF: You might spend 50% of your time looking at specific deals and the other 50% on higher-level asset allocation decisions (sectors, strategies, funds, etc.) and supporting your Portfolio Manager’s ideas and requests.
• Presentations – Traditional PE: The “deal review” pace above means that you could make several presentations to the investment committee or Board each month. And each one will take a fair amount of time and effort.
• Presentations – SWF: You will not make nearly as many presentations to the committee or Board; it might be closer to one per month, depending on the number of direct investments you work on.
• Deal Approval – Traditional PE/HF: To win approval for an investment, you don’t necessarily need to please “everyone” – just the key decision-makers. But they will dig into your work and ask detailed questions.
• Deal Approval – SWF: More people will review your process and recommendations, but they won’t go into as much detail as much as a traditional PE Partner. The approval process might take longer (say, 2-3 months rather than 1 month) because more people need to weigh in.
• Depth of Work – Traditional PE/HF: You’ll spend time doing market research, meeting management teams/customers/competitors, and building detailed financial models for any deal that moves past your quick screening.
• Depth of Work – SWF: You’ll still complete many of these tasks, but not to the depth that you would in most PE/HF roles. For example, you might focus on the model’s 2-3 key points that will drive returns rather than getting all 273 line items correct.
• Returns – Traditional PE: The targets vary by fund type and strategy, but traditional buyout funds usually achieve IRRs in the 15 – 20% range.
• Returns – SWF: Targets are often 3 – 5% lower, whether directly stated or implicitly acknowledged. This might not sound like much, but it could be the difference between a 2.0x and 1.6x multiple over 5 years (for example).

If you do direct investing, you’ll be closer to the “PE/HF” side of the spectrum, but there will still be some differences.

For example, minority-stake investments, credit deals, and co-investments in leveraged buyouts are all common.

But control transactions where your fund acquires over 50% of a company are less common, partly because of rules restricting foreign investment ownership in many countries.

Sovereign Wealth Funds: Salaries, Bonuses, and… Carried Interest (???)

You should expect pre-tax compensation that’s ~25% lower than pay at large PE firms at the junior levels.

So, expect something in-line with pay at middle-market firms, such as $200 – $250K rather than $300K+ total.

As you move up, the pay differential increases because base salaries and bonuses increase more slowly, and carried interest is much lower or non-existent; at the Director level, it might be more like a 40-50% difference.

At the senior levels (MD or Partner), earning $1 million or more is still possible, but it’s less common or “expected” than in traditional PE.

But the biggest difference relates to carried interest.

The “Limited Partner” of any sovereign wealth fund is the government, and the government does not like to pay high fees on its investments.

So, carried interest either does not exist or is greatly diminished at most of these funds, which means that the potential upside at the senior levels is much lower than in traditional PE.

Some places offer “shadow carry” or other vesting compensation that’s linked to performance, but the total amount is much lower than in direct investing roles.

That said, there is a tax advantage if you work in the main office of a sovereign wealth fund because the personal income tax rate is 0% in many Middle Eastern countries and only 22% in Singapore.

If you’re a non-U.S. citizen, these rates make a $200K total compensation package go much further than in other countries.

If you are a U.S. citizen, you still must pay U.S. taxes, but you’ll pay a significantly lower rate due to the foreign earned income exclusion.

So, you could easily earn more after taxes than in a traditional PE job in the U.S. or Europe – at least up to a certain level.

Lifestyle, Hours, and Promotions

The good news is that you also work much less in exchange for the reduced compensation.

At the junior level, you might work anywhere from 40 to 60 hours per week (the upper end of the range is more likely for direct teams), which is much less than most IB and PE groups.

Also, taking time off, planning vacations, and having a real life outside work are much easier.

The general attitude is that you’re in the office to work, but you’re not “on call” 24/7.

The bad news is that it can be quite difficult to get promoted, partially because working at a SWF is much more political than most PE firms and hedge funds.

Completely unqualified people sometimes get hired just because they’re connected to Powerful Politician X or Oil Baron Y, and hardly anyone at the top ever wants to leave.

Another issue is that many SWFs only hire local candidates, greatly prefer local candidates, or promote local candidates more quickly.

The classic example is Singapore, where you’ll get promoted more quickly as a Singaporean citizen at funds like GIC.

But it also happens at many Middle Eastern funds, so it’s not Singapore-specific.

If you’re in a SWF satellite office in the U.S. or Europe, this is less of an issue, but promotion there could also be tricky because these offices are smaller.

How to Recruit at Sovereign Wealth Funds and Win Offers

As mentioned above, in some cases, you need to be a citizen of the SWF’s country to have a good shot at winning a job in the fund’s main office.

This varies by fund and region and changes over time, but it is something to consider before you apply for these roles.

Most SWFs do not recruit undergraduates, with some exceptions, such as GIC and Temasek (if you fit their profile).

So, your best option in most cases is to gain traditional investment banking or private equity experience and use that to move in.

It is possible to move in from backgrounds like equity research, hedge funds, or asset management, but you should target groups that do asset allocation and public-market investments rather than deals.

Some larger funds use headhunters, but networking is essential to win these roles because the process is more like off-cycle private equity recruiting.

If you are a U.S. or European citizen with experience at a large bank, you probably have the best shot at Middle Eastern SWF roles at firms like ADIA, QIA, PIF, and Mubadala.

For more about this one, see our coverage of investment banking in Dubai.

Interviews and Case Studies

Just as the investment process is broader and shallower at SWFs, so is recruiting.

A typical process might look like this:

• Round 1: You might speak with HR or investment staff about very standard questions (“Why the buy-side?” “How would you invest in Industry X?” “Why this firm?” “Why this country?”). They might ask you to pitch a stock, but it will be less formal than in ER and HF interviews.
• Round 2: You answer other fit/behavioral questions about your leadership experience, strengths and weaknesses, and so on.
• Round 3: You might have to prepare and present a short case study or investment pitch in this round (~60 minutes). For example, they could give you information about two similar companies (Visa and Mastercard, Google and Facebook, etc.), ask you to recommend investing in one, and have you answer questions from the PMs about your decision.

You are unlikely to get a traditional LBO modeling test, a growth equity modeling test, or even a simple 3-statement modeling test – but there may be exceptions for teams that focus on direct investments.

Unlike the private equity funds of funds process, you are also unlikely to get a “fund evaluation” case study where you recommend investing in a specific PE fund.

Sovereign wealth funds do more than just PE fund investing, so this task might be too niche for many teams.

The technical questions are similar to the standard ones in any IB or PE interview, but you should also expect broader questions about markets and the economy, similar to an asset management interview.

The best way to prepare for the case study or stock pitch is to practice reading about different companies and making decisions quickly.

You won’t have time to build a simple DCF model or do more than look at multiples and qualitative descriptions, so you must think and act quickly based on limited information.

Sovereign Wealth Fund Exit Opportunities

The good news is that at the junior levels, plenty of people at sovereign wealth funds move around to other buy-side roles.

For example, it’s possible to win offers at middle-market private equity firms, funds of funds, family offices, and even venture capital and growth equity firms if you have tech investing experience.

You can also potentially join a portfolio company if you’ve worked in a group that does direct or co-investments.

On the other hand, it is extremely unlikely that you will go from a SWF to a PE mega-fund because they tend to “discount” SWF experience and prefer candidates from the top bulge-bracket banks.

You can get into good business schools in the U.S. and Europe from SWFs, but your chances at the top 2-3 schools are slightly lower because they also tend to discount SWF experience, especially in the Middle East.

That said, if you do IB/PE first and then work at a sovereign wealth fund for 2-3 years, your exit opportunities will be only marginally diminished.

Your chances at hedge funds depend heavily on what you did at your fund.

You can move to strategies like long/short equity if you have experience there, but if you’ve only done high-level asset allocation, you won’t be competitive.

The bad news is that the exit opportunities get much more limited as you move up the ladder to the VP/Principal/Director level.

Most traditional PE firms will not hire SWF professionals who lack normal PE experience at this level, so many people end up “stuck” at SWFs.

They don’t want to leave and take a big pay cut, but they also can’t easily move to other roles that offer similar pay.

Do Sovereign Wealth Funds Live Up to the Hype?

While sovereign wealth funds have their downsides, I would argue that they come close to offering the perfect mix of high compensation and relatively normal hours.

They are especially good in two specific situations:

1. IB/PE Burnout – Maybe you’ve worked in deal-based roles for a few years and enjoyed some of the work but want more of a life and a slower pace. In this case, joining a SWF for 2-3 years can be an interesting option that will set you apart from others without limiting your exit opportunities too much.
2. Long-Term “Buy and Chill” Career – If you do not care about advancing to the MD/Partner level in traditional PE or starting your own PE fund, and you’d be perfectly happy earning $500K – $1 million while working relatively normal hours, senior-level jobs at SWFs can be quite cushy.

The main problem with sovereign wealth funds is that everything between these two career positions is tricky.

Getting promoted can be very difficult and political, you’ll deal with a lot of bureaucracy, and if you stay too long, you’ll likely take a big pay cut if you decide to leave.

So, I’m not sure I would recommend SWFs over traditional PE/HF/VC/GE roles if your main goal is career advancement.

But if you’re willing to make a side trip to the desert for a few years, you might find a few diamonds in the rough right next to the oil wells.

The post Sovereign Wealth Funds: The Full Guide to the Industry, Recruiting, Careers, and Exits appeared first on Mergers & Inquisitions.

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

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

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

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

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

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

Investment Banking in Australia: Top Banks

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

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

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

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

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

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

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

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

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

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

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

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

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

Locations, Industries, and Deals

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

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

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

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

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

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

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

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

Investment Banking in Australia: Recruiting and Interviews

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

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

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

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

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

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

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

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

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

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

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

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

Investment Banking Target Schools in Australia and the Top Degrees

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

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

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

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

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

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

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

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

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

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

Investment Banking in Australia: Salaries and Bonuses

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

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

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

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

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

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

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

IB Lifestyle and Hours in Australia

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

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

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

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

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

Investment Banking in Australia: Exit Opportunities

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

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

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

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

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

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

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

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

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

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

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

The most common paths for bankers in Australia include:

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

Investment Banking in Australia: Final Thoughts

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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):

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.

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.

Further Reading

You might be interested in:

• Management Consulting vs Investment Banking: The Eternal Battle
• From Consulting to Private Equity: How to Make the Leap
• From Wealth Management to Investment Banking: How to Make the Leap
• How to Break into Investment Banking as an Engineer – If You Enjoy the Punishment

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

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:

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

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

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

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

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

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

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

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

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:

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:

1. 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.
2. Storage & Transportation (“Midstream”) – These firms transport oil and gas from the producers to the refiners via pipelines, ships, and other methods.
3. 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.
4. 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).
5. 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:

1. 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 (!).
2. 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.
3. Acquire new refineries or retail locations – Companies can expand existing refineries only so much, so M&A has become a key growth strategy.
4. 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:

1. 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.
2. Metrics and Multiples – The metrics and valuation multiples also differ because of accounting differences and the importance of a company’s reserves and production.
3. 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:

1. Split the company into “existing production” and “undeveloped regions.”
2. Assume that the existing production declines over time until these reserves are no longer economically feasible.
3. 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).
4. 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.
5. 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.
6. 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.
7. 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)
  • Deal Presentation 1
  • Deal Presentation 2
  • Fairness Opinion from KPMG (“Independent Expert Report”)
• 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)
  • TPH – Deal Process Update
  • GS – Pitch for Fairness Opinion
  • Citi – Analysis of Potential Deal Structures
  • Baird – Fairness Opinion
• 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:

1. 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.
2. 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.
3. 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.
4. 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.

Similar to private equity firms, they operate on longer time frames, influence companies’ operations and finances, and might catalyze major changes, such as spin-offs or acquisitions.

And similar to long/short equity hedge funds, they target undervalued and misunderstood companies and profit when the rest of the market catches up.

If you can win an offer at an activist fund, you’ll arguably get some of the most interesting work in the industry.

The main downside is that you might have to clarify what type of “activist” you are – so that you don’t get mobbed by an angry crowd burning down buildings or sociopaths screaming at each other on Twitter:

What is an Activist Hedge Fund?

Activist Hedge Fund Definition: An activist hedge fund accumulates sizable stakes in companies to gain operational/financial influence and persuades Boards and management teams to enact their desired changes; they profit based on increases in companies’ stock prices after these changes take place.

Activist hedge funds are usually classified as “event-driven” within hedge fund strategies, and for good reason.

Long/short equity and credit hedge funds look for mispriced securities with potential catalysts that might change their market prices.

But activist hedge funds create their own catalysts by winning ownership and influence and persuading others to enact the changes they want to see.

The typical approach goes like this:

1. Start accumulating a small stake in a public company’s equity.
2. Once the stake reaches 5% – which requires disclosure via a 13-D filing in the U.S. – use the filing as an opportunity to announce their position and start their public campaign.
3. Release a presentation with the company’s problem(s) and the hedge fund’s proposed solution(s).
4. Contact other shareholders and Board members and begin a persuasion campaign to win Board seats at the company and implement the proposed solutions.

The problem could be almost anything, but it’s usually related to:

1. Operational Underperformance – For example, peer companies have generated Return on Invested Capital (ROIC) figures of 10-15%, but this company is lagging behind at 5%, which is well below its WACC. Its share price has also been stagnant, while peer companies are up 20-30% over the past few years.
2. Corporate Governance and Management – Management is still earning total compensation in-line with teams at better-performing companies, and the Board is filled with sycophantic “insiders” who keep increasing their compensation despite shareholder complaints.
3. Undervalued or Misunderstood Assets – One specific division is poorly run and could perform better as an independent entity; the market is penalizing the entire company’s valuation due to this one division dragging down everything else.
4. “ESG” – Everyone is going to die from climate change, and this company is the equivalent of Thanos because it doesn’t disclose its carbon emissions or it deviates from the doctrines of the Church of ESG.

The solutions usually involve replacing Board members or executives, divesting assets, changing the capital structure, cutting costs, adopting new strategies, and sometimes selling the entire company.

Elliott’s presentation to Suncor after they announced a 3.4% stake in the company has a good example of this structure (click the image for a larger version):

If Elliott succeeds in this campaign, they’ll gain several Board seats, convince other shareholders to support their changes, and sell their stake once Suncor’s stock price is within range of their target price.

Wait, Why Do Company Boards Care About Activist Hedge Funds?

You might now be thinking: “OK, fine, but why does anyone pay attention to activist investors if they have only 5% stakes (or less) when they announce their plans? That shouldn’t be enough ownership to influence the company significantly.”

The answer is:

1. Disruption Potential – Even with a small stake, activist hedge funds can be very disruptive to management and the Board because they can win support from other shareholders to stage a proxy fight – and even if they have no chance of winning, it will still consume time and money.
2. Even a 5% Stake Could Be Significant – For example, if a public company has no large institutional shareholders, a hedge fund with this type of stake could easily be the top shareholder (or close to it). And even if the public company does have investors like Vanguard, BlackRock, etc., a hedge fund with a 5% stake could still be among the top 5 shareholder groups.
3. The Company Has Been Underperforming – When a company’s share price is down significantly or stagnant, shareholders are often more open to listening to a new group that comes in and proposes dramatic changes. After all, how much worse could it be vs. the current path?

That said, activist hedge funds still tend to get the best results in regions with a strong culture around “shareholder value,” such as the U.S. and the U.K.

They’re often less effective in places like Japan and continental Europe when everyone on the Board knows each other and won’t vote for change, no matter how poorly run the company is.

How Do Activist Hedge Funds Differ from Others?

Activist hedge funds tend to have the following qualities:

1) Long-Term Investment Horizon – It might take years to realize their changes, so their holding periods exceed most other hedge funds.

2) Longer Lockup Periods for Capital – This fact sheet from Trian Partners is useful for quantifying this one:

3) High Net Exposure and High Beta – Since most activist hedge funds target undervalued and misunderstood companies, they are effectively long equities most of the time. This point explains the following graph from Aurum’s Hedge Fund Industry Deep Dive (click the image for a larger version):

4) Normal Leverage Levels – Activist hedge funds have less-liquid positions and longer holding periods than global macro funds, so they tend to use less leverage; it’s on par with the average level for credit funds and a bit below the average for equity funds.

5) Concentrated Portfolios – It’s rare to find an activist hedge fund with 50 or 100 positions because each one requires substantial time and effort that goes far beyond normal “monitoring.” Cevian’s Strategy page has a great summary (significant minority ownership in 10-15 public companies at a time, 5-year holding periods, and €500 million – €1.5 billion per company).

Finally, activist funds tend to be larger (multi-billions of AUM or more) because it’s very difficult to buy substantial stakes in public companies with only $100 or $300 million of capital.

Activist funds with under $1 billion in AUM do exist, but they’re usually limited to small-cap companies.

Activist Investment Strategies

Activist hedge funds differ mostly based on their aggressiveness.

You can divide most strategies into these categories:

• ”Greenmailers” – This strategy involves purchasing enough shares of a firm to credibly threaten management with a hostile takeover. The only way the company can stop it, of course, is to buy back its shares at a premium. This strategy is a short-term, “quick flip” type approach, and Carl Icahn has used it in many of his older approaches (but less so recently).
• “Friendly Engagement” – These firms typically try to get on friendly terms with management and negotiate changes behind the scenes rather than launching high-profile, public campaigns to win over shareholders; time horizons are also longer. Example firms in this category include Cevian and ValueAct.
• “Aggressive Negotiations” – This is not quite the “Anakin Skywalker” strategy, but these firms use far more aggressive approaches and do not necessarily notify the Board before unveiling their stakes. Examples include Elliott and Starboard Value.

The Top Activist Hedge Funds

First, note that there aren’t that many “pure-play” activist hedge funds.

Some value-oriented funds occasionally launch public campaigns, but that doesn’t mean they’re “activists” in the traditional sense.

Some of the best-known activist hedge funds in the U.S. include Elliott Management, Third Point Partners, ValueAct Capital, Trian Partners, JANA Partners, and Starboard Value.

People will sometimes put firms like Pershing Square in this category due to some high-profile activist campaigns they’ve led.

And while Carl Icahn may be the highest-profile activist investor of all time, he hasn’t managed outside money since 2011, so Icahn Enterprises is not technically a hedge fund.

Other names include Ancora Advisors, Barington Capital, Corvex Management, Macellum Capital, Mudrick Capital, Sachem Head, Soroban Capital, and Engine No. 1 (effectively a BlackRock entity; it gained fame via its ExxonMobil campaign).

In Europe, the best-known activist fund is probably Cevian, which focuses on the Nordic and DACH (Germany, Austria, and Switzerland) regions.

Other well-known activist funds include TCI (“The Children’s Investment Fund Management”), Amber Capital, Bluebell Capital, Gatemore Capital, Petrus Advisers, PrimeStone Capital, Sparta Capital (Elliott spin-off), Teleios Capital, and Thélème Partners (TCI spin-off and former workplace of Chancellor of the Exchequer Rishi Sunak).

How to Recruit into Activist Hedge Funds

The short answer is: “Work in investment banking, private equity, or both, and then use your deal experience to recruit for activist funds.”

Few activist funds hire candidates directly out of undergrad because you need substantial deal experience before you can add much value.

I did a quick/informal survey of those in my LinkedIn extended network with experience at activist hedge funds and found the following results for their previous backgrounds:

• Investment Banking: 43%
• Investment Banking & Private Equity: 17%
• Private Equity or Credit Investing: 9%
• Equity Research or Fixed Income Research: 9%
• Directly Out of Undergrad: 9%
• Restructuring/Turnaround Consulting: 4%
• Management Consulting: 4%
• Other Hedge Fund/Asset Management Role: 4%
• Law: 4%
• Venture Capital/Growth Equity: 4%

Since there aren’t that many pure-play activist funds, recruiting tends to be very “random” – an individual fund does not necessarily hire new people every year or follow any schedule.

To maximize your chances, work at the best bank you can get into and then join a private equity mega-fund or an upper-middle-market fund.

In Europe, some funds prefer candidates with a consulting or combined consulting/banking background; Cevian is in this category.

The recruiting process can be quite intense because many activist funds run lean teams, and competition is fierce because of the perceived “prestige,” compensation, and sporadic hiring.

For example, Elliott is known for conducting multi-month recruiting cycles and giving candidates psychological profiles or IQ tests in addition to all the standard interview questions.

Interviews, Case Studies, and Stock Pitches

Case studies, modeling tests, and stock pitches are similar to those in the long/short equity or credit fund recruiting processes.

In other words, expect to complete a fundamental-based valuation (DCF and multiples) of a company and recommend investing based on the output in different cases.

The main differences are:

1. Time Frames – You can assume longer time frames here, such as 2-3 years rather than the normal 6-12 months, because activist strategies often take years to pay off.
2. Catalysts – Rather than relying on external “hard” or “soft” catalysts, you should make your own catalysts by suggesting the specific changes the company must make to increase its valuation.
3. Target Companies – Finally, it can be much harder to craft your own stock pitches because you need to find a company that is undervalued/misunderstood due to specific management or operational issues that can be fixed – not just because the company’s core market is shrinking or because a recent product sold poorly.

This last point explains why these funds might assign you a company or situation rather than asking you to develop an idea independently.

Activist Hedge Fund Careers, Hours, and Compensation

Hedge fund compensation is linked to fund size, performance, and individual performance/contributions, so it’s impossible to say if the “average” activist hedge fund employee earns more or less than the average at other fund types.

I’ve seen some SumZero compensation reports from previous years that break out median compensation by strategy, but they’re not that useful due to big fluctuations from year to year (“activist” is in the mid-to-lower end of the range for compensation, if you’re curious, but I wouldn’t read much into it).

That said, it is fair to say the following about activist hedge funds:

• Promotion: It’s arguably easier for high-performing Analysts to win promotions to Portfolio Manager and eventually Partner because they tend to be involved with everything in the investment process. You’re less likely to be “siloed” than in a strategy like merger arbitrage.
• Hours: The hours are often more “variable” than other types of hedge funds because you could easily get involved in an active investment that starts consuming your attention 24/7 if, for example, the company announces plans for a spin-off, break-up, or sale of the entire company. It’s closer to the IB/PE cycle, where hours fluctuate significantly based on deal activity.
• Headcount: The hours also tend to be longer because many of these firms have extremely lean teams despite fairly high AUM. I don’t think anyone has data on the average AUM per Employee broken out by hedge fund strategy, but I would not be surprised to see higher-than-average figures for activist funds.

Exit Opportunities

Since you probably worked in investment banking, private equity, or both before moving into an activist hedge fund, you could also leave and return to one of them.

If you’ve somehow gotten into an activist fund without doing one of those first, it will be much harder to make this move.

Yes, you do work on “deals,” but it’s a far less comprehensive process, and you’re not responsible for executing all the steps (or even advising on them).

Your main goal is to persuade other shareholders, which means you spend more time on presentations and outreach than on reviewing the fine print on page 157 of the merger agreement.

Since activist investing overlaps with other strategies such as long/short equity, credit, and even merger arbitrage, you could potentially move into a fund or group in one of these areas.

Long-only asset management is also a possibility, but you’re probably not the best fit because of the active vs. passive nature of these two fields.

If you’re at a fund that also invests in debt, you could also potentially move into direct lending, mezzanine, or credit hedge funds.

Other deal-based roles such as corporate development, venture capital, or growth equity are theoretically possible but not that likely.

You work with very different companies in the latter two, and with CD, you use a very different mindset when acquiring companies that your firm plans to hold indefinitely.

So, these are likely exits only if you’ve worked in one of them before joining an activist fund.

Additional Resources

You can find dozens, if not hundreds, of activist hedge fund presentations and letters online, but there are surprisingly few good books about the sector.

Here are some recommendations by media type:

Books

• Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism
• Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World
• Activist Hedge Fund Transactions
• Barbarians in the Boardroom

Presentations, White Papers, and Investor Letters

• Elliott – Previous Letter and Materials
• Starboard Value – Presentations
• Trian Partners – White Papers and Presentations
• Petrus Advisers – Active Investments (Various Presentations and Offer Letters)

Specific Presentations by Activist Hedge Funds

Finally, a few useful presentations and letters include:

• Elliott – Crown Castle (Telecom Infrastructure)
• Elliott – GSK (Pharmaceuticals)
• Elliott – Healthcare Trust of America (Healthcare REIT)
• Elliott – Sampo (Insurance)
• Elliott – Suncor (Energy)
• Starboard – Darden Restaurants
• Starboard – Huntsman, Colfax, and Elanco
• Starboard – Willis Towers and Corteva
• Trian – Ferguson (Plumbing/Heating Products)
• Trian – Proctor & Gamble (Consumer)
• ValueAct – Seven & i Holdings (Conglomerate/Holding Company)

Activist Hedge Funds: Final Thoughts

In many ways, activist hedge funds are “more interesting” versions of long/short equity or credit funds.

They use similar valuation and research methodologies, but they make their own catalysts – or attempt to do so – and profit based on undervalued companies with untapped potential that need major changes to realize that potential.

This strategy makes the work more interesting, but it also comes with a downside: these funds tend to be highly correlated with the overall market, so it’s difficult to say how much of a “hedge” they provide.

The other major issue is that there aren’t that many pure-play activist funds, and the ones that still exist are becoming tamer or turning into private equity firms.

But depending on your career goals, that might be an advantage.

After all, if you can’t decide between private equity and hedge funds, there’s nothing better than joining an activist hedge fund that turns into a private equity firm.

Just make sure you don’t turn into a Twitter “activist” in the process.

Want More?

You might be interested in How to Start a Hedge Fund – and Why You Probably Shouldn’t.

The post Activist Hedge Funds: The Superhero Offspring of Private Equity Firms and Normal Hedge Funds? appeared first on Mergers & Inquisitions.

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:

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:

1. Cut expenses and boost the actual ROE as close to the Authorized ROE as possible.
2. Ask the regulators to increase their Authorized ROE, reduce regulatory lag, or permit a different capital structure.
3. 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:

1. 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).
2. 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
  • APA Group’s Presentation on its Superior Bid for AusNet
  • Case Study from Adara Partners on the Deal Timeline
  • Brookfield Presentation (Note on pg. 13)
• 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
  • Investor Presentation
  • FINEXSI – Fairness Opinion
  • Company Propaganda to Support the Merger
• Pacific Gas & Electric (PG&E) (JPM, BAML, Barclays, and Citi) – Bankruptcy and Debtor-in-Possession Financing
  • Lender Presentation
  • Fitch Credit Rating
  • Court Motion and Sources & Uses for Deal
• Enel Chile / Enel Generación (Banchile, Econsult, LarrainVial, and Asset Chile) – This was a complicated reorganization deal with a combined merger and public tender offer
  • Series of Fairness Opinions from Banks
  • Various Bank Presentations
  • Roadshow Presentation
• 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?

You might be interested in:

• Investment banking product groups
• Investment banking industry groups
• Industrials Investment Banking: The Complete Guide

The post Power & Utilities Investment Banking: How to Turn Yourself into an Electrified ESG Warrior appeared first on Mergers & Inquisitions.

Or, more specifically, they want to become Venture Capital Partners.

The VC Partner is arguably the best “senior job” in finance: you sit on a private island atop a pile of cash, altcoins, and NFTs…

…you drink piña coladas served to you by mermaids and unicorns…

…and you summon Founders and CEOs who desperately need your money to grow their companies.

Just one problem: this might represent the VC Partner role in the metaverse, but it’s not quite an accurate description of the job in real life.

Not only is it challenging to find mermaids and unicorns, but the VC market has also changed over time.

When capital is plentiful and good deals are scarce, VC firms often find themselves chasing after entrepreneurs to win deals.

Before delving into tropical islands, imaginary creatures, and scams NFTs, though, let’s start with the basic job description:

The Venture Capital Partner Job Description

This article assumes that you already know what venture capital is, the basic outline of venture capital careers, and how to get into venture capital.

If not, start with those linked articles to get a sense of the industry.

In fields such as investment banking and private equity, “Partners” or “Managing Directors” are typically at the top of the hierarchy.

In VC, this is a bit more complicated because there are “Junior Partners” and “General Partners” and sometimes other levels (Managing Partners, Managing Directors, etc.).

Since Junior Partners are in between Principals and General Partners, and since we’ve already covered VC Principals, we will focus on General Partners here.

The main difference between General Partners and Principals, VPs, and Associates is that the Partners are far less involved in day-to-day deals and portfolio company operations.

Instead, they spend most of their time on:

1. Fundraising – They raise funds, wine and dine the Limited Partners, and convince them to invest in bigger and newer funds.
2. Public Relations – Partners act as firm representatives by speaking with news sources, attending conferences, and marketing the firm to the public.
3. Final Investment Decisions – GPs have the final say on all investments. They do not get into the weeds of due diligence, but they do perform the final “gut check.”

The job involves sourcing (finding companies to invest in) as well, but GPs do not cold-call or cold-email entrepreneurs like VC Associates do.

Instead, they get introduced to companies via their existing networks and professional referrals (e.g., a lawyer who just helped a new startup incorporate or raise a seed round).

General Partners also take Board seats at portfolio companies, but they tend to be less involved than Junior Partners or Principals.

And they also have the final say on hiring/firing decisions and internal promotions, but this part of the job takes up less time than the others.

The main differences between Junior Partners and General Partners are:

1. Work Tasks – Junior Partners tend to be more active with portfolio companies and deals and less involved with fundraising and PR.
2. Decision-Making Power – This one varies by firm, but Junior Partners are less likely to have “final approval” over deals – though they can reject deals they don’t like.
3. Contributed Capital and Carry – While both types of Partners contribute some of their net worth into their funds, GPs contribute much higher percentages and earn the majority of the carry (assuming the fund performs well enough to generate carried interest).

Some VC firms, such as Lightspeed and a16z, call everyone a “partner” on their public websites.

But that’s now how it works internally; there are still General Partners and everyone else, and “everyone else” has much less power.

Venture Capital Partner Lifestyle and Hours

I’ll go with the standard 50-60 hours per week here, just like VC Associates and Principals – but this could vary in either direction.

The travel component (much less than in IB, but still there) could extend these hours, or at least make them feel longer.

And in the other direction, some Senior or Managing Partners might work less because they’re in “semi-retired” territory (but they get the title and benefits because they founded or co-founded the firm).

Overall, if you’re at a fund that does well enough to generate carried interest, you will get a very nice $ / hour rate, but far from the absolute highest compensation in the finance industry.

Venture Capital Partner Salary, Bonus, and Carried Interest Levels

On average, VC Partners earn less than MDs in investment banking, Partners in private equity, and hedge fund portfolio managers.

This reduced compensation is driven by:

1. Smaller Funds – The fee potential is much lower when the median fund size in the industry is $100 million rather than $1-2 billion.
2. Longer Realization Times – It might take some VC-backed companies a decade or more to exit; the time frame is much shorter in private equity and hedge funds.
3. Highly Skewed Performance – Remember that 65% of VC deals lose money, and only 4% of deals return more than 10x.

Compensation levels vary by firm size, carried interest, and title, so I’m going to estimate a very wide range of $500K – $2 million USD.

In practical terms, this range means:

• Base salaries are probably in the low 6-figure-range at many firms ($200-$400K), at least for the GPs (Junior Partners may be lower).
• Bonuses may be about 1-2x base salaries, depending on firm performance and the Partner’s seniority.
• And carried interest varies widely but could potentially add $0 or increase total compensation by 2x, 4x, or even more.
• Junior Partners are likely to earn around the $500K level (or less), with General Partners in the $500K – $1 million range in terms of salary + year-end bonus.
• And it’s possible to earn less than $500K or more than $2 million; these are more like the 25^th and 75^th percentile markers, not absolute min/max numbers.

The bottom line: Quite a few VC Partners earn less than $1 million per year, and sometimes they earn much less than that – especially if their fund is new, small, or hasn’t performed well.

How Do You Become a Venture Capital Partner?

Unlike senior roles in the other industries, it’s less common to “work your way up” to a VC Partner role.

The most common path is to join after a moderately successful startup exit or reaching a fairly senior level at a tech or biotech company.

To quantify this with a quick sample, here’s what I found by looking at the Seed/Early Team pages of Sequoia Capital and Kleiner Perkins:

• 24 total “Partners” across both firms.
• 16 appear to have mostly startup/operational experience (~66%).
• 7 appear to have mostly VC or other finance experience (~29%).
• And 1 is in the “other/random” category (Mike Moritz, a former journalist).

If you want to get promoted internally, you need a track record of successful deals.

That’s difficult to demonstrate in 3-5 years if you focus on early-stage investments, but you can point to increased valuations in subsequent funding rounds, successful product launches, or progress through phases of clinical trials in biotech.

It’s also much easier to move up when the firm is expanding or moving into new markets/geographies.

A Day in the Life of a Venture Capital Partner

An average day at a mid-sized, early-stage, tech-focused firm might look like this:

8 AM – 9 AM: You arrive at the office, check your emails, scan the news, and respond to a request from a reporter about the crypto market.

9 AM – 10 AM: You meet with the other Partners to discuss your strategy for the larger fund you’re planning to raise and a few recent deals.

Consensus rather than a majority vote is required to approve deals at your firm, so only about half of these investments are approved today.

10 AM – 11 AM: You do a few media appearances on Bloomberg and CNBC to discuss recent trends in the crypto and NFT markets.

The Bloomberg interviewer is quite skeptical of your firm’s bullishness, while the CNBC person seems inclined to sell his kidney to buy more crypto.

11 AM – 12 PM: You join a Board meeting for a troubled e-commerce company at the Junior Partner’s request.

This company’s transaction volume keeps falling despite rising website and mobile app traffic, so you offer to make a few introductions to conversion-rate specialists.

This company also has a terribly messy capitalization table because they raised capital via SAFE Notes early on, which you hate; even something like venture debt is less annoying.

12 PM – 1 PM: You go to lunch with one of the Principals. You can tell that he’s fishing for clues about his chances of getting promoted, so you drop a few vague hints without committing to anything.

1 PM – 3 PM: You hold a few meetings with current Limited Partners to discuss your firm’s upcoming “crypto infrastructure” fund.

The LPs seem skeptical of that market and your plans to target mid-to-late stage deals, as your firm has limited experience there.

You meet with the other Partners afterward and agree that you might need to target new LPs rather than relying on your existing base.

3 PM – 5 PM: You interview two Junior Partner-level candidates, both of whom have founded and sold tech startups.

The rest of the team is split, but you’re strongly in favor of the first candidate, so you cast your vote.

5 PM – 6 PM: You join a virtual conference sponsored by The Wall Street Journal to discuss recent trends in e-commerce and SaaS.

These industries have been around for decades, so they’re not the most exciting topics for you, and you’re quite tired of discussing SaaS accounting, annual recurring revenue, and average revenue per user by now.

But it’s important to market your firm as broadly as possible, so you put on your happy face and do it.

6 PM – 8 PM: You go to a dinner/networking event for your firm’s portfolio companies. This one is part business, part social, and part sourcing because you chat with the executives and founders about other promising startups they’ve heard about.

—

Compared with the Principal, the Partner does more media appearances, LP relations, and fundraising, but less with portfolio companies and current deals.

*Can* You Get Promoted Beyond the Partner Level?

You can get promoted to more senior Partner roles at the firm.

But if you want to be at the very top of the hierarchy, you’ll probably have to leave and start your own VC firm, which is possible but quite challenging to make successful.

It is easier to raise capital than in previous periods, but earning solid returns is a different story.

You’ll be facing an uphill battle because there’s too much capital chasing too few good deals, and talent – not capital – is the major constraint.

Is the Venture Capital Partner the Right Job for You?

The main problem with venture capital is that the returns are highly skewed to the top few firms.

So, if you’re at one of the 10-20% of VC firms that generate a 2-3x+ return on capital, the job can be quite lucrative – especially if you’re credited for some of the better deals.

But if you’re not, you could easily end up earning less than you would as an executive at a large company or in a senior role in another area of finance.

Also, it tends to be more difficult to “find a niche” in VC and attract the best companies because the most-promising companies will always gravitate toward the top few firms.

With the huge proliferation of “funds” and everyone pretending to be a VC, the returns will likely become even more skewed in the coming years.

The bottom line: In my opinion, it makes less sense to “work your way up” to the VC Partner level than to do the same in IB, PE, or even Big Law.

The job makes the most sense if:

1. You’ve already done well with your own startup or as a seasoned industry executive (10-15+ years);
2. You don’t “need” more money, but you want to keep working in some capacity; and
3. You want to change careers while still leveraging your existing skills and network.

You might only become King of the metaverse, but at least you’ll be surrounded by NFT-powered mermaids and unicorns.

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