What is investment banking

© Patrick Fearon 2012

What is Investment Banking?

Patrick FearonAutumn 2012

© Patrick Fearon 20122 IB Grenoble 20122

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?


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


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


Contents of this morning’s 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?


An Overview of Investment Banking


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 & Tradingand PrincipalInvestments


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


Investment Banking

The Commercial Banks that have expanded into Investment Banking

versus The Traditional Investment Banks


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?


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?


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


Investment Banking

Be careful,“Investment Banking” means different things to

different people.


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


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


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/Schroder’s/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


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 2011U

S$

Bill

ions

-Debt and Equity Origination-M&A-Loan Syndication


Investment Banking

A typical Investment Banking deal can involve many areas of the Bank


A typical Investment Banking deal can involve many areas of the bank

CLIENT RELATIONSHIP MANAGER

CorporateFinance

Equities

FICC

Corporate Lending

Corporate Finance

Corporate Finance

Corporate Finance

Loan Syndication

Corporate Finance

EquitySyndicate

FICCSyndicate

LoanSyndication

Sales &Trading

Sales &Trading

Sales &Trading

DIVISIONPRODUCT DELIVERY

PRICING INTO MARKET


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


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


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.


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 you’re 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.


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 MSc’s as last year.


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


A detailed look at Investment Banking


Investment Banking involves four main activities

� Corporate Finance– Financial Advisory– Advice on M&A– Private Equity– Debt Capital Markets Origination– Equity Capital Markets Origination



� Support Functions– Finance– Compliance– Risk (Market,Credit, Operational)– Audit– Operations



What does Corporate Finance mean?

� It’s 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.


How is a Corporate Finance department structured?

Corporate Advisory Group M&A

Debt/EquityOrigination

• 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.


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 clien t– 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 shee t 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


These were the most active M&A advisors globally in 2011

AdvisorsRank 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.


In the next tier of 15, the advisors are very diffe rent 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


There are significant regional variations that you should be aware of

AdvisorsGlobal Value $US

billion US rankingEuropean 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


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


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.

– Goldman’s Net Fee Income from M&A was $1.8 billion last year versus $2.1 billion in 2010 (over $3 billion in 2007)


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


Which sectors were active in 2011?

http://online.thomsonreuters.com/DealsIntelligence


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


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.


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)

� Don’t overlook the Transaction Services arms of the Big 4, or Audit.


Private Equity


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). It’s the purchase of the shares of a

company.– Separate entity (JP Morgan). It competes with the bank’s clients.


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


How is a Private Equity company structured?

Origination Group

Evaluation Group

FundingGroup

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


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


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


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

� Don’t overlook the mid-sized firms, eg 3i, Candover, Apax, Cinven









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.


What asset classes do you find in FICC? How are the product teams split up?

Interest Rate Products

• Flow Products (gov’t 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)


How is a Fixed Income (FICC) division structured? How is each department structured?

Structuring Origination/Syndication ResearchSalesTrading

• 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 SalesStructuring Origination/Syndication TradingOrigination/Syndication TradingOrigination/Syndication

Structuring TradingOrigination/Syndication

SalesStructuring TradingOrigination/Syndication ResearchSalesStructuring TradingOrigination/SyndicationOrigination/SyndicationOrigination/Syndication TradingOrigination/Syndication

Structuring TradingOrigination/Syndication SalesStructuring TradingOrigination/Syndication ResearchSalesStructuring TradingOrigination/Syndication


Who are the major originators of international bonds?

Source: http://banker.thomsonib.com/

BookrunnersProceeds

US$ billionMarket share

# of issues

2010Ranking

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


Volume of New Eurobond Issues

US

$ bi

llion


Bond issuance was down for the second year running in 2011


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.


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


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.


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.


Which banks have the largest market share in FX?

http://www.euromoneyfix.com/Article.aspx?ArticleID=2191629&PageID=3594%20%20for%20fx%20info


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.


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.









What is an Equities Division?

� Deals in shares, of course, but also convertibles which are treated as Equity, not Debt

� New issuance drives the marketa. Previous issuers raising additional Equity (“Sec ondary Offerings”)

- to replace debt- to restructure stretched balance sheet- to finance acquisitions

b. First time issuers: IPOs (“Initial Public Offeri ngs”)- 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 government’s privatisation programme (e.g. EDF,

Air France, ENEL)- IPOs were up 131% in 2010, driven by Chinese issuance, but

decreased by 40% last year.


The largest IPOs to date (as at June 2012)

Agricultural Bank of China 19.2 October 2010Industrial & Commercial Bank of China 19.1 October 2006AIA Group Ltd 18.5 October 2010NTT Mobile Comms 18.1 October 1998Visa Inc 16.6 March 2008ENEL 17.4 October 1999Facebook 16.0 May 2012General Motors 15.8 November 2010Deutsche Telecom 12.5 November 1996Bank of China 11.1 June 2006OAO Rosneft 10.7 March 2006AT&T Wireless 10.6 April 2000

$ billion Date


The effect is to create institutions with a widely quoted share base

Top Banks by Market Capitalisation (as at January 2 012)

Source: FT


How is an Equities division structured?

StructuringSyndication/Origination SalesTrading 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.


Which are the leading houses for EMEA Equities?

All EMEA Equity and Equity Related Issues 2011



Outside of the top 10 who are in the top 20 as equi ty 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 Société Générale

16 VTB Capital

17 SEB Enskilda

18 Royal Bank of Scotland

19 Mediobanca

20 RMB Holdings Ltd


What kinds of products do you see in the equities division?

Flow

• Single stock

• Block trades

• Single Stock options

• Index options

• ETF’s (Exchange traded funds)

• Convertible bonds

Structured

• Equity linked EMTN (European Medium Term Note)

• Complex Equity Derivatives (eg. reverse convertibles).


Where is the Equities market?

US

$ bi

llion

� New issuance fell by 28% in 2011

� IPOs and Follow-on’s were down across all geographical areas

New Issue Volume, Worldwide



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-on’s, however, are running at roughly the same level as last year.

� Fees are down by 29%, the lowest level since 2003



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


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.


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.









Support Functions

© Patrick Fearon 201276 IB Grenoble 2012http://www.goldmansachs.com/careers76

How are the Support Functions structured?

ComplianceRisk

Management AuditFinance

• 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 firm’s control environment

Operations

• Securities Operations

• Clearing Operations

• Derivatives Operations

• Project Management


Why consider a career in any of the support functions?

� Gives you a broad understanding of the bank’s 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).


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!


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 firm’s

control environment.� Finance

– Junior product controller would work closely with the traders to make sure that the trades are booked correctly.









Skills and Opportunities in Banking


In all of these departments, there are only 5 roles

� You’re EITHER an Originator of New Business– OR you’re a Product Specialist/deal doer– OR you’re in Research/Analytics– OR you’re in Sales– OR you’re in Trading


In all of these departments, there are only 5 roles

Corporate Finance

Corporate Lending

Loan Syndication

Debt

Equity

InstitutionalAsset Management

Private Banking

Private Equity

Origination Product DeliveryProduct

ResearchSales 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

-


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


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



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


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


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


But there is good news too…

You don’t need me to tell you that it’s 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 don’t 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!

Economy & Finance

What is investment banking