What Is Investment Banking

What is Investment Banking?
Patrick Fearon Autumn 2012
Patrick Fearon 2012
This year we have split the Banking and Finance Lecture into two:
First Session
What is Investment Banking?
Second Session
What Careers in Banking and Finance are available outside Investment Banking?
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In the Investment Banking lecture this morning we will be looking at:
Corporate Finance

Financial Advisory Advice on M&A Private Equity Debt Capital Markets Origination (DCM) Equity Capital Markets Origination (ECM) Sales & Trading Research Sales & Trading Research Finance Compliance Risk (Market, Credit, Operational) Audit Operations
FICC

Equities

Support Functions

Skills and Opportunities required in Banking
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In the Careers in Finance Outside Investment Banking lecture this afternoon we will look at:
Why you might look at a career outside of Investment Banking Investment Banking careers that can be done outside Investment Banks

FICC Equities M&A Private Equity
Wealth Management

Private Banking Institutional Asset Management Project Finance Leveraged Finance Syndicated Lending Some of the active Corporate Lending Banks you might consider Domestic and International
Corporate Lending

Retail Banking
Audit Governmental Banks
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Contents of this mornings lecture
Which are the various divisions of an Investment Bank? What do those divisions do? What would a graduate do in each of those divisions? What skills and personality traits are the banks looking for?
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An Overview of Investment Banking
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What does an Investment Bank look like?

Goldman Sachs International
Asset & Wealth Management
Securities Services
Corporate Functions
Equities Debt
Investment Banking Trading & Sales & Trading Principal and Principal Investments Investments
Source: www.gs.com/careers
www.prospect.ac.uk
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But Investment Banks do not all look alike

JP Morgan Chase: A Commercial Bank that has expanded into Investment Banking
Corporate Functions
Source: www.careers.jpmorganchase.com
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Investment Banking
The Commercial Banks that have expanded into Investment Banking versus The Traditional Investment Banks
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The Commercial/Investment Banks versus the Traditional Investment Banks
The Commercial/Investment Banks:

What were they? What are they today?

Highly capitalised and therefore Able to underwrite and lend significant amounts Able to lend their own money Have developed or acquired Investment Banking skills
Who are they?
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The Commercial/Investment Banks versus the Traditional Investment Banks
The Traditional Investment Banks

How have they changed? How successful have they been in beating off the challenge of the Commercial Banks? To what extent have they had to expand into commercial banking to compete? Who are they? Who is left?
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This distinction is becoming historical

The traditional US Investment Banks are now required to structure themselves as bank holding companies Increasingly they will be competing for deposits and lending money And the governments are legislating against casino banking which will limit their trading activities
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Investment Banking
Be careful, Investment Banking means different things to different people.
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Different definitions of Investment Banking
JP Morgan Financial Advisory Advice on M&A Corporate Lending Loan Syndication Debt Capital Markets Origination Equity Capital Markets Origination Debt Capital Markets Sales & Trading Equity Capital Markets Sales & Trading Debt Capital Markets Research Equity Capital Markets Research Investment Banking
Morgan Stanley
Credit Suisse
Investment Banking
Corporate
Institutional Sales & Trading
Institutional Research
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Source: Banks own websites
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Different definitions of Investment Banking Summary
How a bank defines Investment Banking reflects

the personality of the bank the power groups or profit centres within the organisation
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How to understand the culture of an Investment Bank

Look at the website/Annual Report/recruiting material Network to understand the culture Understand how the bank was put together

e.g. UBS: merger of UBS/SBC/Warburg/Phillips & Drew Citi: merger of Salomon/Schroders/Citibank/Smith Barney vs Goldman Sachs which has grown organically Merrill Lynch: Sales/creating product to sell to institutions and individuals JP Morgan: Corporate Finance Societe Generale: Equity Derivatives
Is there one business area that drives the Bank?

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But above all, look at the numbers

Global Net Revenues of Investment Banks 2011
41.0 35.4 30.4
US$ Billions
26.7 20.4
-Debt and Equity Origination -M&A -Loan Syndication
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Source: Banks Annual Reports
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Investment Banking
A typical Investment Banking deal can involve many areas of the Bank
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A typical Investment Banking deal can involve many areas of the bank
DIVISION
Corporate Finance
PRODUCT DELIVERY
Corporate Finance Corporate Finance Corporate Finance Loan Syndication
PRICING
Corporate Finance Equity Syndicate FICC Syndicate Loan Syndication
INTO MARKET
CLIENT
RELATIONSHIP MANAGER
Equities
Sales & Trading Sales & Trading Sales & Trading
FICC
Corporate Lending
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A typical Investment Banking deal involves many areas of the bank
The deal fans out to all the Investment Banking divisions It moves through each of those divisions from structuring to pricing to conclusion In the case of the market-oriented divisions (Debt, Equity and Loan Syndication) conclusion = Selling/Trading the asset. The Relationship Manager remains the focal point with the client throughout In this example, M&A is the catalyst for a chain reaction of deals throughout the Investment Bank
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What is the future of Investment Banking?

The regulatory environment with Volcker Rule and Basel 3 in response to the defaults and losses brought about by the crisis will continue to cause changes in the investment banking industry. Basel 3 requires banks to raise significant amounts of capital to ensure capital adequacy A number of governments (e.g. Switzerland) are putting pressure on local banks to raise capital over and above Basel 3 requirements The emphasis of Investment Banks is on developing businesses that are not capital intensive (e.g. Mergers & Acquisitions) as opposed to businesses that are (e.g. commercial lending). You should expect to see banks focusing on their core businesses as opposed to being all things to all men. (E.g. SocGen Equity Derivatives) to conserve capital And this will become more evident as we come out of recession and loan demand increases
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What is the future of Investment Banking?

Volcker Rule prevents banks from undertaking activities that are deemed to be speculative And therefore, Activities like Proprietary Trading fall foul of the Volcker Rule and are being floated off into hedge funds (e.g. Goldman Sachs). The emphasis of banks is increasingly on plain vanilla flow trading The problem is that these high risk activities can also be high profit With the result that Investment Banks are being pushed towards more commoditised, low-profit activities Moreover, flow business will increasingly move on to exchanges, which will mean Investment Banks will have more competition in flow product activities and, therefore, lower earnings.
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What does this mean for banking careers?

The market is increasingly dividing between Investment Banks/Brokers (fee business), Hedge Funds, Private Equity (risk takers) and Third Party money managers (AM, PB). What youre seeing is a combination of pressure on bank earnings and greater capital requirements, and, therefore, lower returns on Equity. Bank bonuses will inevitably be curbed and careers in Banking will be less well remunerated than they have been.
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What kind of positive market signs do you see?

Very few this year Almost every area of Investment Banking activity had a disastrous quarter in either Q1 or Q2 of 2012 M&A was down 16% in the first 9 months of this year. New issues were down 14% in Equities. Only Debt is showing an improvement up 4% Commercial Lending is down 26%. Nevertheless, at this stage the recruiters are saying that they intend to recruit the same number of MScs as last year.
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The market remains extremely cautious

Much of Europe has slipped into a double dip recession The US has lost its triple-A credit rating, which triggered a flight to quality. In January, S&P down-graded Italy, Spain, France and Austria. Concerns about eurozone credit, inflation and recession persist, and even the future viability of the Euro Several rounds of lay-offs in the Investment Banking divisions have been initiated. There is still some hiring going on within front office investment banking divisions (but more within alternative financial services sectors and internal control functions like risk management). .
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http://useconomy.about.com/od/fiscalpolicy/p/US_Debt.htm
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A detailed look at Investment Banking
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Investment Banking involves four main activities
Corporate Finance

Financial Advisory Advice on M&A Private Equity Debt Capital Markets Origination Equity Capital Markets Origination Sales & Trading Research Sales & Trading Research Finance Compliance Risk (Market,Credit, Operational) Audit Operations
FICC

Equities

Support Functions

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What does Corporate Finance mean?
Its an Advisory Activity focused on changes of ownership and raising capital to finance those changes. Mergers and Acquisitions, Equity Capital Markets, Debt Capital Markets are some of the main activities. M&A team can represent the defending or the acquiring company Can refer to any Corporate Development including Management Buy Outs and Joint Ventures Also general financial advice to corporates Most banks view this as an international business and will have units in at least New York, London, Tokyo and Hong Kong (sometimes Latin America, Australia) to follow global clients international activities.
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How is a Corporate Finance department structured?

Corporate Advisory Group Often houses the Relationship managers that are split into industry specialists: Financial Institutions Group Telecoms & Media Oil & Gas Healthcare Real Estate Etc.
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M&A
Debt/Equity Origination
Corporate Solutions
Advise on mergers and acquisitions, joint ventures and other corporate development actions. Finding target buyers or sellers.
Underwriting new equity/bond issues.
The solutions team, may work with any of the other teams to come up with derivative add-on products that will permit the bank to obtain more margin and allow clients to complete risk hedging solutions strategy within one institution.
What would a graduate do in Corporate Finance?

Client wants to make an acquisition Analysts evaluate potential candidates Corporate Finance wants to pitch an idea to a client Analysts prepare the presentation to the client Corporate Finance needs to value an acquisition Analysts value through analysis of previous transactions and forecasting future cash flows Client wants to know how much debt his balance sheet will bear Analysts run the financial modelling
Sometimes Analysts will attend client meetings but will not usually have primary client contact
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These were the most active M&A advisors globally in 2011

Rank Value $US billion
636 631 509 387 367 347 337 293 268 248 236 164 143 142 137
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Advisors
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
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2010 ranking
2 1 3 8 5 9 4 7 6 10 11 13 15 14 28
Number of deals
360 355 285 254 199 254 262 216 155 216 248 187 127 65 96
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Morgan Stanley Goldman Sachs JP Morgan Bank of America Merrill Lynch Citi
UBS Credit Suisse
Deutsche Bank Barclays Capital Lazard Rothschild Nomura BNP Paribas Evercore Partners Societe Generale
Source: http://thomsonreuters.com.
In the next tier of 15, the advisors are very different institutions
The Accountancy firms

PriceWaterhouseCoopers Ernst & Young Deloitte and Touche Enskilda (Nordic) Mediobanca (Italy) Santander Global Banking (Spain) Greenhill & Co (generalist boutique) GPKCCW (Financial Services boutique) Allen & Company (entertainment industry boutique) Blackstone Group
The Regional Experts

The Boutique Investment Banks

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There are significant regional variations that you should be aware of

Announced Deals 2011
Advisors
1 2 3 4 5 6 7 8 9 10 11 12 Goldman Sachs Morgan Stanley JP Morgan Credit Suisse Bank of America Merrill Lynch
Citi
Global Value $US billion

647 511 482 401 395 383 327 273 261 250 224 166
US ranking
1 2 3 5 4 6 7 11 10 8 12 9
European ranking
1 2 3 5 11 6 7 4 9 13 8 N/A
Asian ranking
1 3 7 6 5 2 16 8 4 N/A 9 N/A
Barclays Capital Deutsche Bank UBS Lazard Rothschild Evercore
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http://www.politico.com/static/PPM153_bb_080110.html
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M&A volume collapsed in 2007 and is showing clear signs of a double-dip
Worldwide Announced M&A Quarter by Quarter
2007
2008
2009
2010
2011
2012
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Source: http://bankerthomsonib.com.
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What is the state of Corporate Finance?
The last full year (2011) was weak, particularly in the second half of the year M&A deals announced worldwide were up 7% in value in 2011 year on year, but 5% down in volume Volume reached $2.6 trillion in 2011 ($2.4 trillion in 2010) but first half volume amounted to $1.5 trillion; second half was $1.1 trillion, down 24% Emerging Markets M&A in 2011 reached $667 million versus $806.3 billion in 2010. The only really buoyant area was Private Equity M&A, which was up 32% year on year. Goldmans Net Fee Income from M&A was $1.8 billion last year versus $2.1 billion in 2010 (over $3 billion in 2007)
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What do you see happening in M&A right now?

M&A was down 17% in the first 9 months of 2012 versus the same period last year. $ 1.7 trillion versus $ 1.9 trillion for the first 9 months of 2011 Q1 2012 was the weakest quarter for M&A since the first quarter of 2009 ($485 billion), but Q2 and Q3 were a lot stronger ($626 billion and $552 billion respectively), so maybe we are coming slowly out of the double dip. France has been particularly badly hit. New deals completed in the first 9 months of this year were 71% down in value on the first 9 months of 2011. Emerging Markets M&A in 2012 has reached US$ 465 billion, a 7% decrease compared to 2011. Now driving 28% of M&A worldwide Completed advisory fees were down 22% for the first 9 months of 2012 and totalled $ 11.7 billion
http://online.thomsonreuters.com/DealsIntelligence/Content/Files/2Q10_MA_Financial_Advisory_Review.pdf
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Which sectors were active in 2011?
http://online.thomsonreuters.com/DealsIntelligence
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The deals announced this year are mostly trade transactions. No major Private Equity deals so far.
Announced M&A transactions YTD (June 2012)

Acquiror 1 2 3 4 5 6 7 8 9 10 Glencore FROB Shareholders Walgren Co Anheuser-Busch Inbev Electrobel Nuclear Damage Liability Eaton Corp Nestle SA Lehman Brothers Holdings Inc Xstrata Plc Banco Financiero y de Ahorros ConocoPhillips Refining & Marketing Alliance Boots GmbH Grupo Modelo SAB de CV International Power Plc (40.9%) TEPCO (75.7%) Cooper Industries Plc Pfizer Nutrition Archatone Smith Trust (26.5%) Target $ billion 48.8 23.8 21.7 21.4 20.1 12.9 12.6 12.2 11.9 11.8
http://online.thomsonreuters.com/DealsIntelligence
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Are Corporate Finance Divisions recruiting?

In the major investment Banks outside of France, the 2013 Graduate Programme has largely been filled out of the 2012 Summer internship. Your best way in is through a Summer Internship in 2013. Alternatively, look for a 2013 Spring week internship Within France, the usual route in is through internships. There are a number of these internships available, but full-time roles are very selective.
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Are Corporate Finance Divisions recruiting?

Boutiques are recruiting (VTB, Jefferies), but the numbers they recruit are relatively small. Some of these boutiques outsource their graduate and internship recruiting to firms such as The Cornell Partnership. www.cornellpartnership.com Some firms have difficulty filling their internships in the second half of the gap year. (E.g. Rothschilds) Dont overlook the Transaction Services arms of the Big 4, or Audit.
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Private Equity
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What is Private Equity?

A Private Equity company raises a fund with external investors to make acquisitions (quoted or unquoted) on a leveraged basis Time horizon for holding the investment is 3-4 years Private Equity companies, therefore, compete for acquisitions with trade purchasers The funds can be huge. Latest Blackstone fund is $21.0 billion Which division of a bank does it sit in?

Asset Management (Morgan Stanley). External Investors. Equities (Goldman Sachs). Its the purchase of the shares of a company. Separate entity (JP Morgan). It competes with the banks clients.
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What are the differences between Private Equity acquirers and Public Company acquirers?
Leverage

The banks were prepared to lend up to 5 times the Private Equity investment Huge return on investment Private Equity companies are paid back before the banks Leaves the private equity funds free to play again What would happen if the debt markets dried up? Operating in the Private Sector Not driven by short-term earnings performance Private Equity companies can attract top quality management And they can remunerate management M&A advisory on both purchases and sales Equity Debt Syndicated loans Financing and re-financing
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Quality of Management

They are major clients of the Investment Banks

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How is a Private Equity company structured?
Origination Group
Evaluation Group
Funding Group
Research
Usually a senior who liaises with the Corporate Finance departments
The team that values the target company, and assesses its prospects
The team that decides on the appropriate mix of senior debt/intermediate and equity and external co-investors
Back-up to the Evaluation and Funding Groups
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The largest Private Equity funds
Targeted Funds ($billion) as at August 2012

Bain Capital Fund GS Partners V Cinven IV Thomas H Lee Warburg Pincus Apollo Management Blackstone Real Estate Permira IV Texas Pacific Carlyle Blackstone V KKR KKR GS Partners VI Blackstone VI 0.0
Source: Financial Times/Private Equity Intelligence Ltd
8 8.5 8.6 9 9 10.1 11 14.7 15 15 15.6 16.6 18 19 21 5.0 10.0

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15.0
20.0
25.0
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Where is the Private Equity industry now?

Institutions are once again increasing exposure to the Private Equity industry New funds are being raised, but they are small The largest Private Equity purchase in 2011 was the $7.2 billion purchase of Samson Investment Co. (a US Oil & Gas producer) by KKR More than 1,700 deals have been announced this year. The Carlyle Group, in particular, has announced 33 deals year to date worth $16 billion, the highest number of deals it has undertaken since 2007 Still a large number of work-outs and write-downs in the Private Equity funds portfolios Many of the larger funds remain unspent
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Are Private Equity companies recruiting?
There is some graduate recruitment but relatively small scale Private Equity companies tend to be lean, and delegate a lot of the technical work to bank Corporate Finance departments For example, KKR employs only 320 people worldwide vs 565,000 employees in portfolio companies and $107 billion of revenues from portfolio companies Corporate Finance, Audit and Acquisition Finance are, therefore, the usual stepping stones into Private Equity Dont overlook the mid-sized firms, eg 3i, Candover, Apax, Cinven
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Corporate Finance

FICC

Equities

Support Functions

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What does FICC mean?
FICC refers to the Fixed Income, Currency and Commodites products within

Sales Trading Structuring Research
The feeder of the business is the origination of fixed income securities issued by governments or corporates, which is called DCM or Debt Capital Markets.
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What asset classes do you find in FICC? How are the product teams split up?
Interest Rate Products Credit Products Currency Products
Commodities
Flow Products (govt bonds, swaps, options) Structured products (rates linked notes, complex derivatives reverse floaters, IR spread options barrier options, PRDC)
Flow Products (Credit Default Swaps, Corporate Bonds, Distressed or High Yield bonds - Junk) Securitized Products (Asset Backed Securities, Mortgage Backed Securities) Structured Products (CDO Collateralised Debt Obligations, CLO Collateralised Loan Obligations) Emerging Markets from BRIC, LATAM, MENA, APAC
Energy (Natural Gas, Oil, Electricity) Metals Agricultural Products
Flow Products (Forex spot, Forex swap, forwards, Forex Options Structured products (Forex linked notes)
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How is a Fixed Income (FICC) division structured? How is each department structured?
Origination/ Syndication
Underwriting and Placement of new bond issues. Prices new issues Researches pricing on previous new issues Types of bonds that can be issued: Agency Bonds, Corporate Bonds, Distressed debt, government bonds, sovereign bonds, municipal bonds
Trading
Client Execution Market Making Proprietary Trading Arbitrage (relative value trading, cash and carry,statistical arbitrage.) Portfolio Risk Management
Structuring
Propose solutions to clients for complex investment or liability management. - Tax effective products - Structuring derivative products across all FICC asset classes. - Complex derivative pricing.
Sales
Usually divided into product focus (flow/structured across all FICC products). Flow product sales are usually divided into asset class groups (commodities, credit, rates, but structured products could be sold out of one team). Then further divided into Client focus: Corporate clients/Institutional clients (insurance, a m, pf)
Research
Research prepared for clients Gives ideas to Sales & Clients (increasingly focused on Clients and working more closely with the sales trading desks to give Clients ideas) as long as not in violation of chinese wall. In-house quants model research for valuation and trading of complex derivatives.
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Who are the major originators of international bonds?

Eurobond New Issues 2011
Bookrunners
Barclays Capital Deutsche Bank JP Morgan BNP Paribas Citi HSBC Bank of America Merrill Lynch UBS Goldman Sachs Morgan Stanley
Proceeds US$ billion

249.0 242.5 232.7 169.3 169.2 168.8 164.7 139.7 136.0 119.0
Market share
8.2 8.0 7.7 5.6 5.6 5.6 5.4 4.6 4.5 3.9
# of issues
627 903 737 515 511 568 589 424 388 413
2010 Ranking
1 3 2 9 6 5 4 7 11 12
Industry total
3,027
4,788
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Source: http://banker.thomsonib.com/
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Bond issuance was down for the second year running in 2011
Volume of New Eurobond Issues

US$ billion
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What is happening in the debt issuance market now?

Global Debt Capital Markets activity increased by 4% to $2.8 trillion during the first 9 months of 2012 compared to the same time last year, thanks to a strong Q1 and Q3. Nevertheless, there is a flight to quality going on. Investors are seeking out Government Bonds, Agencies and Investment Grade Debt, particularly Investment Grade Corporate Debt. Q2 2012 was particularly poor - global activity at $1.1 trillion was down 50% compared to Q2 of 2011 and compares to $1.7 trillion in Q1 2012. This coincided with real concerns about Greek Sovereign debt default Fee income has increased by 15% in the first 9 months of 2012, compared to the same period last year. High Yield debt has been surprisingly strong up 12% year on year, evidence that the hedge funds are back in the market. JP Morgan is currently in top spot in league tables.
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What is happening in the commodities market?
January 1st 2009 Copper Aluminium Gold Oil (Brent Crude) $2,825 $1,412 $878 $45
September 1st 2012

$7,670 $1,962 $1,737 $114.25
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Which commodity divisions recruit MScs?

The Commodity divisions of the Investment Banks have been big recruiters of MSc. students in recent years. All the major banks have been involved, particularly Barclays, Citi and JP Morgan They have recruited in Sales, Trading, Structuring and Research, as well as Middle Office functions and Risk. Preliminary indications from the Recruiters are that Risk is likely to be the focal point this year.
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How are the other asset classes in FICC doing?
FX Rates Credit
The main trend is flow or lightly structured products NOT complex structured products.
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Which banks have the largest market share in FX?
http://www.euromoneyfix.com/Article.aspx?ArticleID=2191629&PageID=3594%20%20for%20fx%20info
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What would a graduate do in FICC?

Origination pitches financing to a client

Analysts might do some financial modelling and put the pitch presentation together. Junior members work with senior members putting term sheets and marketing presentations together and trying to understand the products. May have some administration email follow up with clients regarding an order. juniors work with the senior structurers often working on term-sheets and complex pricing simulation to better understand the products. Junior would put together spreadsheets that run risk reports and book trades. Do a lot of spread sheet programming to better capture trading data, including risk parameters. Analysts would crunch historical data to analyze market behaviour. Synthesizes research that a senior member has produced to get ready for distribution.
Sales desk wants to expand
Client wants a structured deal
Trading needs more man-power
Research needs to recruit
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Are the FICC divisions of banks recruiting?

There are still plenty of internships, particularly in Sales Outside of France, the only way into a Graduate Programme is through a SUMMER Internship. Even better, try a SPRING internship. Be aware of the application periods and deadlines. They normally start in September and end in November, but November is an end date. Often banks are full before then.
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Corporate Finance

FICC

Equities

Support Functions

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What is an Equities Division?

Deals in shares, of course, but also convertibles which are treated as Equity, not Debt New issuance drives the market a. Previous issuers raising additional Equity (Secondary Offerings) - to replace debt - to restructure stretched balance sheet - to finance acquisitions b. First time issuers: IPOs (Initial Public Offerings) - worth $164 billion in 2011 globally versus Total Equity Issuance of $617 billion (27% of total) - can be from emerging markets seeking an international investor base (India, Eastern Europe, China etc) and equity with which to make acquisitions - frequently part of a governments privatisation programme (e.g. EDF, Air France, ENEL) - IPOs were up 131% in 2010, driven by Chinese issuance, but decreased by 40% last year.
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The largest IPOs to date (as at June 2012)
$ billion
Date
Agricultural Bank of China Industrial & Commercial Bank of China AIA Group Ltd NTT Mobile Comms Visa Inc ENEL Facebook General Motors Deutsche Telecom Bank of China OAO Rosneft AT&T Wireless
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19.2 19.1 18.5 18.1 16.6 17.4 16.0 15.8 12.5 11.1 10.7 10.6
October 2010 October 2006 October 2010 October 1998 March 2008 October 1999 May 2012 November 2010 November 1996 June 2006 March 2006 April 2000
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The effect is to create institutions with a widely quoted share base
Top Banks by Market Capitalisation (as at January 2012)
Source: FT
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How is an Equities division structured?
Syndication/ Origination
Underwriting and Placement of new issues. Prices new issues Researches pricing on previous new issues Works with Derivatives team for risk hedging purposes
Trading
Market Making (single stock option/index option trading) Proprietary Trading (cash equity,single stock option/index option trading, long/short etc.) Arbitrage (merger arbitrage, basket trading,statistical arbitrage and high frequency trading.) Portfolio Risk Management Stock lending
Sales Trading and Execution Services Executes sales orders for clients Electronic Trading Platforms could include; execution services, algorithmic trading, direct market access (DMA services)
Sales
Usually divided into product focus (cash/derivatives). Cash Equity Sales/research sales: Interprets Analysts recommendations and sells ideas to institutional clients. Derivatives sales usually covering institutional clients and selling risk hedging solutions, or capital guaranteed investment products.
Structuring
Propose solutions to clients for complex investments and capital preservation. - Tax effective products - Structuring derivative products including hybrids (ex equity inflation product). - Complex derivative pricing. - Sectorial basket structuring bespoke index products.
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Which are the leading houses for EMEA Equities?
All EMEA Equity and Equity Related Issues 2011
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Outside of the top 10 who are in the top 20 as equity issuance advisors?
JP Morgan tops ECM rankings list. 11 12 13 14 15 16 17 18 19 20
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HSBC UniCredit Nomura ING Socit Gnrale VTB Capital SEB Enskilda Royal Bank of Scotland Mediobanca RMB Holdings Ltd
http://online.thomsonreuters.com/DealsIntelligence/Content/Files/2Q10_Equity_Capital_Markets_Review.pdf
What kinds of products do you see in the equities division?
Flow
Structured
Single stock Block trades Single Stock options Index options ETFs (Exchange traded funds) Convertible bonds
Equity linked EMTN (European Medium Term Note) Complex Equity Derivatives (eg. reverse convertibles).
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Where is the Equities market?

New Issue Volume, Worldwide
New issuance fell by 28% in 2011 IPOs and Follow-ons were down across all geographical areas
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US$ billion
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How are Equity Issuances doing this year?
Global ECM activity was down 14% in the first 9 months of this year. Q1 was the slowest quarter in 2 years, down 52% on the same period last year IPOs were down 41% on the same period last year This was despite the $16 billion IPO by Facebook in Q2. As a result of Facebook, the volume of $42.4 billion for Q2 was double that of Q1. Follow-ons, however, are running at roughly the same level as last year. Fees are down by 29%, the lowest level since 2003
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Which industries were the most active...?
5 sectors currently account for nearly three-quarters of activity.
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Financial Issuers were 11% the strongest in 24% overall volume with 24%. Energy & Power Materials Energy & Power 14% 13% 14% Industrials pie chart Materials 14% High Technology 11% 14% Real Estate Industrials 11% Other High Technology 13% Real Estate 11% The remnant was shared by High Tech (8%), Consumer (6%), Media & Entertainment (4%), Retail (2%), Healthcare (2%) and Telecoms (1%)
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13%
Financial
What would a graduate do in Equities from cash to derivatives?

Client looks for risk hedging solution for Equity exposure
Sales bring structurers into the deal to create appropriate structured solutions for the client.
Research needs to get out a report on the European Chemical Industry
Analyst works with senior industry analysts and evaluates companies within industry Junior sales would be given some small accounts or work with senior sales to make presentations or term sheets. Juniors would help senior traders, and might start just with setting up pricing spreadsheets or risk spread sheets to get them familiar with the products.
Sales need to expand client coverage
Trading needs more man power
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Are Equities recruiting?

It is never as strong an area for recruitment as Debt. ECM and Equity Markets hire relatively few graduates. Both are very competitive areas Same process as for FICC. The only way into a Graduate Programme outside of France is through a SUMMER or SPRING Internship There are internships with the French and international institutions in both Sales and Equity Research Jobs in Equity Research are hard to find. The sector has contracted by about a third in 4 years, and Debt and Equity Research teams are being merged in a number of houses Look at institutions with a weak equity presence that are trying to expand, for example Unicredit, Macquarie, MUFJ, Daiwa, Standard Chartered etc.
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Corporate Finance

FICC

Equities

Support Functions

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Support Functions
Patrick Fearon 2012
How are the Support Functions structured?

Risk Management Consists of 3 main risks; Market Risk. Credit Risk Operational Risk
Finance Reporting into the CFO includes; Product Control Financial Control Management Reporting Treasury Tax Strategy
Compliance Compliance consists of; Regulatory risk/ relationships, Asset class specialists Trade surveillance Training, Policy AML and KYC.
IB Grenoble 2012
Audit Provides independent opinions on the firms control environment
Operations Securities Operations Clearing Operations Derivatives Operations Project Management
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Why consider a career in any of the support functions?
Gives you a broad understanding of the banks activities from the beginning. Allows interaction with senior leaders from whom you can gain perspective. Due to the crisis and tougher regulatory environment, the support functions have gained visibility and power within the organization. Lack of high quality senior leader pipe line makes good career possibilities for the future. $$$ - senior level support function compensation levels have been rising considerably (outside of continental Europe).
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Are support functions hiring?
YES!
With more focus on internal control, all of the support functions are a hiring focus especially market risk management. Due to the crisis, the support functions have gained visibility and power within the organization. In particular, the Investment Banks are looking for students to work in Risk
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What would a graduate do in the support functions?

Credit Risk
Work with senior risk managers to analyze ratings and counterparty risk associated with perspective or existing clients. Work closely with traders to make sure portfolios are marked correctly; respect of Value at Risk (VAR) limits, and look at risk factors including stock prices, interest rates, foreign exchange rates, commodity prices, volatility etc. Junior auditors would be sent on missions to verify the firms control environment. Junior product controller would work closely with the traders to make sure that the trades are booked correctly.
Market Risk
Audit
Finance
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Corporate Finance

FICC

Equities

Support Functions

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Skills and Opportunities in Banking
Patrick Fearon 2012
In all of these departments, there are only 5 roles

Youre EITHER an Originator of New Business OR youre a Product Specialist/deal doer OR youre in Research/Analytics OR youre in Sales OR youre in Trading
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In all of these departments, there are only 5 roles

Origination Corporate Finance Corporate Lending Loan Syndication Debt Equity Institutional
Asset Management
Relationship Manager
Product Delivery
Corporate Financier
Product Research
Analyst/ Researcher
Sales
-
Trading
-
Corporate Banker Loan Syndication Officer - Structured Products - Syndicate - Structured Products - Syndicate Asset Manager - Asset Manager
Specialist Product People
Credit Analyst
Researcher
Asset Salesman
Asset Trader
Research Analyst
Debt Salesman
Debt Trader
Relationship Manager Senior Product Delivery People Relationship Manager
Research Analyst
Equity Salesman
Equity Trader
Research
Client Execution Trader
Private Banking Private Equity

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Research Analyst Analyst/ Researcher
Senior Product Delivery People
Evaluation Team
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IB Grenoble 2012
Personality traits needed to work in Banking
Energetic Enthusiastic Team player Willing to work all hours Ability to work under pressure Numerate Articulate Innovative A problem solver Seeks new ideas Driven High performer
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Personality traits required for an Originator
Relationship Manager Generalist Extrovert A people person Good at marketing Good listening skills Enjoys negotiation Needs stimulation of varied deals (may get bored easily) Creative
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Personality traits needed as a Product Specialist
Corporate Financier Does not need to be extrovert More than usually numerate Good communicator of complex ideas Deeply interested in his product area Explains product to client in a way he will understand Has a clear idea of value (Asset Manager/Financier) Advisor
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Asset Manager All the same characteristics, but acts as a Principal not an Advisor, and therefore has a longer-term time horizon than an Advisor. Lives with the consequences of his decisions.
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Personality traits needed in Product Support/Research
Researcher More than usually analytical Highly numerate Good oral and written presenter Will need to sell ideas to investors and/or internally Known for original ideas Likes exploring new sources of information
Quantitative Analyst Exceptionally numerate Capable of being a PhD Excellent at modelling Has new ways of looking at problems Creative Likes taking a solution to the next rung
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Personality traits needed in Sales & Trading
Sales Outgoing Clients trust him/her Receptive to new ideas Good at packaging ideas for client Will fight the trader to get the best price for client Value aware Will look after the same clients year after year Enjoys new product
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Trading Not much external contact Thrives on pressure Real feel for value Could enjoy anything from very unsophisticated product (spot fx) to very sophisticated (derivatives) A risk taker but also someone who will think hard about minimising risk
Patrick Fearon 2012
But there is good news too
You dont need me to tell you that its a very difficult marketplace this year The recruiters tell us that they intend to recruit in the same numbers as last year Investment Banks will still need Analysts and Associates. In the second lecture we will look at the strategy and stepping stones you might adopt But dont ignore internships and go broad in your choice of employer And above all, ensure that you are prepared for the interviews you are offered
Good luck will come if you are PREPARED!
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What Is Investment Banking

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What Is Investment Banking

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What is Investment Banking?

Patrick Fearon Autumn 2012

Patrick Fearon 2012