Finance in Canada, Part 2: Investment Banking to Pension Funds and Everything in Between

So where were we again?

Oh yeah, just how different it is working in finance in Canada and how it can be much harder to break into the industry.

If you haven’t already read Part 1 of this interview and learned how our interviewee broke in against all odds – coming from a culinary background – you should get over there and read his story right now.

We’re going to pick up with Part 2 today and you’re going to learn all about what it’s like on the job - from the industries you cover to the most common deal types to the hours and yes, even the pay (with exact numbers).

And then we’ll move into the exit opportunities - a strange world where traditional private equity, venture capital, and hedge funds are less prominent and where pension funds are a more common destination.

NOTE: THIS INTERVIEW APPLIES MORE TO QUEBEC THAN CANADA AS A WHOLE.

So please keep that in mind as you read through it. Yes, things are different in other places. Some of the points here do apply elsewhere, while others are Quebec-specific (i.e. comments on French, some of the figures below, and so on).

Industry Landscape: Got Gold? And Oil?

Q: Switching gears now, how is the finance industry different in Canada overall? Can you go through what the key industry sectors are and how deals are different?

A: Sure. The main industries here are energy, metals & mining, transportation , timber/resources, and a bit of technology.

The Big 5 banks do deals across all of these.

Capital markets activity here is limited to the 5 – 6 biggest banks, and smaller boutiques don’t do debt or equity at all; the Big 5 banks also work with the federal government and provincial governments that issue debt or otherwise need to raise funds.

You do see some boutiques doing private placements and PIPEs, but anything else capital markets-related is rare to nonexistent.

US banks have less of a presence in Canada, though they are still involved in some deals.

A Day in the Life

Q: So the industry is smaller and much more focused – makes sense given the lower and more spread-out population.

What’s an average day in your life like? Are we talking standard investment banking associate days, or is it better / worse?

A: For me it’s pretty much the same as what you see elsewhere – long, grueling days and plenty of weekend work, with a fair number of crazy people in the mix as well.

You do tend to get more responsibility at the junior levels here since the whole industry is smaller.

So as an associate, sometimes I’ll actually go out and find M&A opportunities, bring them back and pitch them to Partners, and so on – or I’ll help with going out and soliciting investors myself. You wouldn’t normally see that at large banks in the US.

Although the PE industry itself is small here, we do a lot of work with pension funds and big banks here and show them projects that require capital – often we raise that capital in the form of special-purpose vehicles (SPVs) with standard-fund economics.

Q: So how would one of those deals work? Can you walk us through the process?

A: Sure. Typically a company that’s lacking capital (usually equity) or needs to grow more quickly would come to us and ask what we can do to help.

So we would complete some due diligence, understand more about their business and market, and assess how much the company could grow over the next 5 – 10 years based on the usual financial statement analysis and projections that you use in banking.

Then we would wrap all of that in a pitch book, and go out and present it to pension funds. Unlike PE or VC firms, pension funds here barely do any soliciting and pretty much wait for inbound leads to show up on their desks before investing in anything.

The Caisse, for example, the largest pension fund in Quebec and 5th largest pension fund in the world, allocates 80% of its portfolio to Fixed Income and Equities and 20% to real-estate & PE / VC.

Pension funds are huge here; 3 of the top 10 biggest funds in the world are based in Canada, even though the country has a smaller population than other developed countries.

So we might pitch one of these private companies that’s looking for growth capital to pension funds and get them interested in investing.

Other banks here might focus on the distressed or debt or convertible markets and find small-cap or mid-cap firms looking to raise money via those vehicles instead.

Q: What about differences on the technical side of deals? Is anything about financial modeling different?

A: There aren’t too many differences.

One point is that the Net Asset Value (NAV) model is more important for intrinsic valuation purposes when you’re looking at oil, gas & mining companies.

And at VC firms here, most of the “analysis” consists of a gut feeling check rather than rigorous technical work in Excel – but you see that in other markets as well.

Hours, Pay, and Paths

Q: OK, so not too many differences on the technical side, although the deal types tend to be a bit different and you deal with pension funds a lot more than traditional PE firms.

What about the hours and compensation? I’ve heard all sorts of mixed views on how they compare at Big 5 banks vs. smaller firms vs. the buy-side in Canada.

A: Sure. The main difference is that salaries and bonuses are much more standardized here, at least at the Big 5 banks. Here’s what you can expect based on recent numbers:

• First Year Associate in Toronto: $105K CAD base salary, with $50K CAD bonus. That ramps up to a $125K CAD base salary over time, with a bonus of $65 – $75K CAD, which stays flat until you reach the VP level.
• Analysts in Toronto: $65 – $75K CAD base salary (Note: May be $80K as the standard at some banks, and sometimes a bit more or less), with $30 – $35K CAD bonus.

However, these numbers are factored by the cost of living in each region, so you would earn 5% less in Vancouver and 10% less in Alberta. Montreal is about 20% less than Toronto.

Unlike the US, each bank here has a set salary and bonus paid to associates – so it doesn’t change much depending on group performance, number of closed deals, or fees.

Q: Right. Those numbers would look a lot better if the US Dollar falls a lot more, but I guess you have to settle for less sometimes.

What about the progression on compensation as you move up the ladder? How much would a VP earn?

A: I don’t have exact numbers for you there, but I’ve heard that VPs might make around $175K CAD base salary with highly variable bonuses based on deals closed, fee structure, and so on.

In a bad year as a VP, you could theoretically earn less than an associate would earn; it’s not common, but it is possible because VP pay is tied much more closely to deals and fees.

Q: What about compensation at boutiques and on the buy-side?

A: For boutiques, pay differs so radically from firm to firm that it’s almost impossible to generalize. Sometimes you could actually end up making more at a boutique than at a Big 5 bank because the fee percentage can be higher.

One deal I heard about here had a 5% fee (which is unusual – it’s normally more like 1-2%) attached to it, and since the boutique bank advising them has lower overhead and fewer people, they were extremely profitable on that deal.

In private equity, some firms here start you at much lower base salaries – maybe $40K CAD – and then give you significantly higher bonuses of around, say, $160K CAD.

Pension funds pay less, but give you more job security – their returns are pathetic, so there’s less money to go around. Plus, they’re highly scrutinized since so many unions rely on the fund and carefully monitor what they pay people.

As an analyst, you might get $60K base salary and a $10 – $15K bonus there; associates might get a base salary of $80K and a bonus of around $20K.

On the other hand, it’s also a very secure job with almost unlimited funds, so you can slack off and barely do anything – it’s almost like working for the government. We’re talking 40-50 hours per week at the most.

The top guys running these places make a lot of money, but the juniors don’t fare nearly as well.

Q: So what’s the typical “path” there in terms of progression and exit opportunities?

A: As I mentioned before, a finance degree from a top Canadian university here is essential. It’s also very helpful if you know French because many of our clients come from Quebec and want to work with other French-speakers.

For some inexplicable reason, they value the CFA very highly here. So that would be an ideal combination to start with: top finance degree + finance internship at Big 5 bank + CFA + French speaker.

After banking, there aren’t too many exit opportunities and most people tend to stick around in the industry; venture capital has been growing lately and some funds are getting larger, but overall the industry is still tiny. And PE is almost nonexistent, relative to the US anyway.

Sometimes people go to big companies’ internal M&A practices – energy companies here, for example, like to solicit oil & gas M&A associates and VPs to come in and run deals so they can avoid paying fees to banks.

And there’s going to be a lot of industry consolidation in coming years because the big companies here want to acquire the smaller players, and they keep on finding new reserves, developing new extraction technologies, and so on.

The Exit Opportunity Landscape in Canada: A Gaping Black Hole?

Q: You’ve mentioned a couple times now that there aren’t many traditional exit opps in Canada – do you have any numbers to back this up or describe the industry?

A: Sure. To give you an idea, in Quebec there are only 3 private equity firms with over $500 million in assets under management; Toronto has a few $1 billion+ AUM funds.

By US standards, $500 million is tiny – the biggest firms out there have tens of billions in capital.

Sometimes, big funds in the US such as KKR actually get aggressive in Canada and will do deals here as well since they consider it part of their “play ground.”

In the VC world, there are also very few firms and in Montreal, for example, only two venture capital firms even have more than $500 million in capital – again, tiny by US standards.

Many PE and VC firms are tiny, which is a bad deal for you if you think about it.

If a firm has $50 million in capital and 6 Partners, you’re looking at $1 million in management fees (2%) each year that gets split between the Partners, leaving very little for the associate; he might make $50 – $60K and be more of an analyst.

Pension funds are an order of magnitude, or maybe even several orders of magnitude, bigger than either of these and a single pension fund might hire 10 associates per year, test them out over several years and see how many a) last b) like the pay c) don’t go on to law school.

(Yes, a significant number of MBA graduates here either have a law degree or follow up with a law degree afterward.)

And since pension funds pay so little, “exit opportunities” for most IB analysts here consist of, “Go to business school and re-join the firm as an associate if you want to get paid more and advance.”

Q: So exit opportunities aren’t too appealing – any differences in recruiting to be aware of, in case someone reading wants to pursue PE, VC, or pension funds in Canada?

A: At pension funds, the process is very similar to what you see in private equity interviews – they give you a case study, a week or so to complete it, and then you have to write up a presentation or thesis on the industry and whether or not you’d make the investment.

And the same goes for PE and VC: the firms are smaller, but they’re still looking for the same qualities – some technical know-how, the ability to recognize and recommend good investments and avoid bad ones, the ability to drive deals to completion independently, and how well you can bring in new business for the firm.

Oh, and since pension funds are heavily regulated by the government, you’re required to be bilingual in French and English if you want to work at a pension fund in Quebec. And there’s tons of M&A activity in Quebec, so you’re pretty much out of luck if you want to work at a pension fund there but don’t know French.

So maybe you should think about doing a Finance degree at McGill with a Minor in French if your heart is set on pension funds…

Q: I’m not convinced by these “exit opportunities” in Canada. It almost sounds like opening your own restaurant might be more lucrative – are you thinking of getting back into that?

A: Hah, good one! For now, I’m happy where I am but who knows what will happen in the future.

I’ve had a passion for food and culinary arts for a long time, and it’s ironic that I originally got into the industry by working at a restaurant.

So I’ve thought about opening my own place before, but I’m not thinking about doing anything like that in the near-term.

Q: I still think you should give it a shot, or at least move to a country where exit opportunities pay more.

But in any case, thanks for the chat – really enjoyed it, and learned a ton about finance in Canada in the process!

A: Thanks! I enjoyed speaking with you as well.

NOTE: THE INTERVIEW ABOVE APPLIES MORE TO QUEBEC THAN CANADA AS A WHOLE.

So please keep that in mind as you read through it. Yes, things are different in other places. Some of the points here do apply elsewhere, while others are Quebec-specific (i.e. comments on French, some of the figures, and so on).

Finance in Canada – Series:

• Investment Banking in Canada – Overview
• Break Into Investment Banking in Canada (Part 1 of Interview)
• Investment Banking in Canada: On the Job and Exit Opportunities (Part 2 of Interview)

UPDATE: Comments on this article are now closed.

Yes, pay figures may be different and some of the individual details within may apply more or less depending on where you are and which bank you’re at.

However, I cannot afford to spend all day arguing about these points. Everything that can be raised about the interview already has been raised and discussed below.

If you don’t like it, please skip over this and read whatever else you want on the site. Best of luck.

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