INVESTMENT BANKING: An inside story
The following article is based largely on the author’s summer internship experience at Banc of America Securities, as well as on interviews conducted with the other analysts at the bank.
Investment banking. For an eager job seeker, these two words conjure up magical images of skyscrapers silhouetted against the night sky, high-powered men in pin-striped suits making deals that change the course of the stock market, and glamorous lifestyles paid for by huge bonuses. Looking in from the outside, investment banking may indeed seem like a dream job. The mysterious and oh-so-enticing world of high finance lures the unwary with promises of big paychecks and even bigger opportunities, and hapless econ majors flock to Wall Street like bees to a honey pot. While many of them know what they are getting themselves into, having had internships or otherwise done extensive research, a fairly large portion enters investment banking with only a vague idea of what it entails or the sacrifices that it demands.
Investment Banking: The Job
So what is investment banking? On a big-picture level, i-bankers (or just “bankers,” as they call themselves) help companies raise capital and provide them with strategic advice. What that basically means is that they assess a company’s financial capabilities and decide what would be best for that company. A company that decides to go public—Google, for instance—needs investment bankers to arrange an IPO (initial public offering). A company in need of cash may turn to an investment bank in order to raise funds through the issuance of either equity (stocks) or debt (bonds). Investment bankers also act as advisors when companies are being bought (the buy side) or sold (the sell side) and when companies merge. Additionally, there is something called a leveraged buyout (LBO), in which a public company is bought by a small group of private investors. These investors — known as “the buyout group”—finance the acquisition by levering a ton of debt on the target company and then using that company’s profits to pay off the loans. Once the debt has been paid off, the company’s cash flows can be used to line the pockets of the investors.
At this point, unless you have developed an immunity from repeated exposure, all of these financial terms are probably giving you a brain rash. Leverage, mergers, acquisitions, LBOs, equity, debt, blah, blah, blah. It’s all good and well that investment bankers do all of these things, you probably want to say, but what do they actually do? There are two things that define the life of an investment banking analyst: Microsoft Excel and PowerPoint. Analysts spend so much time using one or both of these programs that they often have dreams—and nightmares—about them. Aarthi Sowrirajan, a summer analyst at Banc of America Securities (B of A), dreamed about being trapped inside an Excel cell and unsuccessfully trying to use the shortcut keys to get out. Similarly, I once woke up to find myself trying to edit a PowerPoint presentation with the joystick of my cell phone. For an analyst, spreadsheets and slides become a way of life.
In general, there are four common activities that the analysts engage in. The first—and usually most hated—is spreading comps. In order to seem smarter than the average Joe who can look up a company’s financial information on Yahoo, investment banks maintain files on the companies that they do business with and on their competitors (hence the name, comps—comparable companies). Every time a company releases new financial information, analysts update the files by inputting the new data into the Excel spreadsheets that have been created expressly for that purpose. However, since companies exist only to make the bankers’ lives more difficult, each company has a slightly different method of reporting its financials. To make these companies truly comparable, analysts have to go through the companies’ public filings and adjust the financials for any nonrecurring items, hidden charges, and so forth. One of the main goals of spreading a comp is to accurately calculate the EBITDA (earnings before interest, taxes, depreciation, and amortization), which is then used by the investment bankers to approximate the company’s cash flows.
Comps usually take anywhere from 20 minutes to a couple of hours, depending on the speed of the analyst and the number of nonrecurring charges that he has to adjust for. (Notice my politically incorrect use of “he” as a general pronoun. I’m allowed to do this because (a) I’m a female and (b) investment banking is a very male-dominated profession.) The company’s filings with the SEC, usually a 10-K or a 10-Q, range in size from 30 pages to 400, and the analysts have to go through all the footnotes and the management’s discussion of the operating results in order to sniff out any unusual and nonrecurring items. Unless you have the hots for accounting and financial statements, you will enjoy spreading comps about as much as going to the dentist. “I have forty comps to do, forty!” gasps David Tompkins, a first-year analyst at B of A, during his second week on the job. Yep, that’s forty visits to the dentist for poor David right there.
Another common task is putting together a PIB (Public Information Book) on a company. This is considered a very simple job and analysts usually try to pass it off to the summer interns, if such creatures are present. Making a PIB involves gathering all the recent company filings and information about the company from sources such as Hoover’s and Bloomberg, making copies of the gathered materials, and binding everything together to make several books. At B of A, we had Presentation Services that would make copies and bind books for us, but at many smaller banks, the analysts have to do everything manually. In the latter case, hole-punching and fitting pages onto a spiral spine take up quite a bit of an analyst’s time. After they are made, the PIBs are distributed to everyone on the deal team and used by the team members to get smart about the company.
A step above comps and PIBs is the third task—making a pitch book. This is something that investment bankers at all levels, from managing director to a lowly analyst, take part in. Pitching is key to investment banking—and it has nothing to do with baseball. Making a pitch refers to the investment bank offering its services to a prospective client—a salesman’s pitch, if you will. “It’s a sales-driven profession, a sales-driven world,” says Rebecca Jarvis, a second-year analyst at B of A. Investment bankers pitch an idea to some company (potential acquisition or divestiture, debt or equity offering, merger, etc.), with the implication that if the clients like the idea, they hire the bank.
Associates and senior people usually make all the decisions about what goes into a pitch book and how to arrange the information. All that remains for the analyst to do is follow the directions and create whatever graphs and charts the senior people deem appropriate. The biggest challenge here is making sure that everything is nicely formatted and all the numbers tie together. Attention to detail is of utmost importance because prospective clients often form their opinion of the bank based on the materials presented. A sloppy pitch book could lose a bank millions of dollars in revenue. To make everything as perfect as possible, a pitch book undergoes over a dozen revisions (turns). Turning a pitch book may be as simple as inserting a footnote and taking out a few words, or it could mean making additional slides. Either way, the quest for a perfect pitch book has led to many sleepless nights for the analysts and associates.
Finally, there is financial modeling, generally considered to be the “fun” part of being an analyst or an associate. It is also the most skill-intensive task that an analyst gets to do, requiring knowledge of the company’s operations, accounting, corporate finance, and Excel. As a simplified representation of a company’s past and future performance, a good model allows you to test your assumptions and analyze their impact on the company. There are earnings models, financing models, merger consequences models, discounted cash flow (DCF) models, and LBO models. As a new analyst or summer intern, you are unlikely to do a lot of financial modeling, but exceptions do occur.
Although the abovementioned tasks are the most common, they are far from being the only activities that analysts engage in. An analyst’s life has no routine and duties vary from day to day. You might be asked to come up with an idea for a deal toy (an object to commemorate the completion of a transaction) or to prepare an interoffice newsletter, to find data on tea bags or to attend a meeting with a client. In short, you will do whatever needs to be done.
The Life of an Investment Banker
Now that the mystery of the actual investment banking activity has been cleared up a bit, you probably want to know if the rumors about long hours and big paychecks are true. Well, let us begin with the good part—the paychecks.
The earnings of an investment banker are closely tied to how the economy is doing. Bonuses make up a large portion of the earnings, and they tend to shrink together with the Dow Jones when recession hits. Now that the economy is improving, the bonuses are going up again. A first-year analyst can expect 35-45K in bonus, a second-year analyst about 20K above that, and a third-year analyst’s bonus is about eighty grand. At the associate level and above, the bonuses can be simply huge. In contrast, the base salaries are good without being outstanding. A common figure floating around this year is 55K for starting base salary. There is also a sign-up bonus for full-time hires of about 10K. To learn more about the salaries, check out www.careers-in-finance.com/. The information there is a bit dated, but can give you a rough idea of what to expect.
In addition to the salary and the bonus, investment banking comes with a few other perks. At Banc of America Securities, bankers who stay in the office past 6:30 pm (as analysts and associates always do) can order dinner worth $25 and have it be paid for. Same goes for the weekend, plus $15 for breakfast or lunch. The bank also pays for cab rides in the evening and on the weekends. And, for some unfathomable reason, the bank provides cell phones and takes care of up to $40 in monthly bills.
Furthermore, if the bank wants to recruit you, you can expect to be wined and dined in high style. Events for the summer interns in Chicago have included outings to the Cubs and White Sox games (where we had front row or box seats and were booed at by the crowd for wearing suits) and dinners in great restaurants and bars. My junior mentor, Rebecca Jarvis, even treated me to a pedicure. After the recruiting is over, the new full-time hires get their share of the corporate treatment during their five-week training in New York, where they live in a hotel right on Times Square and have events every week.
Having heard all this, you may be wondering why people do anything other than investment banking. It is the perfect job, right? Well, not quite. The hours that an investment banking analyst puts in are beyond anything that regular people with their nine-to-five jobs can imagine. Analysts spend 80-120 hours a week in the office. To give you some idea of what that entails, an eighty-hour week means that you’re in the office from 9 am to midnight every day of the week and five additional hours on the weekend. A 120-hour week means that you’re pulling a couple of all-nighters and working straight through the weekend. Think of the worst finals week you’ve ever had at the U of C and you might come close to what investment bankers experience on a regular basis.
There is also a lot of pressure that comes with the job. Deadlines are looming every day. Everyone from an associate to a managing director (MD) wants things done yesterday. If there is a pitch book going out to a client next Monday, the MD wants to see it this Friday. This means that the vice president (VP) wants to see it on Wednesday, and the associate wants it completed by Tuesday morning. You, as an analyst, probably got the assignment this Monday and now have less than one day to complete the presentation. Needless to say, you are not going to be sleeping much that night. You are also likely to be working that weekend, making all the changes that the MD comes up with on Friday. The unpredictability of the business is often what makes it so difficult. Kurt Sunderman, a summer associate with B of A, admits that he had to cancel plans twice during his ten-week internship. “The worst part about this job is when, after a difficult couple of weeks, you think you have Friday night off, only to learn on Friday afternoon that you would be working that entire weekend,” reveals second-year analyst Rebecca Jarvis. She has also discovered that people unfamiliar with the business often find it difficult to comprehend the all-consuming nature of investment banking and often think that she chooses to stay in the office on a Friday or a Saturday night to avoid socializing. The lack of control over their own lives can be very frustrating to analysts, who are on call 24-7 thanks to a handy device known as a Blackberry.
In general, investment banking wreaks havoc with an analyst’s social life. Juggling family and friends when you have only one night a week free becomes a virtual impossibility. That is why, Rebecca says, many of her friends are themselves analysts at B of A. They know exactly what she is going through on those late nights and are always willing to lend a hand to help her get done faster. Being friends with the people in the office mitigates the stress of the job and makes those 100-hour weeks tolerable. For Rebecca, the level of camaraderie and teamwork that she found in the office is the most surprising—and pleasant—aspect of the job.
Investment Banking as a Career Choice
Now that you know something about investment banking, the big question is whether this job is right for you. Although you only work as an analyst for two or three years, it is not a decision to be made lightly. According to summer analyst Himal Agarwal, your time as an analyst can be “the hardest two years of your life,” and a summer internship is “a must” for anyone considering this profession. Vikas Sekhri, a first-year analyst, agrees with that assessment. “Definitely do an internship before doing this full-time,” he advises. Ask yourself if you would be willing to give up your life for two years and whether you will enjoy the work itself. If not, then no amount of money will be enough to make up for the hell that you will go through.
Should you decide to make the sacrifices that being an investment banking analyst requires, the world is your oyster. Because of the steep learning curve and the hours spent on the job, just two years of investment banking gives you a wealth of experience and a set of marketable skills that make you a highly desirable employee. Hedge funds and private equity firms will be knocking on your door trying to hire you. If you really enjoy investment banking and wish to continue in the profession, it is possible as well. Although investment banking is never a nine-to-five job, the hours beyond the analyst level definitely improve. Associates usually get to leave the office before 9 pm on a semi-regular basis, while the senior people tend to go home before 7 pm. There are exceptions to everything, of course, and I have seen some managing directors in the office at midnight, but those instances are rare. In general, bankers above the analyst level do have some kind of life outside of work, so a long-term career in investment banking is feasible.
So now you know the truth about investment banking. Is it glamorous? At times. Is it difficult and demanding? Oh, yes. Is it worth it? You decide.
Investment banking. For an eager job seeker, these two words conjure up magical images of skyscrapers silhouetted against the night sky, high-powered men in pin-striped suits making deals that change the course of the stock market, and glamorous lifestyles paid for by huge bonuses. Looking in from the outside, investment banking may indeed seem like a dream job. The mysterious and oh-so-enticing world of high finance lures the unwary with promises of big paychecks and even bigger opportunities, and hapless econ majors flock to Wall Street like bees to a honey pot. While many of them know what they are getting themselves into, having had internships or otherwise done extensive research, a fairly large portion enters investment banking with only a vague idea of what it entails or the sacrifices that it demands.
Investment Banking: The Job
So what is investment banking? On a big-picture level, i-bankers (or just “bankers,” as they call themselves) help companies raise capital and provide them with strategic advice. What that basically means is that they assess a company’s financial capabilities and decide what would be best for that company. A company that decides to go public—Google, for instance—needs investment bankers to arrange an IPO (initial public offering). A company in need of cash may turn to an investment bank in order to raise funds through the issuance of either equity (stocks) or debt (bonds). Investment bankers also act as advisors when companies are being bought (the buy side) or sold (the sell side) and when companies merge. Additionally, there is something called a leveraged buyout (LBO), in which a public company is bought by a small group of private investors. These investors — known as “the buyout group”—finance the acquisition by levering a ton of debt on the target company and then using that company’s profits to pay off the loans. Once the debt has been paid off, the company’s cash flows can be used to line the pockets of the investors.
At this point, unless you have developed an immunity from repeated exposure, all of these financial terms are probably giving you a brain rash. Leverage, mergers, acquisitions, LBOs, equity, debt, blah, blah, blah. It’s all good and well that investment bankers do all of these things, you probably want to say, but what do they actually do? There are two things that define the life of an investment banking analyst: Microsoft Excel and PowerPoint. Analysts spend so much time using one or both of these programs that they often have dreams—and nightmares—about them. Aarthi Sowrirajan, a summer analyst at Banc of America Securities (B of A), dreamed about being trapped inside an Excel cell and unsuccessfully trying to use the shortcut keys to get out. Similarly, I once woke up to find myself trying to edit a PowerPoint presentation with the joystick of my cell phone. For an analyst, spreadsheets and slides become a way of life.
In general, there are four common activities that the analysts engage in. The first—and usually most hated—is spreading comps. In order to seem smarter than the average Joe who can look up a company’s financial information on Yahoo, investment banks maintain files on the companies that they do business with and on their competitors (hence the name, comps—comparable companies). Every time a company releases new financial information, analysts update the files by inputting the new data into the Excel spreadsheets that have been created expressly for that purpose. However, since companies exist only to make the bankers’ lives more difficult, each company has a slightly different method of reporting its financials. To make these companies truly comparable, analysts have to go through the companies’ public filings and adjust the financials for any nonrecurring items, hidden charges, and so forth. One of the main goals of spreading a comp is to accurately calculate the EBITDA (earnings before interest, taxes, depreciation, and amortization), which is then used by the investment bankers to approximate the company’s cash flows.
Comps usually take anywhere from 20 minutes to a couple of hours, depending on the speed of the analyst and the number of nonrecurring charges that he has to adjust for. (Notice my politically incorrect use of “he” as a general pronoun. I’m allowed to do this because (a) I’m a female and (b) investment banking is a very male-dominated profession.) The company’s filings with the SEC, usually a 10-K or a 10-Q, range in size from 30 pages to 400, and the analysts have to go through all the footnotes and the management’s discussion of the operating results in order to sniff out any unusual and nonrecurring items. Unless you have the hots for accounting and financial statements, you will enjoy spreading comps about as much as going to the dentist. “I have forty comps to do, forty!” gasps David Tompkins, a first-year analyst at B of A, during his second week on the job. Yep, that’s forty visits to the dentist for poor David right there.
Another common task is putting together a PIB (Public Information Book) on a company. This is considered a very simple job and analysts usually try to pass it off to the summer interns, if such creatures are present. Making a PIB involves gathering all the recent company filings and information about the company from sources such as Hoover’s and Bloomberg, making copies of the gathered materials, and binding everything together to make several books. At B of A, we had Presentation Services that would make copies and bind books for us, but at many smaller banks, the analysts have to do everything manually. In the latter case, hole-punching and fitting pages onto a spiral spine take up quite a bit of an analyst’s time. After they are made, the PIBs are distributed to everyone on the deal team and used by the team members to get smart about the company.
A step above comps and PIBs is the third task—making a pitch book. This is something that investment bankers at all levels, from managing director to a lowly analyst, take part in. Pitching is key to investment banking—and it has nothing to do with baseball. Making a pitch refers to the investment bank offering its services to a prospective client—a salesman’s pitch, if you will. “It’s a sales-driven profession, a sales-driven world,” says Rebecca Jarvis, a second-year analyst at B of A. Investment bankers pitch an idea to some company (potential acquisition or divestiture, debt or equity offering, merger, etc.), with the implication that if the clients like the idea, they hire the bank.
Associates and senior people usually make all the decisions about what goes into a pitch book and how to arrange the information. All that remains for the analyst to do is follow the directions and create whatever graphs and charts the senior people deem appropriate. The biggest challenge here is making sure that everything is nicely formatted and all the numbers tie together. Attention to detail is of utmost importance because prospective clients often form their opinion of the bank based on the materials presented. A sloppy pitch book could lose a bank millions of dollars in revenue. To make everything as perfect as possible, a pitch book undergoes over a dozen revisions (turns). Turning a pitch book may be as simple as inserting a footnote and taking out a few words, or it could mean making additional slides. Either way, the quest for a perfect pitch book has led to many sleepless nights for the analysts and associates.
Finally, there is financial modeling, generally considered to be the “fun” part of being an analyst or an associate. It is also the most skill-intensive task that an analyst gets to do, requiring knowledge of the company’s operations, accounting, corporate finance, and Excel. As a simplified representation of a company’s past and future performance, a good model allows you to test your assumptions and analyze their impact on the company. There are earnings models, financing models, merger consequences models, discounted cash flow (DCF) models, and LBO models. As a new analyst or summer intern, you are unlikely to do a lot of financial modeling, but exceptions do occur.
Although the abovementioned tasks are the most common, they are far from being the only activities that analysts engage in. An analyst’s life has no routine and duties vary from day to day. You might be asked to come up with an idea for a deal toy (an object to commemorate the completion of a transaction) or to prepare an interoffice newsletter, to find data on tea bags or to attend a meeting with a client. In short, you will do whatever needs to be done.
The Life of an Investment Banker
Now that the mystery of the actual investment banking activity has been cleared up a bit, you probably want to know if the rumors about long hours and big paychecks are true. Well, let us begin with the good part—the paychecks.
The earnings of an investment banker are closely tied to how the economy is doing. Bonuses make up a large portion of the earnings, and they tend to shrink together with the Dow Jones when recession hits. Now that the economy is improving, the bonuses are going up again. A first-year analyst can expect 35-45K in bonus, a second-year analyst about 20K above that, and a third-year analyst’s bonus is about eighty grand. At the associate level and above, the bonuses can be simply huge. In contrast, the base salaries are good without being outstanding. A common figure floating around this year is 55K for starting base salary. There is also a sign-up bonus for full-time hires of about 10K. To learn more about the salaries, check out www.careers-in-finance.com/. The information there is a bit dated, but can give you a rough idea of what to expect.
In addition to the salary and the bonus, investment banking comes with a few other perks. At Banc of America Securities, bankers who stay in the office past 6:30 pm (as analysts and associates always do) can order dinner worth $25 and have it be paid for. Same goes for the weekend, plus $15 for breakfast or lunch. The bank also pays for cab rides in the evening and on the weekends. And, for some unfathomable reason, the bank provides cell phones and takes care of up to $40 in monthly bills.
Furthermore, if the bank wants to recruit you, you can expect to be wined and dined in high style. Events for the summer interns in Chicago have included outings to the Cubs and White Sox games (where we had front row or box seats and were booed at by the crowd for wearing suits) and dinners in great restaurants and bars. My junior mentor, Rebecca Jarvis, even treated me to a pedicure. After the recruiting is over, the new full-time hires get their share of the corporate treatment during their five-week training in New York, where they live in a hotel right on Times Square and have events every week.
Having heard all this, you may be wondering why people do anything other than investment banking. It is the perfect job, right? Well, not quite. The hours that an investment banking analyst puts in are beyond anything that regular people with their nine-to-five jobs can imagine. Analysts spend 80-120 hours a week in the office. To give you some idea of what that entails, an eighty-hour week means that you’re in the office from 9 am to midnight every day of the week and five additional hours on the weekend. A 120-hour week means that you’re pulling a couple of all-nighters and working straight through the weekend. Think of the worst finals week you’ve ever had at the U of C and you might come close to what investment bankers experience on a regular basis.
There is also a lot of pressure that comes with the job. Deadlines are looming every day. Everyone from an associate to a managing director (MD) wants things done yesterday. If there is a pitch book going out to a client next Monday, the MD wants to see it this Friday. This means that the vice president (VP) wants to see it on Wednesday, and the associate wants it completed by Tuesday morning. You, as an analyst, probably got the assignment this Monday and now have less than one day to complete the presentation. Needless to say, you are not going to be sleeping much that night. You are also likely to be working that weekend, making all the changes that the MD comes up with on Friday. The unpredictability of the business is often what makes it so difficult. Kurt Sunderman, a summer associate with B of A, admits that he had to cancel plans twice during his ten-week internship. “The worst part about this job is when, after a difficult couple of weeks, you think you have Friday night off, only to learn on Friday afternoon that you would be working that entire weekend,” reveals second-year analyst Rebecca Jarvis. She has also discovered that people unfamiliar with the business often find it difficult to comprehend the all-consuming nature of investment banking and often think that she chooses to stay in the office on a Friday or a Saturday night to avoid socializing. The lack of control over their own lives can be very frustrating to analysts, who are on call 24-7 thanks to a handy device known as a Blackberry.
In general, investment banking wreaks havoc with an analyst’s social life. Juggling family and friends when you have only one night a week free becomes a virtual impossibility. That is why, Rebecca says, many of her friends are themselves analysts at B of A. They know exactly what she is going through on those late nights and are always willing to lend a hand to help her get done faster. Being friends with the people in the office mitigates the stress of the job and makes those 100-hour weeks tolerable. For Rebecca, the level of camaraderie and teamwork that she found in the office is the most surprising—and pleasant—aspect of the job.
Investment Banking as a Career Choice
Now that you know something about investment banking, the big question is whether this job is right for you. Although you only work as an analyst for two or three years, it is not a decision to be made lightly. According to summer analyst Himal Agarwal, your time as an analyst can be “the hardest two years of your life,” and a summer internship is “a must” for anyone considering this profession. Vikas Sekhri, a first-year analyst, agrees with that assessment. “Definitely do an internship before doing this full-time,” he advises. Ask yourself if you would be willing to give up your life for two years and whether you will enjoy the work itself. If not, then no amount of money will be enough to make up for the hell that you will go through.
Should you decide to make the sacrifices that being an investment banking analyst requires, the world is your oyster. Because of the steep learning curve and the hours spent on the job, just two years of investment banking gives you a wealth of experience and a set of marketable skills that make you a highly desirable employee. Hedge funds and private equity firms will be knocking on your door trying to hire you. If you really enjoy investment banking and wish to continue in the profession, it is possible as well. Although investment banking is never a nine-to-five job, the hours beyond the analyst level definitely improve. Associates usually get to leave the office before 9 pm on a semi-regular basis, while the senior people tend to go home before 7 pm. There are exceptions to everything, of course, and I have seen some managing directors in the office at midnight, but those instances are rare. In general, bankers above the analyst level do have some kind of life outside of work, so a long-term career in investment banking is feasible.
So now you know the truth about investment banking. Is it glamorous? At times. Is it difficult and demanding? Oh, yes. Is it worth it? You decide.
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