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Patrick Fearon 2012
What is Investment Banking?

Patrick Fearon
Autumn 2012
Patrick Fearon 2012 2
IB Grenoble 2012
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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)
FICC
Sales & Trading
Research
Equities
Sales & Trading
Research
Support Functions
Finance
Compliance
Risk (Market, Credit, Operational)
Audit
Operations
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
Corporate Lending
Project Finance
Leveraged Finance
Syndicated Lending
Some of the active Corporate Lending Banks you might consider
Retail Banking
Domestic and International
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?
Patrick Fearon 2012
An Overview of Investment Banking
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What does an Investment Bank look like?
Securities
Services
Trading &
Principal
Investments
Investment
Banking
Asset & Wealth
Management
Corporate
Functions
Source: www.gs.com/careers www.prospect.ac.uk
Debt
Equities
Goldman Sachs International
Sales & Trading
and Principal
Investments
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But Investment Banks do not all look alike
Corporate
Functions
Source: www.careers.jpmorganchase.com
JP Morgan Chase: A Commercial Bank that has expanded into Investment Banking
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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
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
JP Morgan Morgan Stanley
Credit Suisse
Investment
Banking
Investment
Banking
Corporate
Institutional
Institutional Sales
& Trading
Research
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
Is there one business area that drives the Bank?
Merrill Lynch: Sales/creating product to sell to institutions and individuals
JP Morgan: Corporate Finance
Societe Generale: Equity Derivatives
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But above all, look at the numbers
Source: Banks Annual Reports
26.7
41.0
20.4
30.4
35.4
Global Net Revenues of Investment Banks 2011
U
S
$

B
i
l
l
i
o
n
s
-Debt and Equity Origination
-M&A
-Loan Syndication
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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
CLIENT
RELATIONSHIP
MANAGER
Corporate
Finance
Equities
FICC
Corporate
Lending
Corporate
Finance
Corporate
Finance
Corporate
Finance
Loan
Syndication
Corporate
Finance
Equity
Syndicate
FICC
Syndicate
Loan
Syndication
Sales &
Trading
Sales &
Trading
Sales &
Trading
DIVISION
PRODUCT
DELIVERY
PRICING INTO MARKET
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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).
.
http://useconomy.about.com/od/fiscalpolicy/p/US_Debt.htm
Patrick Fearon 2012
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
FICC
Sales & Trading
Research
Equities
Sales & Trading
Research
Support Functions
Finance
Compliance
Risk (Market,Credit, Operational)
Audit
Operations
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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
M&A
Debt/Equity
Origination
Often houses
the Relationship
managers that
are split into
industry
specialists:
Financial
Institutions
Group
Telecoms &
Media
Oil & Gas
Healthcare
Real Estate
Etc.
Advise on
mergers and
acquisitions,
joint ventures
and other
corporate
development
actions.
Finding target
buyers or
sellers.
Corporate Solutions
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.
Underwriting
new equity/bond
issues.
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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 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
Advisors
Rank Value $US
billion 2010 ranking Number of deals
1 Morgan Stanley 636 2 360
2 Goldman Sachs 631 1 355
3 JP Morgan 509 3 285
4 Bank of America Merrill Lynch 387 8 254
5 Citi 367 5 199
6 UBS 347 9 254
7 Credit Suisse 337 4 262
8 Deutsche Bank 293 7 216
9 Barclays Capital 268 6 155
10 Lazard 248 10 216
11 Rothschild 236 11 248
12 Nomura 164 13 187
13 BNP Paribas 143 15 127
14 Evercore Partners 142 14 65
15 Societe Generale 137 28 96
Source: http://thomsonreuters.com.
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In the next tier of 15, the advisors are very different
institutions
The Accountancy firms
PriceWaterhouseCoopers
Ernst & Young
Deloitte and Touche
The Regional Experts
Enskilda (Nordic)
Mediobanca (Italy)
Santander Global Banking (Spain)
The Boutique Investment Banks
Greenhill & Co (generalist boutique)
GPKCCW (Financial Services boutique)
Allen & Company (entertainment industry boutique)
Blackstone Group
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There are significant regional variations that you
should be aware of
Advisors
Global Value $US
billion US ranking
European
ranking Asian ranking
1 Goldman Sachs 647 1 1 1
2 Morgan Stanley 511 2 2 3
3 JP Morgan 482 3 3 7
4 Credit Suisse 401 5 5 6
5 Bank of America Merrill Lynch 395 4 11 5
6 Citi 383 6 6 2
7 Barclays Capital 327 7 7 16
8 Deutsche Bank 273 11 4 8
9 UBS 261 10 9 4
10 Lazard 250 8 13 N/A
11 Rothschild 224 12 8 9
12 Evercore 166 9 N/A N/A
http://www.politico.com/static/PPM153_bb_080110.html
Announced Deals 2011
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M&A volume collapsed in 2007 and is showing clear
signs of a double-dip
2007 2008
Worldwide Announced M&A Quarter by Quarter
Source: http://bankerthomsonib.com.
2009 2010 2011 2012
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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.
Acquiror Target $ billion
1 Glencore Xstrata Plc 48.8
2 FROB Banco Financiero y de Ahorros 23.8
3 Shareholders ConocoPhillips Refining & Marketing 21.7
4 Walgren Co Alliance Boots GmbH 21.4
5 Anheuser-Busch Inbev Grupo Modelo SAB de CV 20.1
6 Electrobel International Power Plc (40.9%) 12.9
7 Nuclear Damage Liability TEPCO (75.7%) 12.6
8 Eaton Corp Cooper Industries Plc 12.2
9 Nestle SA Pfizer Nutrition 11.9
10 Lehman Brothers Holdings Inc Archatone Smith Trust (26.5%) 11.8
Announced M&A transactions YTD (June 2012)
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.
Patrick Fearon 2012
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 $21.0 billion
Which division of a bank does it sit in?
Asset Management (Morgan Stanley). External Investors.
Equities (Goldman Sachs). Its the purchase of the shares of a
company.
Separate entity (JP Morgan). It competes with the banks clients.
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What are the differences between Private Equity
acquirers and Public Company acquirers?
Leverage
The banks were prepared to lend up to 5 times the Private Equity investment
Huge return on investment
Private Equity companies are paid back before the banks
Leaves the private equity funds free to play again
What would happen if the debt markets dried up?
Quality of Management
Operating in the Private Sector
Not driven by short-term earnings performance
Private Equity companies can attract top quality management
And they can remunerate management
They are major clients of the Investment Banks
M&A advisory on both purchases and sales
Equity
Debt
Syndicated loans
Financing and re-financing
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How is a Private Equity company structured?
Origination
Group
Evaluation
Group
Funding
Group
Research
Usually a senior
who liaises with the
Corporate Finance
departments
The team that
values the target
company, and
assesses its
prospects
The team that
decides on the
appropriate mix of
senior
debt/intermediate
and equity and
external co-investors
Back-up to the
Evaluation and
Funding Groups
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The largest Private Equity funds
21
19
18
16.6
15.6
15
15
14.7
11
10.1
9
9
8.6
8.5
8
0.0 5.0 10.0 15.0 20.0 25.0
Blackstone VI
GS Partners VI
KKR
KKR
Blackstone V
Carlyle
Texas Pacific
Permira IV
Blackstone Real Estate
Apollo Management
Warburg Pincus
Thomas H Lee
Cinven IV
GS Partners V
Bain Capital Fund
Targeted Funds ($billion) as at August 2012
Source: Financial Times/Private Equity Intelligence Ltd
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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
Financial Advisory
Advice on M&A
Private Equity
FICC
Sales & Trading
Research
Equities
Sales & Trading
Research
Support Functions
Finance
Compliance
Audit
Operations
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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
Flow Products (govt
bonds, swaps,
options)
Structured products
(rates linked notes,
complex derivatives
reverse floaters,
IR spread options
barrier options,
PRDC)
Commodities
Energy (Natural
Gas, Oil, Electricity)
Metals
Agricultural
Products
Credit
Products
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
Currency
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?
Structuring
Origination/
Syndication
Research Sales Trading
Propose solutions to
clients for complex
investment or
liability
management.
- Tax effective
products
- Structuring
derivative products
across all FICC
asset classes.
- Complex derivative
pricing.
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
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.
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)
Client Execution
Market Making
Proprietary Trading
Arbitrage (relative
value trading, cash
and carry,statistical
arbitrage.)
Portfolio Risk
Management
Origination/
Syndication
Trading
Structuring
Origination/
Syndication
Trading Sales
Structuring
Origination/
Syndication
Trading
Origination/
Syndication
Trading
Origination/
Syndication
Structuring
Trading
Origination/
Syndication
Sales
Structuring
Trading
Origination/
Syndication
Research Sales
Structuring
Trading
Origination/
Syndication
Origination/
Syndication
Origination/
Syndication
Trading
Origination/
Syndication
Structuring
Trading
Origination/
Syndication
Sales
Structuring
Trading
Origination/
Syndication
Research Sales
Structuring
Trading
Origination/
Syndication
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Who are the major originators of international
bonds?
Source: http://banker.thomsonib.com/
Bookrunners
Proceeds
US$ billion
Market
share
#
of issues
2010
Ranking
Barclays Capital 249.0 8.2 627 1
Deutsche Bank 242.5 8.0 903 3
JP Morgan 232.7 7.7 737 2
BNP Paribas 169.3 5.6 515 9
Citi 169.2 5.6 511 6
HSBC 168.8 5.6 568 5
Bank of America Merrill Lynch 164.7 5.4 589 4
UBS 139.7 4.6 424 7
Goldman Sachs 136.0 4.5 388 11
Morgan Stanley 119.0 3.9 413 12
Industry total 3,027 4,788
Eurobond New Issues 2011
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Volume of New Eurobond Issues
U
S
$

b
i
l
l
i
o
n
Bond issuance was down for the second year
running in 2011
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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 September 1st
2012
Copper $2,825
$7,670
Aluminium $1,412
$1,962
Gold $878
$1,737
Oil (Brent Crude) $45
$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.
Sales desk wants to expand
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.
Client wants a structured deal
juniors work with the senior structurers often working on term-sheets and complex
pricing simulation to better understand the products.
Trading needs more man-power
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.
Research needs to recruit
Analysts would crunch historical data to analyze market behaviour. Synthesizes
research that a senior member has produced to get ready for distribution.
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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.
IB Grenoble 2012
61
Corporate Finance
Financial Advisory
Advice on M&A
Private Equity
FICC
Sales & Trading
Research
Equities
Sales & Trading
Research
Support Functions
Finance
Compliance
Audit
Operations
IB Grenoble 2012
62
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.
IB Grenoble 2012
63
The largest IPOs to date (as at June 2012)
Agricultural Bank of China 19.2 October 2010
Industrial & Commercial Bank of China 19.1 October 2006
AIA Group Ltd 18.5 October 2010
NTT Mobile Comms 18.1 October 1998
Visa Inc 16.6 March 2008
ENEL 17.4 October 1999
Facebook 16.0 May 2012
General Motors 15.8 November 2010
Deutsche Telecom 12.5 November 1996
Bank of China 11.1 June 2006
OAO Rosneft 10.7 March 2006
AT&T Wireless 10.6 April 2000
$ billion Date
IB Grenoble 2012
64
The effect is to create institutions with a widely
quoted share base
Top Banks by Market Capitalisation (as at January 2012)
Source: FT
IB Grenoble 2012
65
How is an Equities division structured?
Structuring
Syndication/
Origination
Sales
Trading
Sales Trading and
Execution Services
Executes sales
orders for clients
Electronic Trading
Platforms could
include; execution
services,
algorithmic trading,
direct market
access (DMA
services)
Underwriting and
Placement of new
issues.
Prices new issues
Researches pricing
on previous new
issues
Works with
Derivatives team for
risk hedging
purposes
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
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.
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.
IB Grenoble 2012
66
Which are the leading houses for EMEA Equities?
All EMEA Equity and Equity Related Issues 2011
IB Grenoble 2012
Outside of the top 10 who are in the top 20 as equity
issuance advisors?
JP Morgan tops ECM rankings list.
http://online.thomsonreuters.com/DealsIntelligence/Content/Files/2Q10_Equity_Capital_Markets_Review.pdf
11 HSBC
12 UniCredit
13 Nomura
14 ING
15 Socit Gnrale
16 VTB Capital
17 SEB Enskilda
18 Royal Bank of Scotland
19 Mediobanca
20 RMB Holdings Ltd
IB Grenoble 2012
68
What kinds of products do you see in the equities
division?
Flow
Single stock
Block trades
Single Stock
options
Index options
ETFs
(Exchange
traded funds)
Convertible
bonds
Structured
Equity linked
EMTN
(European
Medium Term
Note)
Complex
Equity
Derivatives
(eg. reverse
convertibles).
IB Grenoble 2012
69
Where is the Equities market?
U
S
$

b
i
l
l
i
o
n
New issuance fell by
28% in 2011
IPOs and Follow-ons
were down across all
geographical areas
New Issue Volume, Worldwide
IB Grenoble 2012
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
IB Grenoble 2012
Which industries were the most active...?
5 sectors currently account for nearly three-quarters of activity.
Financial Issuers were the strongest in overall volume with 24%.
Energy & Power 14%
Materials 14% pie chart
Industrials 11%
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%)
24%
14%
14%
11%
13%
11%
13%
Financial
Energy & Power
Materials
Industrials
High Technology
Real Estate
Other
IB Grenoble 2012
72
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
Sales need to expand client coverage
Junior sales would be given some small accounts or work with
senior sales to make presentations or term sheets.
Trading needs more man power
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.
IB Grenoble 2012
73
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.
IB Grenoble 2012
74
will be looking at:
Corporate Finance
Financial Advisory
Advice on M&A
Private Equity
FICC
Sales & Trading
Research
Equities
Sales & Trading
Research
Support Functions
Finance
Compliance
Audit
Operations
Patrick Fearon 2012
Support Functions
IB Grenoble 2012
http://www.goldmansachs.com/careers 76
How are the Support Functions structured?
Compliance
Risk
Management
Audit
Finance
Consists of 3
main risks;
Market Risk.
Credit Risk
Operational
Risk
Reporting into
the CFO
includes;
Product
Control
Financial
Control
Management
Reporting
Treasury
Tax
Strategy
Compliance
consists of;
Regulatory
risk/
relationships,
Asset class
specialists
Trade
surveillance
Training,
Policy
AML and
KYC.
Provides
independent
opinions on
the firms
control
environment
Operations
Securities
Operations
Clearing
Operations
Derivatives
Operations
Project
Management
IB Grenoble 2012
77
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).
IB Grenoble 2012
78
Are support functions hiring?
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
YES!
IB Grenoble 2012
79
What would a graduate do in the support functions?
Credit Risk
Work with senior risk managers to analyze ratings and counter-
party risk associated with perspective or existing clients.
Market Risk
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.
Audit
Junior auditors would be sent on missions to verify the firms
control environment.
Finance
Junior product controller would work closely with the traders to
make sure that the trades are booked correctly.
IB Grenoble 2012
80
will be looking at:
Corporate Finance
Financial Advisory
Advice on M&A
Private Equity
FICC
Sales & Trading
Research
Equities
Sales & Trading
Research
Support Functions
Finance
Compliance
Audit
Operations
Patrick Fearon 2012
Skills and Opportunities in Banking
IB Grenoble 2012
82
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
IB Grenoble 2012
83
In all of these departments, there are only 5 roles
Corporate
Finance
Corporate
Lending
Loan Syndication
Debt
Equity
Institutional
Asset Management
Private Banking
Private Equity
Origination Product Delivery
Product
Research
Sales Trading
Relationship Manager
Senior Product Delivery
People
Senior Product Delivery
People
Corporate Financier
Corporate Banker
Loan Syndication
Officer
- Structured Products
- Syndicate
- Structured Products
- Syndicate
Asset Manager
- Asset Manager
Specialist Product
People
Evaluation Team
Analyst/ Researcher
Credit Analyst
Researcher
Research Analyst
Research Analyst
Research
Research Analyst
Analyst/ Researcher
-
-
Asset Salesman
Debt Salesman
Equity Salesman
-
-
-
-
-
Asset Trader
Debt Trader
Equity Trader
-
Client Execution Trader
-
IB Grenoble 2012
84
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
IB Grenoble 2012
85
Personality traits required for an Originator
Generalist
Extrovert
A people person
Good at marketing
Good listening skills
Enjoys negotiation
Needs stimulation of varied
deals (may get bored easily)
Creative
IB Grenoble 2012
86
Personality traits needed as a Product Specialist
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
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.
Corporate Financier Asset Manager
IB Grenoble 2012
87
Personality traits needed in Product
Support/Research
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
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
Researcher Quantitative Analyst
IB Grenoble 2012
88
Personality traits needed in Sales & Trading
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
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
Sales Trading
IB Grenoble 2012
89
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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Patrick Fearon 2012

What is Investment Banking?

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