But the events of 2023, including the UBS acquisition of Credit Suisse and the rise of firms like Wells Fargo, Jefferies, and RBC, have shaken up the traditional list.

As of 2024, I consider the following to be the list of bulge bracket banks (note that the “potential” category is speculative and could include other, similar firms beyond the 5 currently listed there):

Sources: The list above is based on deal volume and fee data from Dealogic, the Financial Times, and Statista over the past few years.

What is a “Bulge Bracket Bank”?

Bulge Bracket Bank Definition: The “bulge brackets” are the largest global banks that operate in all regions and offer all services – M&A, equity, debt, and others – to clients; they work on the biggest deals (usually $1 billion+) and have divisions for sales & trading, equity research, wealth management, corporate banking, and more.

The name “bulge bracket” (BB) comes from the prospectus for an IPO or debt issuance, which lists all the banks underwriting the deal.

The larger banks play more important roles, acting as bookrunners or joint bookrunners, and earn higher fees.

Therefore, their names are in bigger font sizes on the cover page, so they appear to be “bulging out” next to the smaller firms:

Note that “bulge bracket” and “BB” are online terms; I don’t think I’ve ever heard anyone use them in a spoken conversation.

Similar to terminology like “target school,” it would sound weird to use these words in an interview or networking setting.

So, if you need to refer to these firms in real life, try something like “large bank(s)” instead.

Why Have the Bulge Bracket Banks Changed? What About Deutsche Bank and UBS?

The end of Credit Suisse in 2023 means that it’s no longer on this list.

It also means that UBS, which acquired CS, is more firmly in the “bulge bracket bank” category, even though people sometimes debate its status.

The full list changes over time because banks get acquired, go out of business, and change their focus – while other banks make acquisitions and grow organically.

For example, Lehman Brothers and Bear Stearns were considered bulge bracket banks before the 2008 financial crisis – but many people today don’t even remember them.

As another example, some argue that UBS should not be a bulge bracket bank because it has focused on wealth management and areas outside the capital markets.

However, the global IB fees over the past two years do not support that argument:

UBS cares less about investment banking than the banks above it, but it is still in the top ~7 worldwide for IB revenue.

Also, following the acquisition of Credit Suisse, it’s hard to argue that UBS is not a BB bank (similar to how Barclays’ acquisition of Lehman Brothers’ operations turned Barclays into an official bulge bracket).

Deutsche Bank is a trickier case because it now generates less investment banking revenue than firms like Jefferies, Wells Fargo, and RBC.

It also tends to work on smaller deals than the top ~5 banks.

Older bankers might still think DB is a bulge bracket, but I would put it in the “borderline” category as of 2024.

I’m still listing it because it was #9 by global IB revenue in 2021 and 2022, but I would not be surprised if it fell off this list eventually.

This does not mean it’s a bad place to work.

It’s just that it’s not in the same category as GS, MS, JPM, etc., anymore (to be honest, I don’t think it has been in that same category for at least 5-10 years).

Bulge Bracket Bank “Challengers”: Do Wells Fargo, RBC, or Jefferies Qualify?

Looking at these lists, you might think:

“Wait a minute. Firms like Wells Fargo, RBC, and Jefferies all have annual IB revenue between $1 and $2 billion, so they’re not that far from Barclays and Citi. What’s the difference?”

There’s no exact revenue cut-off to qualify for this list, but these firms are less diversified in products and geography, so we do not consider them bulge brackets (yet).

For example, Wells Fargo always does well in debt capital markets but much worse in M&A advisory and equity capital markets.

You can see this if you break out the performance by product area and select “Loans”:

Wells Fargo is usually in the top 5-7 worldwide for debt but ranks much lower in the other areas.

Also, it has less of a global presence, as it’s U.S.-based and executes mostly North American deals.

Meanwhile, a firm like Jefferies is more diversified with a bigger international presence, but it also works on smaller deals than most bulge brackets.

One interesting case is a firm like Mizuho, which acquired Greenhill in 2023 (note that the deal has not yet closed as of the time of this article).

Greenhill was formerly considered an “elite boutique,” at least by some people, so this deal could turn Mizuho into more of an investment bank and give it a greater presence outside Asia, which is why I listed it in the “Potential” category above.

That said, it will still be many years before anyone starts thinking of it as a bulge bracket firm (if ever).

What About the Chinese Banks, Such as CITIC, China International, and Huatai?

While some Chinese banks earn high global revenue from their IB activities, they have virtually no presence outside China.

Also, they are often strong in ECM or DCM but far weaker in areas like M&A.

Due to the current geopolitical climate, it’s highly unlikely that these firms will expand significantly beyond China anytime soon.

But in the distant future, sure, one or more of these firms might join this list.

Bulge Bracket Banks vs Boutique, Middle Market, and Elite Boutique Banks

In addition to the bulge bracket banks, there are other categories: middle market banks, regional boutiques, and elite boutiques.

Each has a separate article on this site; there’s also a summary of the top investment banks.

I’d summarize the differences for front-office investment banking roles as follows:

• Bulge Bracket vs. Elite Boutique Banks: Both firms work on large/complex deals, and you gain access to very good exit opportunities from both. You’ll get higher compensation at an EB, more interesting work, and more responsibilities, but you’ll also get a smaller network and a lesser-known brand name if you ever want to leave the finance industry.
• Bulge Bracket vs. Middle Market Banks: You’ll work on smaller deals, have more limited exit opportunities, and get less of a network and brand name at MM banks. But the compensation doesn’t differ much for entry-level roles, and it is more feasible to win offers, particularly if you are at a non-target school, have a lower GPA, or got a late start in the recruiting process.
• Bulge Bracket vs. Regional Boutique Banks: The differences above are even more extreme here. You’ll work on very small deals at most regional boutiques, have even less access to private equity and hedge fund exits, and get even less of a network and brand name. But you might also have a chance at these very small firms even if you’re not competitive elsewhere.

Based on these comparisons, you might think the bulge bracket banks “win” across all categories.

But that’s not quite true because it ignores a few important points:

1. The elite boutiques are arguably better if you want to stay in finance long-term due to the compensation and work differences.
2. It’s harder to win offers at the BB banks, and you need more upfront preparation and an early start in university (or a top-tier MBA).
3. In some regions, the bulge brackets are not the best because domestic banks are stronger. For example, the “Big 5 (6?)” Canadian banks dominate investment banking in Canada, and the top banks differ in emerging markets such as Brazil.

So, my advice here is simple: Get a realistic sense of where you’re competitive and focus on winning the best offer you can.

If that’s at a bulge bracket bank, great.

If not, go for smaller banks, do your best, and think about moving around once you have more experience.

Final Thoughts: Bulge Bracket Bank or Bust?

A long time ago, many university and MBA students assumed that bulge bracket banks were the “be-all and end-all” for careers.

While they still have advantages, it’s a murkier distinction nowadays.

The elite boutique banks (Evercore, Lazard, Centerview, etc.) are now strong competitors, and you could easily make the case for accepting an offer there.

Also, many private equity firms and hedge funds now recruit undergrads directly via Analyst programs, and if you can win an offer at a large/reputable firm, it’s quite a good option.

Finally, technology firms now offer lucrative jobs to engineers, product managers, and salespeople, so many students go the tech route instead.

The bottom line is that while the bulge bracket banks are still appealing, they are no longer the clear winner in the “Post-Graduation Career Olympics.”

This is especially the case with the changes over the past few years and the disruptions to the traditional list.

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

Advantages of Working in Investment Banking at the Bulge Bracket Banks:

• Brand Name & Alumni Network: Everyone knows your firm, which is helpful for finance and non-finance roles.
• Broad Exit Opportunities: You have good options for both finance and non-finance companies because of the brand, network, and access to recruiters.
• Larger, More Complex Deals: You’ll work with multi-billion-dollar corporations instead of family-owned businesses, so the analysis is often more in-depth.
• Compensation: You’ll earn more than you would at smaller firms but less than at the elite boutiques.

Disadvantages of Working in Investment Banking at the Bulge Bracket Banks:

• Extremely Competitive: To win offers, you must start early, ideally attend a top university or MBA program, and have excellent work experience and networking.
• Long Hours and Unpredictable Lifestyle: You won’t have much of a life for the first few years (even with “protected weekends” and other measures).
• Larger Teams: While the deals may be more complex, larger deal teams also mean that Associates and VPs may do more of the interesting work.
• Compensation: Higher percentages of compensation start to become deferred and paid in stock as you get promoted, and the absolute numbers may be less than elite boutique pay as well.
• Regional Variations: Finally, depending on your region, domestic banks might have better deal flow than the BB banks.

If you’re not sure of your long-term plans and you’re competitive for roles at the largest banks, sure, go for it.

But if you are more certain and you can win offers at the elite boutiques or buy-side firms, one of those could be a better alternative.

And if you don’t know where you have a realistic chance, go back to Square One and review our coverage of how to get into investment banking.

Final Note: Everything in this article refers to investment banking jobs. If you are interested in corporate banking, wealth management, IT, or other areas, the top firms and groups differ.

The larger banks still offer advantages over smaller ones, but the rankings change depending on your area of interest. We may cover these points in future updates (for more, see our coverage of wealth management vs. investment banking).

The post Bulge Bracket Banks: 2024 Edition 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.

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.

• Remote / hybrid work means that some of the advantages and disadvantages of different cities are more nebulous.
• Certain industries have risen and fallen out of favor over time, and banks’ reputations and strengths in different regions have also changed.
• Major cities in the U.S., just like “elite” universities and the government, are in a period of institutional decline. I enjoy watching the flames from a safe distance.
• Some new financial centers are growing in certain regions, such as the Southeast.

I’ll focus on the five most significant cities for IB roles here, but I’ll touch on several others at the end:

Investment Banking in New York vs. San Francisco: Why Does It Matter?

Your first thoughts might be: “Wait a minute, isn’t this a pointless topic? Why would an Analyst or Associate want to work anywhere but NY for their first job?”

“It’s the biggest financial center with the most deal flow, networking, and exit opportunities. And aren’t your bank and group more important than your location?”

And… you’d be correct on all counts.

Yes, NY is usually the safest bet if you want to keep your options open, don’t care about specific industries, and don’t mind the city’s current state.

And, yes, your bank’s “tier” and your group tend to be more important than your location.

But there are valid reasons to care about other cities:

1. Multiple Offers – What if you want to work in NY, but you get offers for groups in Chicago and LA and nothing in NY?
2. Industry Focus – If you’re interested in tech and venture capital, should you focus on SF-based groups? Is there any reason to think about LA, NY, or other cities?
3. Late Recruiting – If you got interested in IB late and need to catch up on internships ASAP or apply directly to full-time jobs, will you gain an advantage if you focus on other cities?
4. Targeted Banks – If you’re targeting middle-market or boutique banks, many of these firms are more likely to be strongest in specific cities.

On the other hand, if you’re going for standard off-cycle, school-year, or summer internships at small firms to gain the experience required for large banks, location doesn’t matter.

Search for firms close to your university or current city and network aggressively until you find an opportunity.

How Should You Think About Investment Banking in New York vs. Chicago vs. Los Angeles vs. Others?

It’s tricky to answer this question because some differences are easier to quantify than others (e.g., average team size vs. “culture”).

But if I had to make a list, the main differences would consist of:

1. Industry Focus – Generalist? Tech / healthcare? Industrials?
2. Relative Strength of Different Banks and Groups – Even if a bank is technically “middle market,” it might advise on larger deals if it’s particularly strong in one city.
3. Recruiting – Interview questions are the same or very similar, but the types of candidates and the “randomness” differ.
4. Cost of Living and Quality of Life – Sure, you’ll be working crazy hours, but what happens if you miraculously get some free time?
5. “Culture” – This one is nebulous, but let’s say that personality types differ in different regions.
6. Networking / Exit Opportunities – Which places give you the most depth and breadth?

The hours and compensation may differ slightly, but for junior-level roles, these differences are small and have more to do with your bank and group than your location.

You should not pick one city over another because you believe you will work 5 hours less per week or earn 5% more.

Difference #1: Industry Focus

Investment banking industry groups tend to be “headquartered” in different cities:

• New York – Generalist.
• Chicago – Industrials and some Consumer/Retail and Business Services.
• San Francisco – Tech and Healthcare, along with some Financial Sponsors Groups.
• Los Angeles – Real Estate (“Gaming & Lodging”), along with some Financial Sponsors and Media groups and a mix of the others.
• Houston – Oil & gas. We have an entire article about investment banking in Houston.

You have the highest chance of being pigeonholed if you work in Houston because energy is very specific, and non-energy groups don’t have much presence there.

You can move to other groups/banks/locations, but you might have to move “down-market” if you want to go from an oil & gas group at a bulge bracket to a generalist PE role.

Of the others, LA and Chicago have more industry focus than NY, but they’re still fairly broad and won’t constrain you too much.

Difference #2: Relative Strength of Banks and Groups

I’m not going to write a comprehensive list here, but in short, some banks and groups tend to have specific regional strengths (and weaknesses).

For example, some bulge bracket banks treat their Chicago offices as “pitch factories” – they pitch for deals and then hand them off to the NY team once the real work begins.

But there are also some positives: for example, William Blair is very strong in Chicago and has great deal flow and solid placement for Analysts (better than a “typical” middle-market firm).

In some locations, such as San Francisco, three banks – Goldman Sachs, Morgan Stanley, and Qatalyst – consistently advise on the biggest and most important deals (which means “tech M&A” in SF).

In LA, banks such as Credit Suisse, Moelis, GS, and Barclays tend to be strong because their Leveraged Finance or Sponsors groups get a lot of deal flow and have strong relationships.

The issue with all these factoids is that you need to decide on a location first and then target the strongest banks and groups there.

Also, since turnover in IB is so high, things might change significantly between when you get an offer and when your internship or full-time job starts.

So, I would not recommend weighting this one too heavily unless you get offers from firms with dramatically different strengths in the same city.

Difference #3: Recruiting

Interview questions do not differ significantly by region.

Yes, some industry-specific questions will come up in places like Houston or SF, but they’re not going to ask you about the deductibility of tangible vs. intangible drilling costs for the entire interview.

The same recruiting timeline exists across these cities, but offices outside of NY sometimes start and finish a bit later (heavily dependent on how the bank views its regional offices).

The primary recruiting differences are:

1. Different Target Schools – You will see more Ivy League candidates in NY and fewer in other places; expect more of the top Midwestern schools in Chicago, the best West Coast ones in SF and LA, and the top Texas schools in Houston.
2. MBA Recruiting – There is much less of it outside NY. You can still win MBA-level offers in places like SF and LA, but fewer internships are available.
3. Full-Time Recruiting – Your probability of winning internships/jobs doesn’t differ much “on paper” (fewer candidates but fewer roles), but there is more randomness to the intern classes in non-NY locations. So, if you’re making a last-minute effort or applying to full-time roles without an internship, you may have better luck in other cities.

Difference #4: Cost of Living and Quality of Life

All these cities are expensive, but based on objective metrics such as rent and food prices, Houston is easily the cheapest.

Also, unlike New York, Illinois, and California, Texas has no state income taxes, so you can potentially save the most if you work there.

My full ranking from most to least expensive, factoring in where you’re likely to live in each city (e.g., Manhattan rather than Brooklyn), would be:

NY ~= SF > LA > Chicago > Houston

Quality of life is trickier to define because it depends on factors like the weather, non-work activities (nature, sports, bars/clubs, events, etc.), crime/homelessness, dating, and, if you’re older, the ability to raise a family there.

I don’t want to get into the weeds here because this one is off-topic for this site, but most of these cities are not that different when these criteria are used together.

For example, crime and homelessness are bad in these cities, except for Houston (maybe?), but there’s also less to do in Houston for young/single people.

The other cities have a good amount of activities, but NY probably wins based on sheer volume.

Overall, San Francisco is probably the worst for quality of life – but maybe not by a huge margin.

Before you leave an angry comment: I lived in the area or visited every year for the past ~20 years (going back to 2002).

The crime and homelessness are quite bad, and they’re compressed into a smaller area than in the other cities – which makes them seem worse even if they’re not.

Also, the pandemic and the resulting restrictions hit SF particularly hard, and it’s probably the worst city on this list for dating.

(I’m not going to elaborate, but if you want an explanation, just go there and try some dating apps or real-life interaction and see what happens.)

In short: If you want the most activities outside of work and you can tolerate a declining city, NY wins, and if you want to save the most money, Houston wins.

Chicago and LA are in the middle, but the need for a car or repeated Uber/Lyft use hurts LA.

Difference #5: Culture

People often argue that IB is more “relaxed” outside of NY in terms of attire, communication style, and on-the-job expectations.

Teams tend to be smaller, and you’re less likely to see stereotypically crazy banker types in Chicago than in NY.

That said, some factors work against non-NY locations as well.

For example, the time zones in California can be annoying because you’ll be 3 hours behind NY and 8-9 hours behind London (i.e., expect late-night or early-morning calls).

And you need to drive or use Uber/Lyft in most of these other cities to various extents.

But I’ll be honest: I don’t think you should pick a location based on culture.

If you want to work with “nicer bankers,” you shouldn’t go into IB in the first place because you will still encounter occasional psychopaths anywhere you go.

Difference #6: Networking and Exit Opportunities

The simple answer is that New York wins due to numbers – especially if you include the surrounding areas.

If you want to keep your options open and access the most exit opportunities, your best bet is to work in the biggest financial center.

The exit opportunities are fine in other places, but there are fewer of them, and you’re less likely to be competitive for NY-based roles.

For example, if you work in Chicago, you’re less likely to win an offer at an NY-based private equity mega-fund.

Too many NY-based candidates already compete for those roles, and most funds and headhunters don’t spend much time courting candidates in other cities.

You could easily win a PE offer in the Midwest, but it’s more likely to be at a smaller firm.

And with the two most specialized cities – SF and Houston – if you want to work in venture capital or energy-focused buy-side roles, sure, go there.

Just don’t expect the same access to generalist PE roles as bankers in NY.

Other Locations for Investment Banking in the U.S.

Plenty of other cities in the U.S. have offices of investment banks, but most focus on other areas, such as private wealth management, asset management, or commercial banking.

Although Miami is attracting more hedge funds, tech bros, and crypto bros, there still isn’t a huge amount of IB activity there.

It’s still mostly for wealth management and private banking, focusing on wealthy clients from Latin America (see: wealth management vs. investment banking).

Raymond James is headquartered in Florida (St. Petersburg), and there are quite a few LatAm-focused boutiques in the state (mostly in Miami).

Seattle, in addition to hosting Antifa Capital lovely scenery, has several boutiques (Cascadia, D.A. Davidson, and Meridian) and a few groups from other firms like BMO and KeyBanc.

But the large banks don’t have much of a presence there, partially because many of the tech and healthcare companies in the area are covered by teams based in California.

In the Southeast, Charlotte and Atlanta are a few financial centers worth noting.

Wells Fargo and BAML are known for their strength there, but there are also names like Truist (more for DCM than M&A), Regions, Stephens, Citizens, and plenty of boutiques.

Other middle-market firms, such as Raymond James, William Blair, Stifel, and Houlihan Lokey, also have offices in one or both of these cities, and the BB banks have a presence as well (GS and Barclays).

I’m not sure there’s a specific industry focus; you’ll see everything from aerospace & defense to real estate to Leveraged Finance to tech and consumer/retail.

Moving northward, Washington, D.C. also has banks, but they tend to focus on aerospace & defense and government services, and the large firms don’t have major advisory presences.

Even further north, in Boston, there is a tech and healthcare focus, and various elite boutiques such as Lazard and Evercore have offices, along with Deutsche Bank and some MM banks.

Finally, in Dallas, similar to Houston, you’ll find a lot of energy-focused middle-market and boutique banks.

Houlihan Lokey and Stephens have some of the biggest presences, but you’ll also find Raymond James (due to its Southeast focus) and others.

Outside of Investment Banking

While NY is the center for investment banking, private equity, and hedge fund roles in the U.S., other jobs are distributed more evenly.

For example, if you work in corporate finance or do a rotational program at a large company, you’ll end up working all over, from large cities to small towns in the middle of nowhere.

Industries like asset management, private wealth management, and corporate/commercial banking are also more spread out, and plenty of firms operate in smaller cities.

Finally, venture capital has traditionally been concentrated in California, but that is changing, with a decent percentage of activity in NY and Boston now (and other places growing).

So, What’s the Best City for Investment Banking?

If you don’t know what you want to do long-term, you have no strong industry preference, and you’re aiming for the “summer internship to full-time offer” route, NY is the best bet.

This is even more true at the MBA level due to the relative lack of internships elsewhere.

Other cities can be fine if you’re going there to pursue a specific exit opportunity, you’re focused on one industry, or you have strong personal reasons for being in the area.

I hesitate to give a “ranking” because it depends on your options: if you get a GS offer in SF and a boutique or middle-market offer in NY, take the GS offer in SF any day of the week.

But if you have similar offers in multiple cities, I would probably rank Chicago as the next-best place, followed by LA.

I would put SF and Houston below these because of the specialization/pigeonholing issues and the cost and/or quality-of-life problems.

The other cities mentioned at the end can also be fine, but I wouldn’t recommend them over any of the five major centers for entry-level IB jobs.

And whatever you choose, remember that big cities in the U.S. are not great places to live in for the long-term due to the cost of living, crime, and generally deteriorating conditions.

You want to gain experience, earn money, establish yourself, and then interview for other roles that let you live and work in cheaper areas with better governance.

Pick your poison correctly, and it shouldn’t be too painful to get there.

Want more?

If you liked this article, you might be interested in reading:

• From Quant Trading in Singapore to Fintech in Mexico: How to Enter a More Exciting Jungle
• Equity Research in Brazil: The Best Way to Apply Economics to Real Life?
• Investment Banking Latin America: Never-Ending Internships or Never-Ending Bonuses?

The post Investment Banking in New York vs. Chicago vs. San Francisco vs. Los Angeles: How to Pick Your Poison 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.

According to some, you do almost no modeling or technical work in this group, and it’s one of the easier jobs in IB, similar equity or debt capital markets.

But if you read other accounts, FSG runs models, Analysts get hands-on technical work, and the hours could be longer and more stressful because your clients are private equity firms.

It’s the equivalent of Schrödinger’s cat, but the problem isn’t quantum superposition – it’s that the Financial Sponsors Group operates quite differently at different banks.

We’ll discuss these competing views of the group and go into details on everything else, but let’s start with the basic definitions:

FSG Investment Banking: What the Financial Sponsors Group Does

Financial Sponsors Group Definition: In investment banking, the Financial Sponsors Group (FSG) advises private equity firms, hedge funds, sovereign wealth funds, and pension funds on capital issuances and transactions involving their portfolio companies.

Essentially, FSG is an “industry group” for firms that raise capital from outside investors or the government/retirement system, invest in companies and assets, and split the profits with those outside investors.

“But wait,” you say, “FSG sounds quite similar to the Financial Institutions Group (FIG). So what’s the difference?”

Private equity firms and hedge funds may indeed be classified as “alternative asset managers” within the FIG category, but their customers and business models are quite different from banks, insurance firms, and traditional asset managers (see below).

If you want a complete list of firm types covered by FSG, Houlihan Lokey’s page has a nice summary: private equity, credit managers, family offices, general partners, hedge funds, pension funds, sovereign wealth funds, and special situation investors.

And if you consider infrastructure private equity or real estate private equity separate categories, sure, you could add them to the list as well.

Interestingly, most FSG teams do not cover venture capital firms, even though VC firms also raise capital from outside investors, invest in companies, and split their investment profits.

That might be due to the relatively small deal sizes in VC (traditionally) and the fact that coverage of VC portfolio companies is better handled by the relevant industry groups, such as technology or healthcare.

In practice, FSG bankers spend most of their time covering private equity firms, focusing on:

1. Deal Financing – All PE firms require debt to complete their initial deals, which is why all LBO modeling tests involve leverage.
2. Portfolio Company Exits – PE firms are better at buying companies than selling them or taking them public.

The Financial Sponsors Group vs. the Financial Institutions Group

Although these groups appear similar at first glance, they differ significantly in two key areas:

1. Customers – Financial sponsors raise capital from “enterprise customers,” such as endowments, retirement/pension funds, state and federal governments, and wealthy individuals, while financial institutions such as banks, insurance firms, asset managers, and fintech companies have a mix of enterprise and “retail customers” (i.e., normal, non-wealthy individuals).
2. Business Model – Unlike financial institutions such as brokerages, exchanges, and investment banks, financial sponsors invest directly in companies and assets and profit or lose money from those investments; they don’t earn money from commissions charged on trades or deals.

There are many other differences as well.

For example, the specialized accounting and valuation used for commercial banks and insurance firms do not apply to financial sponsors (there are different metrics, but these differences are much smaller).

Also, if you work in FSG, you’ll get exposed to a wide variety of industries and deal types because private equity firms own many different portfolio companies across industries.

By contrast, you’ll get a narrower, more specialized exposure in FIG.

The Financial Sponsors Group vs. Leveraged Finance vs. Debt Capital Markets

These three groups are arguably closer to each other than FSG is to FIG, despite names that sound more different.

At a high level, all three groups focus on financing, i.e., issuing debt for companies, but they do so differently.

FSG advises private equity firms on the financing required to complete deals. There is some overlap with Leveraged Finance, but LevFin works on more than just leveraged buyouts.

The DCM team, by contrast, advises mostly on investment-grade issuances for standard companies that need the funds for everyday business purposes rather than large transactions.

Finally, FSG and LevFin tend to be more technical than DCM, and the hours are generally worse, but the exit opportunities are better.

Recruiting: Who Gets Into the Financial Sponsors Group?

It’s the same mix of candidates as usual, and the same criteria/requirements apply (good university or MBA, high GPA, solid internship experience, and plenty of networking).

One difference in FSG is that there are fewer lateral hires from “industry,” as almost no one willingly leaves a private equity firm or hedge fund to return to investment banking.

So, most new hires tend to be straight out of school at the undergraduate or MBA levels or transfers from other groups at the bank.

For example, some FIG bankers transfer into FSG to get broader deal and financial modeling experience and access to better exit opportunities.

If banks make lateral hires for FSG at all, the candidates are likely to come from Big 4 firms or valuations firms that advise financial sponsors.

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

The #1 question here seems to be: “How much financial modeling work is there? Do you do ‘real work’ in FSG?”

And the short answer is that it depends – because different groups run differently.

That makes FSG a riskier choice than a standard industry group or M&A team, but you can reduce this risk by researching the group before committing to anything.

Broadly speaking, the Financial Sponsors Group is either relationship-focused or execution-focused.

If the team is relationship-focused, the junior bankers spend time on tasks such as summarizing the current holdings of financial sponsors, how much they paid for different companies, and which portfolio companies might be interesting to acquirers.

They’ll also spend time finding data and trends for PE, HF, and SWF industries and determining the average multiples, leverage, and other deal terms.

If the team is execution-focused, junior bankers will help PE Associates with tasks such as the initial model, the data room, writing or reviewing the CIM, and responding to requests from potential buyers.

Most, but not all, FSG teams at bulge bracket banks operate this way, focusing on execution.

A few factors influence how Analysts and Associates spend their time:

1. The Number of “Cooks in the Kitchen” – Financial sponsor deals tend to involve many parties and counter-parties, such as the sponsor, the portfolio company, FSG, the industry group, the product group, and the potential buyers or investors. The more parties involved in the deal, the less likely you are to do substantial work.
2. Industry Specialization – If the portfolio company is in a highly specialized industry (real estate, banks/insurance, or oil & gas), the industry group is more likely to do the modeling since they’ll know the accounting and valuation better than you.
3. Group Business Model – If your group charges a standard success fee for completed deals, you’re more likely to be heavily involved with each one. But if your group runs broad screens for sponsors and charges a retainer, you’ll do less modeling work.

People sometimes claim that “the hours are better” in the Financial Sponsors Group because you do fewer pitches and have more long-term clients (PE firms are always doing deals!).

There is some truth to this claim, but I’m not sure it’s universally true.

It’s more accurate to state that the hours and lifestyle are better for senior bankers in FSG because less “relationship maintenance” is required (see the bottom section of this article on pros and cons).

Financial Sponsors Group Trends and Drivers

The trends and drivers here are similar to the ones for FIG but with a few key differences.

Financial sponsors are sensitive to monetary and fiscal conditions and economic cycles, but in slightly different ways than banks and insurance firms.

For example, while interest rates are a mixed bag for banks and insurance companies, lower interest rates almost always help private equity firms:

Lower interest rates mean that investors earn less from government and corporate bonds, so they’re incentivized to allocate more to riskier assets such as equities, real estate, and… private equity.

Also, lower interest rates make it easier to fund deals such as leveraged buyouts that involve significant debt.

However, this trend doesn’t carry over quite as readily for hedge funds.

Yes, lower interest rates drive demand for their services, but loose monetary policy also makes it harder for hedge funds to beat the overall market.

If you can earn a 25% or 30% annual return by investing in an S&P 500 index fund, why bother with a hedge fund that might perform about the same but charge higher fees?

Regulations are still a factor for financial sponsors, but less so than in FIG because PE firms and hedge funds are “lightly regulated.”

They are more significant for sovereign wealth funds and pension funds because these funds might have limitations related to asset allocation, leverage, and geography.

Market valuations are a mixed bag because they improve exits but also make it harder to execute the initial deals at reasonable prices.

Finally, there are metrics for trends and drivers unique to financial sponsors, such as:

• Fundraising: How much in new funds has the sector as a whole attracted recently? What is the growth rate over the past few years?
• Cumulative Overhang (“Dry Powder”): How much capital have firms raised but not deployed? Frothy environments make it easier to raise capital but might result in lower performance.
• Vintage: When did a specific fund launch, and how does its performance compare to other funds launched in the same time frame?

Verticals within the Financial Sponsors Group

We’ve covered private equity and hedge funds extensively, including the career path, different roles and responsibilities, compensation as you move up the ladder, and the day-to-day work.

So, I’ll refer you to the existing coverage if you want to learn more about these firms.

We haven’t featured much on sovereign wealth funds (SWFs) or pension funds, but there are a few articles about how they operate in different regions.

In short, these funds have direct investing teams that may operate similarly to PE firms, but they tend to be less aggressive, returns targets are often lower, and compensation is lower as well.

Since these funds invest on behalf of governments or retirees, the incentives are often different as well.

For example, a pension fund might pursue a deal that makes little financial sense, such as one with a 30x+ EBITDA multiple and a 20-year holding period, if it’s required to invest a certain amount in a specific state or province.

Accounting, Valuation, and Financial Modeling in the Financial Sponsors Group

Valuation and financial modeling are not much different for financial sponsors; you can still use standard multiples like TEV / EBITDA, P / E, and so on.

However, there are some additional metrics and multiples that are useful for benchmarking sponsors, such as Enterprise Value / Assets Under Management (TEV / AUM), “FRE” (Fee-Related Earnings), and assets under management vs. “permanent capital.”

To get a good sense of these metrics, take a look at this investor presentation for Apollo’s acquisition of Athene:

Other metrics include the net organic flows into the fund to separate the AUM impact of performance from contributions and withdrawals (only applicable to hedge funds, not private equity, since most PE funds are closed-ended).

If you want a valuation example, look at one of the Fairness Opinion examples below.

In addition to the standard methodologies, a Sum of the Parts (SOTP) valuation is often useful for financial sponsors.

Fee-related earnings (FRE) are often worth different multiples than incentive fees, and financial sponsors’ current Balance Sheets are also worth something.

There’s a simple example from the Apollo / Athene presentation here:

And another example from Perella Weinberg here:

A few other fund performance metrics include TVPI (Total Value to Paid-in Capital), DPI (Distributions to Paid-in Capital), and RVPI (Residual Value to Paid-in Capital).

Allen Latta has a great explanation of these metrics on his site, so I will link to it here.

(You might also see returns-based metrics such as the Return on Assets used more frequently, but they’re a bit more common for actual banks and insurance firms.)

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

Here’s the list by category, including many example valuation football fields:

Presentations by Banks to Financial Sponsors About M&A Deals

• Brookfield / Oaktree Capital – Perella Weinberg and Sandler O’Neill created many update presentations for this one.
  • Collection of FSG Presentations from Both Firms
  • Fairness Opinion from Sandler O’Neill
  • Board Presentation and Valuation from PWP
• HF2 / Zais Group – Zais focuses on specialized credit investments.
  • Investor Presentation
  • Later Valuation from Houlihan Lokey
• KKR / KFN – KFN is a specialty finance company, but the presentation here also contains a valuation of KKR as a financial sponsor.
  • Deal Update and Valuation Summary from Lazard

Investor Presentations from Financial Sponsors About M&A Deals or General Updates

• Apollo / Athene (very useful)
• Alvarium Tiedemann Capital (SPAC Deal)
• Patria / Moneda
• Blue Owl Update (Owl Rock Capital)

Investor Presentations from Financial Sponsors About IPOs and Capital Issuances

• Patria (LatAm-Focused PE Firm)
  • Investor Presentation
  • IPO Prospectus
• Vinci Partners (Brazil Focus)
  • Investor Presentation
  • IPO Prospectus

Hedge Fund Presentations

You can find hedge fund presentations about companies they are betting on via Google searches, cross-referenced with news reports.

It’s trickier to find annual update presentations from hedge funds, but there are a few exceptions, such as Pershing Square and Sculptor Capital (formerly Och-Ziff, now a public entity):

• Pershing Square – Annual Update Presentation
• Sculptor Capital – Collection of SEC Filings and Presentations
• Paragon Funds Management – Introductory Presentation (L/S equity fund in Australia)

FSG Investment Banking League Tables: The Top Firms

For the most part, the bulge bracket banks with large Balance Sheets perform well here because most FSG deals involve acquisition financing.

People often cite Bank of America Merrill Lynch, Credit Suisse, and JP Morgan as the “top groups” in FSG, but you’ll also see others, such as Barclays, Citi, Deutsche Bank, and UBS, on many deals.

It’s difficult to separate FSG-specific performance because most league tables are not set up this way; you’d have to look at the Leveraged Finance league tables and then filter deals based on the presence of a financial sponsor.

Morgan Stanley also has a strong group, but Goldman Sachs’ team is sometimes seen as a bit “weaker” – apparently because the GS internal private equity team also competes with many financial sponsors for deals.

Elite boutique and middle market banks operate in FSG as well, but they tend to advise much smaller PE firms, and these groups are often more “relationship-based.”

Therefore, you might get a very different experience in the Financial Sponsors Group at these smaller firms even though the group name is the same.

There aren’t too many industry-specific boutiques operating in the space, but Sandler O’Neill (now Piper Sandler) was one well-known firm that advised on M&A deals in the sector.

Exit Opportunities from the Financial Sponsors Group

Assuming that you work in an FSG team that does a good number of deals, you should have solid exit opportunities into private equity and possibly hedge funds.

Venture capital is not the best option, but corporate development could work if you get to know one industry very well.

Sovereign wealth funds and pension funds are probably not realistic options in a region like the U.S., but they might be more feasible in places like Canada, Australia, and Singapore, where such funds are large and very important.

But the #1 question here is the following:

“If you want to work in private equity, is it better to join the Financial Sponsors Group, another industry group, or a product group like M&A or Leveraged Finance?”

I would give the slight edge to a strong industry group or M&A / Leveraged Finance because these groups tend to offer more consistent experiences, even at banks of different sizes.

Many people move from FSG into private equity, but I don’t think you gain much of an advantage for these opportunities by working in this group.

For Further Reading

Some recommended news sources include:

• Private Equity: PitchBook, PE Hub, and PE News
• Hedge Funds: Hedge Week, Opalesque, and Institutional Investor
• Sovereign Wealth Funds and Pension Funds: Pensions & Investments, Investment & Pensions Europe (IPE), SWF News, and the Financial Times

Pros and Cons of the Financial Sponsors Group (FSG)

This group is not easy to summarize because it overlaps with ones such as LevFin and FIG but is also different in subtle ways.

There are also differences between “relationship” groups and “execution” groups, making it hard to draw definitive conclusions.

But here’s my best attempt:

Pros

• Perspective & Deals: You gain a broad perspective on private equity, hedge funds, and many different industries and deal types – it’s like working across product and industry groups.
• Somewhat Less Pitching & Improved Hours: You tend to spend the most time on deals financing and LBOs in execution-focused teams, but you’ll get pulled into M&A, dividend recaps, and even equity issuances occasionally. Your clients need to do deals to stay in business, so less “selling” is required. This reduced pitching could mean better hours than other groups in some cases.
• Exit Opportunities: Execution-focused groups set you up fairly well for private equity exits and perhaps also hedge funds depending on your coverage universe.
• Long-Term Career Potential: The senior bankers in FSG have clients that are constantly doing deals, which means they don’t need to manage as many relationships to generate the same fee volume. Clients will keep coming back for more as long as the bankers do a reasonably good job on deals.

Cons

• Highly Variable Modeling/Deal Exposure: If you’re in a good sponsors team, you’ll run the model – but if not, or if there are too many parties involved in your deals, your responsibilities will be more limited. And unfortunately, this part is a bit random. You’ll often build “quick and dirty” LBO models but may not go too far beyond that.
• Lack of Exposure to “Strategic” Deals: You’ll never advise a normal, independent company on its sale or acquisition of another normal company, so your deal experience will be skewed toward the mindset and process of PE firms and hedge funds with short holding periods.
• Demanding/Savvy Clients: Since your clients are private equity firms, they will not hesitate to ask you for model/presentation updates or make other requests at 3 AM. By contrast, when your clients are large companies, many people stop responding to emails after 6 PM.
• Difficult to Get Promoted: Since FSG is known as a “cozy” place for senior bankers, getting promoted above the VP level is arguably more difficult.

I’m not sure I’d recommend the Financial Sponsors Group above something like industrials, tech, healthcare, or TMT.

That said, it’s still a very good entry point into banking and is one of the best groups if you want a long-term career in the industry.

And the exit opportunities are much more than a “mirage” – but with this type of long-term career outlook, you may not even care about that.

The post The Financial Sponsors Group: Masters of the Financial Universe, or Exit Opportunity Mirage? appeared first on Mergers & Inquisitions.

The only problem is that there aren’t that many “real” trading roles in fintech outside of crypto.

But there is another approach: leverage your finance skills to move into entirely different areas, such as corporate strategy and fundraising at promising startups.

While you’re at it, you could also hop on a plane to Mexico and use the trip to improve your standup comedy.

It may sound unbelievable, but I recently spoke with a reader who did all of this and more, in this story about fintech Mexico:

How to Quit the “Hottest Field in Finance”: Quant Trading

Q: Can you start by giving us a quick summary of your story?

A: Sure. I was born in India, moved to Singapore at a young age, did all my education there, and completed the required army service.

I went to one of the top business universities and did a sales & trading internship, which made me interested in the rates trading desk.

Back at school, I switched from engineering to quant finance, and I liked it so much that I didn’t care that it was a tough major with a reputation for low GPAs.

I eventually won a full-time role in the algorithmic trading desk of a bulge bracket bank…

…but quickly realized I hated it.

The problem was that my entire job was managing hedging algorithms, and we were effectively just market makers – we couldn’t take positions due to Dodd-Frank.

I thought about looking for other jobs, but my girlfriend was in Mexico, so I decided to quit, buy a one-way plane ticket there, and look for finance jobs in Mexico instead.

Her parents were both in the finance industry, so I won interviews through their network.

But there were many, many, many “issues” with working at large banks in Mexico.

So, I switched gears and started looking at fintech startups in the lending and payment spaces instead.

I networked my way into corporate strategy, finance, and data science roles at Konfio and DiDi Mexico, and now I’m joining a “challenger bank” (Fondeadora) here.

I also started a side business doing fundraising consulting for startups and continued to improve my standup comedy, which I had started in Singapore.

Q: OK, that is quite a story – a few questions before we get into the details.

First off, why didn’t you just move to another trading desk, like rates or credit? And what about buy-side roles such as quant funds?

A: Part of it was that I just didn’t like the full-time work environment at big banks; I liked trading and coming up with new strategies, but not everything else that came with it.

Also, after living in Singapore for most of my life, I was looking for a more significant change and a completely different environment.

As far as buy-side firms, one of the problems with S&T exit opportunities is that you usually need significantly more full-time experience to win them.

In investment banking, people work for a year or two and then move into private equity, corporate development, or hedge funds, but in sales & trading, they want to see a track record where you’ve managed your own book for several years.

So, it’s tough to transition over unless you’re at the Associate or VP level – and I was not.

Q: OK. So, then you went to Mexico… what were the “issues” you ran into when recruiting for finance jobs there?

A: First off, I did not know Spanish at all at the time, so investment banking at most firms was not an option.

You wrote about investment banking in Mexico a long time ago, and not much has changed since then – it’s still very “family”/nepotism-oriented, and it’s closed off to most foreigners.

Also, starting salaries are ridiculously low – as in $1,000 USD per month for Analysts, which is not enough even in Mexico.

Finally, I knew that I wouldn’t like the bureaucracy of a big bank all over again, even if it was in an emerging market.

Breaking Into Fintech  – at a Bar

Q: Fair enough. What was your next move?

A: When I was out at a bar, I met the CEO of Konfio, who had previously been a trader at Deutsche Bank.

(Konfio is an online lending platform for small and medium businesses.)

We connected well since we were both ex-traders who had come to Mexico, so I went through a few informal interviews, met the rest of the team, and he invited me to join.

I joined in a finance/data science role, and my first task was to help the company get its act together.

Not only were unsecured loans to SMBs incredibly risky in Mexico (default rates were often 30%+, or even 50%+), but no one was measuring anything – it was growth at all costs.

No one knew the size of the loan portfolio, and they were assessing credit risk by… applying statistics to peoples’ names.

I started creating databases to organize everything, learned SQL, and made sure we started using tax and performance data to evaluate credit risk.

The company kept growing and improved a lot over a few years, and I then switched roles and helped them raise a total of $85 million USD in debt and equity.

Q: And what was that like?

A: At the time, it was ridiculously difficult to raise money because Mexican venture capitalists were risk-averse and wanted to copy U.S. companies or only invest in “the next big thing.”

There are also a lot of rich people in Mexico who want to throw money around, but who don’t necessarily provide guidance or support for their portfolio companies.

Our CEO ended up making dozens of trips to fintech events and conferences to pitch the company to potential investors.

Out of ~100 pitches, we got a 5% success rate (in terms of initial interest from firms), and two firms submitted term sheets.

We picked the better offer, and the Partner from that firm joined the Board.

In some rounds, we had to sell sizable stakes in the company because it was challenging to raise institutional funds at the time.

As of 2020, things are quite different: there’s a lot more money pouring in from the likes of Softbank, which raised a $5 billion fund for LatAm.

Sequoia and a16z are also planning to enter the market, believing that “Fintech Mexico” (and Latin America, more broadly) is extremely promising.

Q: Thanks for sharing that.

Why did you leave Konfio and move to DiDi after doing all this?

A: I came a long way in a few years as the company grew, but I realized that the advancement opportunities were narrowing once the company had reached a certain stage.

The firm had started hiring so many senior executives that I knew someone with my age and experience would not be able to go much further.

I joined DiDi because they let me work on payments – one of the three big areas in fintech, along with lending and crypto – and launch a debit card in Mexico.

I also thought I would be useful for the company because they were very “left-brained,” while Mexican culture is very “right-brained.”

Having grown up in Singapore and India, but now living in Mexico, I was familiar with both ways of thinking.

I stayed at DiDi for around a year and completed my debit card project – but then everything started shutting down due to the coronavirus, so I felt it was time to move on again.

I’ll be joining a “challenger bank” in Mexico (Fondeadora), which was originally a crowdfunding platform that Kickstarter acquired, and which later pivoted into a banking platform.

I will be acting CFO there.

Q: Wow. I realize it’s a startup, but how did you move from a junior data science/finance role to the CFO level in only ~5-6 years?

A: As you just said, it is a startup, so this is different from being CFO at a Fortune 100 company, or even being a Regional or Departmental CFO or something similar.

I won the position partially through networking and my track record at Konfio and DiDi, but another point that helped was starting my own side business that offered fundraising consulting for startups.

Entrepreneurship was becoming more popular in Mexico, but founders often didn’t know what VCs were looking for, or how to build models or presentation decks that would entice them.

So, I took on 3-4 clients at a time, charged a monthly retainer and a success fee, and taught them what VCs looked for in pitch presentations.

Sometimes I created new presentations or built financial models for them.

Very few other people could offer this service because only company founders knew enough about fundraising to teach it – and most of them were busy running their companies.

The company I’m joining now was a client that wanted me to work full-time for them, which I happily accepted.

Long-Term Planning and Thoughts on Startups, Fintech Mexico, and Standup Comedy

Q: So, what are your long-term plans? You’ve made quite a few career moves in a short amount of time.

A: I’m planning to stay with my new company for the long term, set up their financial systems, get them out of trouble spots, and potentially do more fundraising.

I have thought MBA programs and moving to other countries, but I want to stay here for now to take advantage of the fintech boom.

I don’t think I want to go back to Singapore because it’s a slightly more risk-averse country, and I want to leverage my first-mover advantage in the Mexican startup world.

Q: Taking a step back, what makes “Fintech Mexico” (or Latin America) such a promising area?

A: There are two schools of thought: the optimistic one and the pessimistic one.

The optimistic one is that there’s huge smartphone penetration, but very low banking penetration, partially because of an old-school/analog banking system.

People pay a lot of money for stupid things such as high credit card interest (rates are sometimes over 100%!).

So, investors think there’s a huge opportunity to use mobile technologies to improve banking and everyday finances for normal people.

The pessimistic/cynical school of thought is that investors can’t find the returns they’re looking for in developed markets anymore.

As a result, they’re taking a chance on emerging markets such as LatAm and throwing money around to see what sticks.

The truth is somewhere in the middle: there is a huge opportunity, but there are also lots of silly or nonviable ideas that won’t survive the bear market.

Overall, I’m most optimistic about fintech startups and challenger banks (Nubank in Brazil being the best example), but other areas have had success stories as well (e.g., DogHero in Brazil and Moons in Mexico, which was in Y Combinator).

Q: Great. Do you have any general thoughts on startup life vs. working at a large bank?

A: Startup life is far less “glamorous” than you would think from reading news reports and books and watching TV shows about it.

The hours are long, the pay is low, there’s a constant lack of infrastructure, and you always have to explain why 2-3 things are going poorly even when you have no answers.

I’m taking a pay cut at the company I’m joining, and I expect many sleepless nights before getting any downtime.

If you can’t deal with constant uncertainty and massive swings up and down, you should stay away from startups and stick to banks.

The upside is that all the work you do improves the company, and since there’s little structure, you can potentially advance more quickly and earn significant equity in the process.

Q: Well said. Finally, can you tell us about your standup comedy hobby?

A: I had always been the “class clown” growing up, but I didn’t realize I could make money with it for a long time.

I did some performances in Singapore, but it’s a tougher crowd there.

I’ve had more success in Mexico – even though I do my routines in English – because I get new material all the time.

The standup comedy scene here is going through a renaissance, and there’s now a decent number of English-speaking comedians (and plenty of ex-pats to listen to them).

In comedy, reading the room is half the battle. If you understand the crowd well, you could go on stage and make people laugh even if there’s a language barrier.

My usual routine goes something like: “I’m a confused foreigner in Mexico, here are my experiences, and here’s how the cultures of Mexico, Singapore, and India compare.”

If you’re interested, you should come to my comedy club the next time you’re here.

Q: Will do! Once this coronavirus crisis has passed, anyway.

Thanks for your time and for sharing your story!

A: My pleasure.

The post From Quant Trading in Singapore to Fintech in Mexico: How to Enter a More Exciting Jungle appeared first on Mergers & Inquisitions.

You might want to follow in their footsteps… but maybe do something a bit different.

One good option is equity research, where you can combine your economic skills with finance and the capital markets.

Our reader today came to the same conclusion as he navigated his way into equity research in Brazil – from a family of economists:

Equity Research Brazil: Out of the Central Bank and into the Investment Bank: Getting In

Q: How did you first become interested in equity research?

A: I was born in “Economist Land:” My immediate family (plus cousins and others) all worked in economics or finance in some way.

One of them had worked for the IMF and the Brazilian Central Bank, and another family member had owned a small broker-dealer company in Brazil in the 1990s.

I saw how the high inflation and the currency fluctuations made the capital markets a high-risk, high-reward place, and I knew I wanted to get into the industry from a young age.

Q: So, you majored in finance or economics, and then…

A: No! I did an undergraduate major in engineering, completed a Master’s in Finance degree, and worked in various fields before entering equity research: Risk management and the back office, a family office, and FICC-related sales & trading.

After a few years in those roles, I applied for MBA programs, won admission to a top business school in the U.S., and joined the sell-side equity research team at a large domestic bank in Brazil.

I gained experience there and in a corporate finance rotational role, and now I’m looking to get into buy-side equity research.

Q: Good luck!

What was the sell-side equity research recruiting process like?

A: It’s far less structured than it is in the U.S.

Banks still hire students out of undergrad and incentivize them to stay for the long term, but the entire process happens more slowly, and firms don’t necessarily make you go through a specific set of steps.

People who network their way in tend to come from related roles, such as sales & trading, corporate finance, and investment banking. But it gets very difficult to network your way in after more than a few years of full-time work experience.

My story of winning an offer during an MBA program is quite rare.

Interviewers focus heavily on your soft skills and your ability to fit in with the team. As in other regions, you need a demonstrated interest in the markets, and you must be able to discuss recent trends.

The ER industry has become more competitive because there are so many Brazilians with MBAs from top schools, so the CFA is also becoming more important for setting yourself apart.

The technical questions and case studies in interviews are the same as those anywhere else: Expect 3-statement modeling tests, accounting/valuation questions, and stock pitches.

Equity Research Brazil – On the Job at a Large Brazilian Bank

Q: Can you tell us about the equity research industry in Brazil?

A: Since Brazil has the largest economy and capital markets in Latin America, it has a well-developed equity research industry as well.

A mix of international bulge bracket banks, “In-Between-a-Banks,” and domestic Brazilian banks cover companies here.

Middle market and boutique firms (whether regional or “elite boutique“) don’t do much yet (as of 2017 – 2018).

Pretty much all the international BB banks cover companies here: JPM, MS, Citi, CS, GS, BAML, and DB.

Of the “In-Between-a-Banks,” the European and Japanese ones have the strongest presence – firms like Santander, BNP Paribas, Mizuho, and Sumitomo all have solid coverage teams.

Three major domestic banks control most of the investment banking market: Itaú, Bradesco, and BTG Pactual.

They all have a strong presence in equity research as well, which you’ll see if you look at any of the Institutional Investor rankings.

That might change in the future because of the corruption scandal(s); the political climate could give smaller domestic banks and international firms an opening.

Q: Thanks for that summary.

What are the most common industries, and does any of the analysis differ from what you do in other regions?

A: Brazil has a diversified economy, at least compared with the smaller countries in Latin America, so research teams cover a mix of industries.

Some of the biggest industries by market cap are commodities (Oil & Gas and Metals & Mining), financials (Commercial Banks), and consumer staples (Food & Beverage), so many of the companies we cover are in those sectors.

Financial modeling is financial modeling, so you’ll still see quarterly and annual projections of the three statements, valuations using multiples and DCF analysis, and industry data to support initiating coverage reports.

The main differences include:

• Brazilian GAAP vs. IFRS – These have been converging over the years, but if you look at older reports and filings, there will be discrepancies. Some of the differences relate to subsidiary accounting, dividends, and exchange rates and borrowing costs.
• Lower Liquidity and Market Capitalization – Since there is far less liquidity, and since firms are much smaller than they are in the U.S., you have to dig into companies in a lot more detail to understand them.

It’s much harder to skim through a company’s financial statements and build a model just based on the documents; you have to get to know management and speak with sources on the ground.

• Currency Fluctuations – Since the BRL/USD exchange rate has been volatile and since the Real has fallen so much against the Dollar, sometimes research analysts will present financial projections in both BRL and USD side-by-side.

If you want to see a few sample reports for companies and industries, check out these examples:

• Brazil Retail & Consumer Goods Research – Santander
• Brazil Macro & Market Research – Generali Investments
• LatAm Universe Coverage Book – Santander

NOTE: We found all these reports with simple Google searches. Many firms make reports and updates publicly available if you search for the right keywords.

Q: Thanks for explaining that.

Previous equity research associate interviewees have said they spent more time speaking with investors and management teams than they did on financial modeling.

What was your experience?

A: I agree with those previous comments; you do a lot of modeling for the initiating coverage reports, but not quite as much after that.

In my role, I spent more time getting to know the management teams and putting them in touch with institutional investors.

I didn’t speak with the investors as much as the salespeople did, but we still interacted a fair amount because sales always wanted our views on various issues.

You split your time more evenly between company management and investors in buy-side equity research since you have to understand what everyone else in the market is doing.

Q: What are the compensation and long-term prospects of this role? Do most research analysts stay there for a long time?

A: Post-tax, post-living-expense equity research compensation in Brazil is about 20% lower than in New York.

Individual income taxes are about 15% lower in Brazil, companies pay for 100% of your healthcare, and the cost of living in São Paulo is ~30% lower than in NYC.

However, salaries and bonuses are also lower, so you can expect to earn about 20% less after taxes and living expenses.

Regarding exit opportunities, most sell-side research analysts either stay in the field or move into investor relations at companies they have covered.

A few may go into private equity or mutual funds, which is possible because recruiting is less structured than in NY and London.

But traditional ER exit opportunities are more limited because there are relatively few hedge funds here.

Q: Thanks for explaining that.

You mentioned in the beginning that you’re looking to move into buy-side research now. What’s your long-term plan?

A: Buy-side research was my plan all along.

I like buy-side research because it combines analytical/introspective work and communications with investors and management.

In most roles, you tend to do one or the other (investment banking skews heavily toward analytical work at the junior levels), so it’s rare to find that balance.

Also, the compensation and working hours are quite reasonable if you find a good team.

Finally, I like the importance of communication skills in research.

You publish reports and speak with different parties all the time, and, coming from a technical background, I’ve always wanted to do more of that.

Q: Great. Thanks for your time!

A: My pleasure.

Want more?

If you liked this article, you might be interested in reading:

• From Quant Trading in Singapore to Fintech in Mexico: How to Enter a More Exciting Jungle
• Equity Research in Brazil: The Best Way to Apply Economics to Real Life?
• Investment Banking Latin America: Never-Ending Internships or Never-Ending Bonuses?

The post Equity Research in Brazil: The Best Way to Apply Economics to Real Life? appeared first on Mergers & Inquisitions.

Or, you might not think of anything at all, since there’s much less information about the debt markets than there is about the equity markets.

Everyone can recall famous IPOs of technology companies, but hardly anyone outside the finance industry can name a “famous” debt offering.

Debt is lower-profile than equity, but it also offers many advantages – both to the companies issuing it and the bankers advising them in the context of DCM.

Similar to its counterpart, Equity Capital Markets, Debt Capital Markets is a cross between sales & trading and investment banking.

But that’s where the similarities end:

Debt Capital Markets Explained: What You Do in the DCM Group

Definition: A Debt Capital Market (DCM) is a market in which companies and governments raise funds through the trade of debt securities, including corporate bonds, government bonds, Credit Default Swaps etc.

Therefore, in the DCM Team, you advise companies, sovereigns, agencies, and supra-nationals that want to raise debt.

“Raising debt” means that an entity borrows funds and then pays interest on those funds – as opposed to equity, where the entity sells a percentage ownership in itself and pays no interest.

It’s similar to borrowing money for a student loan or mortgage, but organizations do it on a much greater scale than individuals.

As a junior-level banker in this group, you’re responsible for three main tasks:

• Pitching clients and potential clients on debt issuances and answering their questions.
• Executing debt issuances for clients.
• Responding to requests from other groups, updating market slides, and creating case studies of recent deals.

As a specific example of task #1, a company might come to you and say:

“We have $500 million of debt maturing in 5 years. Interest rates have fallen, so we think we could ‘refinance’ by raising new debt at a lower interest rate and using the proceeds to repay the existing issuance.

However, we’d also have to pay a prepayment penalty fee if we do that. Does this plan make sense? What terms could we get on the new debt? What interest rate is necessary for us to come out ahead?”

Or, a company might ask you something like:

“We want to raise debt to fund our everyday operations – what type do you recommend, and what should we expect regarding the interest rate, maturity, and prepayment penalty?”

You’ll answer these types of questions and advise organizations on their best options.

On the execution side – task #2 – much of your work will consist of drafting memos for internal committees and sales teams.

These memos help get your bank comfortable with deals and provide the sales force with the numbers and analysis they need to ‘sell’ the offerings to institutional investors.

Finally, you will also spend a fair amount of time answering requests from industry groups and product groups, updating market slides, and creating case studies of recent debt deals.

There is some quantitative and financial modeling work, but it is usually not as in-depth as you might think.

DCM tends to be a higher-volume, lower-margin business than ECM.

The global credit markets are far bigger than the global equity markets, there are more deals, and the deals happen more quickly – days rather than weeks or months.

As a result, investment banks charge lower fees than they do for, say, IPOs, and they have to make up for it with higher deal flow.

Debt Capital Markets vs. Leveraged Finance vs. Corporate Banking

Several other groups at investment banks also advise on debt issuances; the two most similar ones are Leveraged Finance and Corporate Banking.

The differences between these three departments vary from bank to bank.

DCM is different from Leveraged Finance because it focuses on investment-grade issuances that are used for everyday business purposes.

By contrast, Leveraged Finance focuses on higher-risk, higher-yielding issuances (“high-yield bonds”) that are often used to fund acquisitions, leveraged buyouts, and other transactions.

Corporate Banking groups focus on “bank debt” (Revolvers and Term Loans) that is kept on the bank’s Balance Sheet and not syndicated to outside institutional investors.

By contrast, DCM focuses on investment-grade bonds that are syndicated and sold to outside investors.

These are general guidelines, but in practice, there can be significant overlap between these groups, and there may be exceptions to these guidelines.

For example, Leveraged Finance is sometimes called “Leveraged Debt Capital Markets,” and a DCM team might focus exclusively on syndicated debt assignments of all types.

DCM Interview Questions and Answers

As with any other IB group, some students intern in DCM and accept full-time offers there, while others are placed into the group via a sell-day or off-cycle recruiting.

Sometimes lateral hires with credit analysis experience at rating agencies or corporate banking join, and you’ll find former industry coverage bankers here as well.

The recruiting process is similar to the one for any other investment banking role: Start early or be left behind!

The main difference is that the interview questions are often closer to the ones you might receive in sales & trading interviews.

Since DCM is a hybrid group and often sits on the trading floor, interviewers from fixed-income trading desks could easily ask you questions about how to hedge interest rate or FX risk (for example).

You could even get macroeconomic questions about the activities of central banks or the impact of trade policy on FX rates.

At the minimum, you should have a solid understanding of bond analysis: Yields, prices, call and put options, the yield to maturity (YTM) and yield to worst (YTW), make-whole analysis, and how companies think about refinancing decisions.

(For more, please see our full tutorials on the bond yield, the Current Yield, the Yield to Maturity, the Yield to Call, and the Yield to Worst.)

You should also know something about how credit ratings are assigned, why companies raise debt vs. equity, and how to advise a company on the most appropriate type of debt.

We cover these points in the IB Interview Guide in the Equity vs. Debt section and in more depth in the Core Financial Modeling (CFM) course:

The Interview Guide is best for more of a “quick review,” while the CFM course is more about learning the concepts from the ground up, for both interview prep and internship/full-time job preparation.

You should also be prepared to discuss debt market trends; you can find that information on sites such as LeveragedLoan.com and sometimes directly from banks (ex:  Société Générale’s year-end reports).

To prepare for deal discussions, you can look at GlobalCapital’s list of recent bond issuances and research the names you find there.

Finally, if you’re still in the networking phase, check out the Fixed Income Analysts Society, Inc. (FIASI) and the CFA Society.

The DCM Team Structure: Variance 101

The structure of Debt Capital Markets teams varies a lot because of the hybrid nature – some banks might even combine DCM with Leveraged Finance.

Some teams are divided into corporate vs. government issuers, and then they are further divided into industry verticals.

Just as in ECM, there’s also a syndicate team that’s responsible for allocating orders between different investors and building the books for bond offerings.

Junior Analysts typically work across a few verticals and then specialize as they move up the ladder.

DCM Jobs: Workstreams, Projects, and Sample Assignments

As in ECM, your main task in DCM is to tell stories about companies, governments, and other organization so they can raise capital more easily – but the plot points and characters in those stories differ.

For example, equity investors like to hear about the growth potential and upside of a company’s business, but debt investors care most about avoiding losses since their upside is capped.

As a result, they’ll focus on the stability of a company’s cash flows, its recurring revenue, the interest coverage, and the business risk.

They want to hear a story that ends with: “You’ll earn an annual yield of XX%, and even in the worst-case scenario, the company will still repay your principal.”

If you’re working in Debt Origination, you can expect these types of tasks:

• Market Update Slides: You might work with an industry coverage team to present your thoughts on financing alternatives in the current market. These pages can include details on the volume of capital raised, the number of offerings completed, the market’s total leverage, and the terms of recent offerings. Here are a few examples:
  • CEEMEA Markets Update by Citi
  • Credit Market Considerations by Goldman Sachs
  • Credit Materials (Pages 28-33) by Goldman Sachs
  • Credit Market Update by Merrill Lynch
• Debt Comparables (Comps): The idea is similar to comparable public companies (public comps) or Comparable Company Analysis, but since these are for debt issuances, they present very different data. You might show the issuer’s name, the offering date and amount, the coupon rate, the security type (e.g., senior secured notes vs. subordinated notes), the current price, the issuer’s credit rating, the Yield to Maturity (YTM) and Yield to Worst (YTW), and credit stats and ratios such as Debt / EBITDA, EBITDA / Interest, and Free Cash Flow / Interest. You can see a few examples below:

• Case Studies: You will also create slides on similar, recent offerings to motivate and inform prospective clients. To do this well, you’ll need to research an individual offering’s details, read through the term sheet, and assess the company’s performance following the offering. Here are a few examples:
  • Gazprom by ABN Amro
  • Industry and Construction Bank by ABN Amro
  • Bond Offering by Goldman Sachs
• Internal Memorandum: You’ll draft this document to setthe narrative about the proposed debt offering and to inform your bank’s internal committee of the risks involved. Typical sections include:
  • Situation Overview
  • Credit Considerations
  • Risk Factors
  • Transaction Analytics and Financial Overview
    • Sources & Uses
    • Capitalization Table
    • Operating Summary and Credit Statistics
  • Company Information
  • Industry Overview
  • Business Unit Overviews
  • Comparables Analysis

It’s incredibly difficult to find public examples of this type of memo, so our team of ninjas did the next-best thing: They found leaked examples from everyone’s favorite failed bank:

• Debt and Equity Financing for Archstone-Smith Trust by Lehman Brothers
• Bridge Loan for Archstone-Smith Trust by Lehman Brothers

Yes, they’re old, but these memos do not change much over time, and it’s almost impossible to post anything recent and not get sued.

• Sales Team Memorandum: This one is similar to the equity sales force memorandum, but it’s slightly more technical. It helps sales professionals pitch the bond offering to potential investors, and it includes details such as:
  • Offering Summary (the purpose of the offering)
  • Key Dates and Road Show Schedule (an abbreviated timetable outlining the sequences of marketing to investors to offering pricing)
  • Summary Financials
  • Company Overview
  • Investment Highlights (why the investors should participate)
  • Summary Valuation
  • Products/Services Overview
  • Growth Strategy
  • Sources & Uses
  • Capitalization
  • Comparables Analysis and Operations Benchmarking
  • Risk Factors
• Speaking with Clients and Investors: You’ll do more of this as an Associate, but frequently investors will call the group to find out more about a company’s issuance – sometimes via the sales force. If everyone else is busy or gone, you’ll take these calls. The DCM group will also send out indicative pricing to clients each week so they can get an idea of the terms of new potential offerings.
• Financial Modeling: In credit analysis, you focus on building 3-statement models with different scenarios (e.g., Base, Downside, and Extreme Downside) and assessing how a company’s credit stats and ratios (Debt / EBITDA, EBITDA / Interest, etc.) change… at least in theory. In practice, you do little financial modeling in many DCM groups because investment-grade issuances are so straightforward to analyze. Bond pricing and terms are often based on a client’s credit rating and basic financial stats.

DCM Products: Originate, Structure, and Market

DCM deals differ based on the type of issuer (corporation vs. sovereign vs. agency vs. supranational vs. municipal) and the terms of the issuance.

For example, issuing senior secured notes for a mature industrial company will be quite different than issuing a 10-year bond for the government of Brazil.

Many people put debt into different categories, such as Senior Secured Notes vs. Junior Subordinated Notes vs. Subordinated Notes vs. Senior Notes vs. a laundry list of others.

That’s a useful start point, but it can get confusing because there’s overlap between the categories, and sometimes the dividing lines are not clear-cut.

It’s more helpful to think about the key terms of any bond issuance:

• Principal Amount: How much money the organization raised or is planning to raise.
• Coupon Rate: This is usually a fixed rate for corporate bonds, such as 5.0% or 7.0%. On the other hand, government bonds are often priced at spreads to prevailing rates such as the 10-year U.S. Treasury rate.
• Maturity Date: When does the organization need to repay the bond in full? Five years? Ten years? Thirty years (for government bonds)?
• Frequency: Many corporate bonds have semiannual (twice per year) interest payments, but some bond payments are annual, quarterly, or even monthly.
• Seniority: Where does this bond rank in the company’s capital structure? This point is critical in the case of a bankruptcy or liquidation scenario.
• Redemption / Redemption Prices: Can the organization repay the bond early? If so, how much extra will it pay to do so? Normally, corporate bonds cannot be repaid for the first few years after issuance, but they can be repaid as the maturity date approaches, according to a downward sliding scale of prepayment premiums (e.g., 103%, 102%, and 101% in the three years before maturity). A company might want to repay debt early to reduce its interest expense (if rates have fallen).
• Covenants: What does this issuance prohibit the company from doing? Maintenance covenants limit the company’s credit stats and ratios (e.g., it must stay below 5x Debt / EBITDA at all times), while incurrence covenants limit its actions (e.g., it cannot divest a division or issue dividends above a certain level, which might be an issue depending on its dividend yield).
• Original Issue Discount (OID): Was this bond issued at a discount to par value? If so, why? How is the amortization of this discount reflected on the financial statements?

To further complicate things, there are also different types of mandates besides bonds: Loans (more senior, with floating interest rates), asset-backed securities, and commercial paper, for example.

Other teams, such as corporate banking or structured finance, may take the lead on these assignments, with DCM involved but not necessarily leading the deal.

And Debt Capital Markets itself has grown to include products for hedging interest-rate and FX risk – which is yet another reason why it’s a hybrid group.

At PwC, there is even a team that covers debt capital advisory.

In a financing assignment, your team might act in any of the following roles:

• Bookrunning Manager
• Lead / Co- / Sole Manager
• Initial Purchaser
• Sole / Joint Placement Agent

Similar to equity deals, the bookrunners have the most responsibility and earn the highest fees.

When you work with an industry group at the bank, the industry group will provide the market analysis and valuation, and DCM will handle the credit analysis and answer questions about the pricing and terms of an offering.

The process of executing a debt deal isn’t that much different from the process of executing an equity deal.

The main differences are that borrowers issue debt more frequently and deals happen more quickly, so you don’t need to do as much work educating investors.

Finally, there are also block trades (bought deals) and agency transactions in some regions, such as Canada.

In bought deals, the bank acts as a principal and buys the client’s debt before reselling it to investors, and in agency deals, the bank acts as an agent and allocates the debt to institutional investors on a “best-efforts” basis.

DCM Hours

Since DCM sits between sales & trading and investment banking, the culture is also somewhere between those two.

In the best-case scenario, you might work close to “market hours,” i.e., roughly 12 hours per day on weekdays.

In practice, however, many DCM bankers work more than that, and the hours can approach the traditional IB grind.

That’s partially because it’s a higher-volume business, so you’re more likely to get staffed on deals consistently.

An average day might start with you at the desk at 7 AM, followed by team meetings with the sales force and traders.

Those two groups leave, and syndication stays behind to discuss possible and pending deals.

You finish up with meetings at 8 AM and then spend the next hour catching up on the news, overnight events, and monitoring traders in other offices.

Deals start launching when the market opens at 9:30 AM in NY (the market open time varies based on your region), so you’ll be quite busy if your bank is leading deals.

After that, the day varies based on your team’s deal flow. If you’re launching deals, you’ll have to monitor their performance and be around to answer questions.

If there are no live deals, a “quiet day” might consist of updating market slides, responding to requests from industry groups, and creating case studies based on recent bond offerings.

Debt Capital Markets Salary and Bonus Levels

At the Analyst level, compensation in DCM is similar to compensation in any other group.

However, the pay ceiling for Managing Directors and senior bankers is lower because fees and margins are lower, and the fees are split more ways.

A decent-performing MD in a financial center can still earn $1 million+ USD per year, but he/she is unlikely to go far beyond that.

Some argue that DCM offers better long-term career prospects than ECM because it’s “more stable” and bankers are less likely to be cut in downturns.

There is some truth to that because equity markets tend to shut down more quickly and decisively than debt markets; also, the skill set in DCM transfers to a wider variety of other fields.

But this claim is also a bit exaggerated because in a true recession, a lot of bankers across all groups will be cut.

DCM Exit Opportunities: Credit-Related Anything?

The good news is that you do have access to a wider set of exit opportunities in DCM than you do in ECM.

Not only could you move to different groups at your bank, but you could also apply to Treasury roles in corporate finance at normal companies, credit rating agencies, corporate banking, and fixed income research.

The bad news is that DCM is still not an ideal group for getting into private equity or getting into hedge funds.

“But wait,” you say, “you work with debt in DCM. Private equity firms use debt to do deals! And many hedge funds are credit-focused! They should want DCM bankers.”

Yes, but the problem is that PE firms use debt to fund transactions – whereas most debt issuances in DCM are not M&A/LBO-related.

As a result, you don’t get much practice with modeling acquisitions or leveraged buyouts or understanding the dynamics of those deals.

Also, while there are quite a few credit hedge funds, most invest in high-yield bonds, mezzanine, or other securities with higher risk/potential returns instead of investment-grade issuances.

So, if you’re interested in private equity careers or hedge fund exits, you’re better off joining a strong industry group or M&A team.

But if you want to make a long-term career out of banking, DCM is a good option since you’ll have a better lifestyle and you’ll still earn a lot.

And if you’re interested in other credit-related roles, or in corporate finance at normal companies, Debt Capital Markets also gives you solid options.

So Why Work in Debt Capital Markets?

Similar to ECM, DCM tends to attract a lot of negative comments online – often from people with zero experience in the finance industry.

It isn’t necessarily “the best group,” but it’s still far better than most entry-level jobs outside of investment banking.

And if you intern or work in the group and find out it’s not for you, just transfer to another team – they’re always looking, especially after bonuses are paid.

Further Reading

You might be interested in:

• Capital Markets vs. Investment Banking: Deals, Careers, Recruiting, Exits, and Offer Decisions
• Investment Banking League Tables: Neutral Arbiter of Bank Rankings or Marketing Manipulation?
• Fixed Income Trading: The Definitive Guide

The post Debt Capital Markets (DCM): The Definitive Guide appeared first on Mergers & Inquisitions.

In other words, if you cover emerging markets such as Latin America or Africa, is it better to be based in those regions, or to work in the nearest financial center, such as New York or London?

You might think it pays to be local, but that’s not always the case.

And the classic example of that is investment banking in Latin America, where being “on the ground” creates some interesting trade-offs – as our reader today found out:

Breaking into Banking: The Never-Ending Internship

Q: Can you tell us your story?

A: Sure! I completed my degree in Latin America, did several internships in valuation and M&A, and won a one-year-long “internship” at a large international bank in a Latin American country.

I won a full-time offer from the internship and have been here ever since.

Q: I know you don’t want to describe your background in detail, so let’s move on.

What is the IB recruiting process like in Latin America?

A: You have to divide the process into “Latin American coverage groups in New York” and “Actual IB teams on the ground in Latin American countries.”

In New York, the process is the same as in any other group: Banks recruit students from target schools. If you’re at one, you apply and win interviews/offers like that, and if you’re not, you go through a huge networking effort to get in.

Many people get hired in the New York coverage team and then transfer to regional offices.

If you start out at a regional office, the process is completely different because banks offer internships of 1.0 – 1.5 years before awarding full-time offers.

I’ve seen people work for 2-3 years before receiving a full-time offer.

Each office of a “large bank” in a place like Lima, Buenos Aires, or Santiago might have only ~10 people and might hire only one person every two years.

The exceptions are Brazil and Mexico, which have bigger offices, more openings, and real product and industry groups.

Q: OK. And I assume you have to be at the top university in each country to have a chance?

A: Banks tend to recruit from the top 1-3 universities in each country.

So, in Brazil, they recruit from schools like Insper, Fundação Getúlio Vargas (FGV), University of São Paulo (USP), and several others since it’s the biggest country.

They recruit from Pontificia in Peru, and in Chile, they recruit from Pontificia (different one) and Universidad de Chile. Countries such as Colombia and Argentina follow similar patterns.

As in the U.S. and Europe, most people who get in tend to major in Business, Economics, or Engineering; I’ve rarely seen candidates with History or Literature degrees win offers.

I also haven’t seen many people get in from foreign (U.S., European, or Asian) universities, but plenty of MBAs move back to the region after working abroad for a while.

Q: Somehow, investment banking sounds even more elitist there.

With these extended internships, when do they tell you whether or not you’ll get a full-time offer?

A: If it’s a 10-month internship, they might tell you by Month 4 or 5; the team will review you and say whether or not they’re happy with your performance.

If they’re not happy, the internship will last a few more months, and then you’ll be gone.

If they are happy, you’ll complete the internship and, if nothing goes wrong, receive a full-time offer at the end.

Q: Are there any differences in interviews?

A: Interviews tend to be less technical than they are in the U.S. or Europe, and the technical questions you do receive will be less complex.

Bankers care more about “fit,” including the social circles you’re in, your connections to the country, and your commitment to a long-term future there.

Bulge Brackets vs. Domestic Banks vs. Elite Boutiques in LatAm

Q: What can you tell us about the overall industry there?

Let’s start with the bulge brackets vs. the big Latin American banks, such as BTG Pactual.

A: The bulge-bracket banks tend to work on the largest M&A deals and any deals with non-LatAm buyers/sellers.

Latin American banks focus on IPOs, debt issuances, and regional M&A deals; for example, if a Brazilian company is buying a Colombian company, a Brazilian bank might win that mandate over an international BB bank.

JPM, BAML, CS, MS, and Citi all tend to do well here, with the exact rankings and industry strengths changing from year to year.

The In-Between-a-Banks, such as Santander, HSBC, and BBVA, are strong mostly in ECM and DCM.

Among Latin American banks, the Brazilian ones tend to dominate, with the top three there – BTG Pactual, Itaú, and Bradesco – always ranking well.

The elite boutiques have less of a presence than they do in the U.S. and Europe: Centerview and Perella Weinberg aren’t here at all, Evercore is only in Brazil and Mexico, and Moelis only has a São Paulo office.

The exceptions are Lazard and Rothschild.

Lazard has offices in all the major countries: Argentina, Brazil, Chile, Colombia, Mexico, Panama, and Peru. The offices outside of Mexico and Brazil came from MBA Lazard before it was acquired in full by Lazard.

Rothschild, meanwhile, often ranks well in the M&A league tables because it advises many European companies buying assets here.

Then, there are dozens or hundreds of regional boutiques, so I won’t even attempt to name them all.

A few well-known ones include BR Partners (Brazil), Inverlink (Colombia), and VACE Partners (Mexico).

Q: Thanks for that information dump!

If each country is so small, why do banks even use local teams?

A: Because bankers outside of Mexico and Brazil all cover multiple countries.

For example, a banker in Panama might also cover the rest of Central America, and someone in Chile might also cover Argentina and Peru.

Also, many of the product MDs for groups like M&A, ECM, and DCM at large banks are based in NY and travel to the countries here frequently.

Q: OK. What about the most common deal types and industries?

A: Deals tend to be much smaller, with the possible exception of Brazil.

A $1-2 billion USD deal is “normal” in the U.S., but it would be huge here.

Many deals range from $20 million to $50 million USD in size, with occasional deals over $100 million (depending on the country).

Most of the economies in Latin America are commodities-driven, so natural resources, infrastructure, and power deals are very common.

Many countries still lack basic infrastructure, so private equity firms have been popping up to do infrastructure deals (though the deals can be hard to find and close).

Banks often win or lose mandates via Project Finance work, so European and Asian banks have an advantage there.

There’s a lot of deal flow in consumer/retail, but less in consolidated industries such as telecom (There are just 2-3 major players in many countries, which leaves little room for M&A).

Real estate is a developing segment, and we’ve seen more movement in RE deals over time.

While REITs have existed in the U.S., Europe, Australia, and other developed countries for a long time, they are relatively new here.

The “FIBRA” (Fideicomiso de inversión en bienes raíces) offers a similar structure in Mexico, and REITs will become more widespread in the other countries here in the long term.

New York, New York… or Latin America?

Q: Thanks for all that information.

Based on what you know of Latin America and developed countries, where would you recommend working?

A: I think it’s better to be in New York if you want to advise on Latin American deals because there are more exit opportunities, and you gain more exposure to various Latin American markets rather than the localized approach in the regions.

Also, investment banking in NY is less “prestigious” than it once was, and banks face serious competition from hedge funds, private equity firms, and even technology companies like Google and Facebook.

The top performers have many options, so banks have less bargaining power.

But in Latin America, there are few real hedge funds, and there are relatively few PE firms (except for Brazil/Mexico), so investment banking is still an appealing long-term career.

As a result, banks have more power and the rules may be slightly more stringent than in developed countries.

Q: I see. So, exits into private equity are not that common?

A: They’re pretty rare except for Brazil and Mexico, where the private equity industry is more developed.

But there are fewer PE firms in the smaller countries here, and you might also take a significant pay cut if you move from banking into private equity.

To give you an idea, you might earn 40-50% less at a domestic PE fund in some cases.

The same applies if you go into corporate finance or corporate development.

As a result, bankers in smaller countries tend to stay in banking or move to the U.S., Europe, Brazil, or Mexico to gain more opportunities.

Q: Thanks for that explanation, and for your time. I learned a lot!

A: My pleasure.

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If you liked this article, you might be interested in reading From Quant Trading in Singapore to Fintech in Mexico: How to Enter a More Exciting Jungle.

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