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2
My Background
Graduated with a Finance Major December 2002
Merrill Lynch Investment Banking Analyst (Chicago)
Allied Capital Private Equity Associate Oct 2004 - Present (Chicago and New
York)
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Why Work in the World of Wall Street? Challenge / Responsibility
Be in a position to provide advice and guidance to people whom, if you worked in a corporate setting, you would probably have no exposure to
Compensation: 2006 Investment Banking Average First Year Compensation $60K salary + $70K bonus = $130K
Opportunities after Investment Banking Private Equity / Venture Capital Hedge Funds Corporate Finance Business School
Networking Direct Promotion to Associate
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Components of Wall Street
Sell-side FirmsAgents or Middle Man
Sell investment banking services: Acquisition Advisory Capital Markets (IPOs) Trading Services Stock Research
Morgan Stanley, Goldman Sachs, Merrill Lynch
Example : Merrill Lynch advised P&G on their acquisition of Gillette in 2005.
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Buy-side FirmsPrincipals
Those who buy the services that the sell-side is offering: money managers including Mutual Funds Private Equity Firms Hedge Funds
Fidelity, Putnam, KKR, Carlyle Group, Blackstone, Citadel
Example : Fidelity asking Merrill Lynch to sell their Microsoft Stock.
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CORPS:Abbott, GE
Sell-Side / Buy-Side
INVESTMENT BANKINGCAPITAL MARKETSSALES & TRADING
RESEARCH
INVESTMENT BANKINGCAPITAL MARKETSSALES & TRADING
RESEARCH
strategic advisoryunderwrite and place
securities
Sell-Side
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INVESTMENT BANKINGCAPITAL MARKETSSALES & TRADING
RESEARCH
INVESTMENT BANKINGCAPITAL MARKETSSALES & TRADING
RESEARCH
MUTUAL FUNDS(Buy-Side)
MUTUAL FUNDS(Buy-Side)
CORPS:Abbott, GE
strategic advisoryunderwrite and place
securities
sell equity and debt securities, provide
research
invest directly
Sell-Side
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INVESTMENT BANKINGCAPITAL MARKETSSALES & TRADING
RESEARCH
INVESTMENT BANKINGCAPITAL MARKETSSALES & TRADING
RESEARCH
INDIVIDUAL INVESTORS
INDIVIDUAL INVESTORS
sell equity and debt securities, provide research, financial planning strategic advisory
underwrite and placesecurities
sell equity and debtsecurities, provide
research
invest directly
MUTUAL FUNDS(Buy-Side)
MUTUAL FUNDS(Buy-Side)
CORPS:Abbott, GE
Sell-Side
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INVESTMENT BANKINGCAPITAL MARKETSSALES & TRADING
RESEARCH
INVESTMENT BANKINGCAPITAL MARKETSSALES & TRADING
RESEARCH
CORPS:Abbott, GE
institutions
strategic advisoryunderwrite and place
securities
invest indirectly by buying mutual funds, insurance policies, etc.
sell equity and debt securities, provide
research
invest directlyinves
t dire
ctly
MUTUAL FUNDS(Buy-Side)
MUTUAL FUNDS(Buy-Side)
INDIVIDUAL INVESTORS
INDIVIDUAL INVESTORS
sell equity and debt securities, provide research, financial planning
Sell-Side
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IndividualInvestors:
High Net Worth Individuals
InstitutionalInvestors:
•Insurance Companies •Pension Funds
•College Endowments
CashEquivalents
DebtSecurities
Stocks
Private EquityHedge Funds
RealEstate
Money Flow
Mutual Funds
Publicly Traded Investments
Privately Traded Investments
Buy-sideFirms:
InvestmentTypes:
PrivateAssets
Other:Metal, Oil
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Private Equity Fund
Private Equity Fund: is an investment company that provides equity capital in exchange for an ownership position in a private company (not traded on a public stock market post transaction). Venture Capital: invest in start-ups and early stage
deals (Technology) Leverage Buyout Funds: invest in buyouts, usually of
mature companies (Allied Capital) Leverage Buyout (LBO): is the process of acquiring a
company using a significant amount of debt, which helps increase the acquirer’s equity return.
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Leverage Buyout: ExampleHouse Leverage Buyout (LBO)
Pre Deal Research: Hire a Broker or look at listings, attend open houses.
Hire investment bankers who help find potential opportunities or do your own search. Visit companies, meet management.
Deal Related Work/ Investigation (Due Diligence):
Hire inspector, attorney, title company
Perform Financial, Legal, Accounting, and Insurance Due Diligence (Usually hire outside parties)
Payment: 1) Down payment
20% 25-40%
2) Borrow From Bank Mortgage Payment Interest Payment
Hold Period: Varies 3-7 years
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Leverage Buyout: Ultimate Goal Buy low, sell high! An equity investor expects that the Company will grow
in value. How does Private Equity Firm create value?
Cost cutting (outsource to Asia) Selecting operating executives and boards of
directors Industry consolidation or acquisition strategies
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Power of Leverage
Why borrow capital (debt) to fund buyout transaction?
Transaction Structure: Cash Purchase LBO
Purchase Price Today: $100 million $100 million
Equity $s Invested: $100 million $30 million (30%)
Selling Price (1 year
later): $125 million $125 million
Profit: $25 million $25 million
Simple Return Calc: $25 (profit) / $100 (invested amount) = 25%
$25 (profit) / $30 (invested amount) = 83%
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Private Equity Firm StructureGeneral Partners
Managing Directors (MD’s)
Principals
Vice Presidents
Sr. Associates
Associates
Back Office (Accounting, Treasury, etc.)
Operating Partners
Former CEOs, COO’s, CFO’s, and management consultants
Recent MBA’s often with related experience
Undergrads with 2-3 years experience as: •Investment Bankers •Management Consultants •Big Four Accountants
General partners (GPs) The private equity firm employees that manage the firm’s investing activities
• Receive a 2% management fee and 20% of profit
Limited partners (LPs) The pension funds, college endowments, etc. that provide capital to the private equity firms but do not actively manage the investments
• Receive their initial investment and 80% of profit
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Development
Meineke hired investment bankers to help them sell the Company
Investment Bankers put together a book describing the business (Offering Memorandum) and submitted it to Allied and other interested parties
Allied performed financial analysis to determine the value of the Company and submitted it to Meineke through Investment Bankers
Allied met Meineke management
Investment Bankers compared all the offers and decided that Allied’s offer was the best
Deal Execution
Work with Lawyers to prepare acquisition documents, debt documents, management employment agreements
Finally work with Allied’s treasury department to make sure that the money wires go to the right recipients
Celebrate
Allied Internal Process
Financial Analysis of Historical information
Determine the appropriate Capital Structure (How much debt should the company hold)
Hire Third Party providers to perform additional investigations:
•Accounting
•Tax
•Insurance
•Legal
•Industry (Customer Calls)
•Background Checks of Management
Present the deal to Allied’s internal Investment Committee for approval
Deal Process: Allied acquisition of Meineke
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Insurance Diligence
Allied hired Marsh (risk management consulting firm) to perform Insurance Due Diligence: Review existing policies and provide recommendation to
Allied concerning uninsured and underinsured risks Project estimate of annual cost of Meineke insurance
program going forward Insurance policies reviewed: Product Liability, Pollution
Liability, Auto liability, Property, Directors and Officers Liability, Workers’ Compensation, & Franchisor Liability
Marsh’s issued a 30 page report summarizing their findings. They recommended additional insurance that would increase the current annual premium by 85%.
Marsh is an insurance broker and gets commission for any additional insurance that the Company buys from them.
Allied’s and Meineke’s role is to figure out what additional Insurance is truly necessary.
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Risk Management
M & A Insurance solves deal specific liability concerns Tax liability
• To protect against changes of tax treatment of the transaction
Environmental Liability• To protect against pollution liabilities arising post
transaction close Litigation
• To insure against a lawsuit or threat of litigation
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Exit 3-7Years
The Private Equity Summary
Insurance Companies
College Endowments
Pension Funds
Wealthy Individuals
Private Equity Firms:
25% Returns
Work with:• Investment Bankers• Lawyers• Accountants• Insurance
Consultants
Debt Providers
Portfolio Companies
$
$
$
$Equity30%
Debt70%
Value Creation:Strategic DirectionCut ExpensesAcquisition StrategyManaging Oversight
LBO Structure:
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My Job: the Good and the Bad Good:
Interesting and challenging work• Enjoy learning about different businesses and
every deal has different issues• Interaction with upper management both at Allied
and at portfolio companies• Good compensation
Bad Work long hours and difficulty making plans Spend many hours doing work that might not
go anywhere
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Overview of Investment Banking Jobs
Investment banks provide financial advice for corporations, trade and sell stocks and other securities, and develop research and opinions on all financial markets and economies.
They hire college graduates each year into two- to three-year analyst programs. Entry level positions on Wall Street that have active recruiting programs are as follows:
Investment Banking
Debt and Equity Capital MarketsEquity ResearchSales and Trading
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Investment Banking Analyst Typically organized into Industry (Consumer Products, Healthcare, Energy and
Power, etc.). However, role of the analyst doesn’t change much across groups.
Marketing
• Preparing presentations (“Pitch Books”)
• Industry research
• Financial modeling (Projecting the Company’s Financials in Excel)
Live Deals
• Valuation work (Determining the value of a Company)
• Writing offering documents (SEC Documents)
Expect to work 90+ hour weeks This means 13 hours every day of the week…
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Debt and Equity Capital Markets Analyst
Overall work is a little less technical than in investment banking and the hours are generally better. However, expect to start work early in the morning.
Trading floor environment - need to be able to focus despite innumerable distractions
Gather market intelligence; talk to traders
Keep market transaction database
Work with Investment Bankers to prepare presentations and pitches
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Equity Research Analyst
Work will typically include a lot of writing and less technical than investment banking. The hours are better than banking, but very busy around earnings releases.
The role of the equity research analyst is to assist the senior analyst to conduct research on a particular industry segment, such as the “Healthcare Industry.” Research analysts usually work with only one or two supervisors. Conducting industry and company research (talking with companies,
suppliers, customers, and other industry experts) Writing research reports Developing models to project the future financial performance of specific
companies Listen to Company earnings calls Keep Sales and Trading informed on industry developments
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Sales and Trading Analyst
Typically work around market hours (no weekends) and expect to be on your computer and phone every minute the stock market is open.
As a sales analyst you will be supporting the work of senior sales people as they provide investment recommendations for their clients. The main responsibilities of this job are:
Work with research to collect information and tips on investment opportunities for your group’s clients
Record and process “buy” and “sell” orders from clients
Talk with the Trading group to execute sales on behalf of clients
The trading group is in charge of executing all trades on behalf of the bank’s clients. If a client wants to sell a particular stock at a certain price, the trader must find someone interested in buying the stock at that price.
Booking and processing all transactions that you or your senior trading associates execute in a day
Receiving orders from sales people or directly from clients who need to execute trades
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How Do You Get There?
High GPA Relevant / Challenging Classes
Preferred majors: Finance and Accounting Good Internships Extracurricular Activities
Leadership Roles Meeting Recruiters Early
Read Wall Street Journal Network with Alumni / Faculty