The Financial Sponsors Group: Masters of the Financial Universe, or Humble Servants of PE Firms and Hedge Funds?

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Financial Sponsors Group (FSG)While much of the terminology used in finance contradicts itself, there’s a special amount of confusion over four groups in particular: Leveraged Finance, Debt Capital Markets, Financial Institutions, and Financial Sponsors.

They all have “Finance” or “Capital” in their titles somewhere, and we’ve covered 3 out of 4 of them before…

So today we’re going to finish up with the last one: the Financial Sponsors Group (FSG).

Among the many benefits of this group:

  • You get to work directly with private equity firms and hedge funds (and more?), and with their portfolio companies.
  • You get to learn about lots of industries – or at least the ones that your client firms have invested in.
  • Oh yeah, and you might actually understand what you do in the group compared to all the similar groups above.

But will you do any modeling, or get any exit opportunities?

Tougher questions to answer…

So let’s get started with how you break into the group, what you do, and what you do next – directly from our interviewee, who’s worked in both a standard coverage group and the Financial Sponsors Group.

Sponsored Into Financial Sponsors?

Q: Let’s start with your story and how you broke in – did you have any kind of background in financial sponsors before breaking in? A private equity internship, maybe?

A: Nope, not at all. I did a political science degree and was in ROTC (Reserve Officers’ Training Corps, a college-based program for training the armed forces) with a focus on artillery.

I was recruited out of school just as the market was tanking, and there were few spots to choose from – lots of people wanted to be in the natural resources group at my bank but were placed elsewhere, myself included.

There were rumors that there weren’t even enough spots for our entire class and that some of us would be let go before even starting – luckily we all still had spots before starting, but it was a horrible time to be entering the market.

I spent 2 years in a coverage group, and then applied to transfer into the Financial Sponsors Group (FSG), mostly to get a change of pace and understand how another group worked.

While my coverage group was great, I wanted to take a step back and take on a broader coverage area. If you’re in a group focused on a sector, headhunters automatically assume that’s where you want your career to follow.

Going to the Financial Sponsors Group meant that I would be able to work in a broader range of industries, and that I would be able to convey my background as a more valued generalist.

Q: So your background didn’t prepare you at all for what you do in the group, but you proved yourself elsewhere first and so the internal transfer process was made easier.

A: Yeah, pretty much. I picked up everything I’ve learned starting on day one of work. I went through analyst training, and learned how to model from there.

Through my assignments, I learned the group-specific topics and metrics that you’ve covered pretty thoroughly in your coverage group series.

Financial Sponsor Work

Q: Ok, since you don’t have a wonderful story to tell us about how you started a hedge fund or three before joining the group, let’s move on…

What do you actually do in the Financial Sponsors Group?

A: We’re a coverage group but for private equity firms, hedge funds, and sovereign wealth funds rather than traditional companies.

In a traditional coverage group, for, say, consumer retail or industrials, you might go out and advise companies in those industries on M&A deals and financings, and build relationships with them over time.

We do the same thing, but for investment firms that have portfolios of companies or ownership stakes in companies rather than the companies themselves.

The main difference is that all of the firms above care a lot about exits: what they can do in 3-5 years (or sometimes less) to sell the company or their stake in the company and get a good return on investment.

PE firms prefer to sell to strategic or financial buyers, or do an IPO of a portfolio company if a sale is problematic; with hedge funds, strategies vary and can be much shorter term.

So unlike normal companies, which may think about acquisitions for the very long-term, with financial firms it’s all about how you can realize a great return in a short period of time.

Q: Right, so I’m assuming that creates some differences in how you pitch these firms and come up with ideas for them… you focused on PE above, but how do hedge funds and sovereign wealth funds differ?

A: Hedge funds make smaller investments in companies and then sell them off when the time is right; they also use broader investment strategies and can sometimes act much more quickly than PE firms.

New York Magazine published an article back in April 2007, “Behind the Hedge”, with some great details on how hedge funds operate (dated, yes, but still very relevant).

Sovereign wealth funds are pretty similar to private equity firms in their approach to investing. But since they’re associated with foreign governments, there might be rules governing the operations of the fund, or considerations that influence how investments are made (ex: risk, geographic presence, ethics, etc.).

Finally, some of these firms might only invest in certain sectors… going back to the PE example, if you were interested in the industrials sector you might look at firms like Veritas, Greenbriar Equity Partners, or American Industrial Partners.

Q: So what influences this market? We’ve seen how factors such as consumer spending and government defense spending influence other sectors, so what’s important for financial sponsors?

A: That’s a pretty broad question, but mainly the market is driven by access to financing, valuation, and broader sector conditions for specific portfolio companies.

You can’t just use broad economic indicators and conclude that it’s a good time to invest; you might have a divergence from Dow Theory, with capital goods and transportation sectors falling and the Dow Jones Industrial Average (DJIA) rising.

On the financing side, if investors are willing to contribute capital then financial sponsors can contribute less of their own equity into transactions. A healthier financing environment supports more deal-making with fewer dollars and more loans being written for the sponsor community.

If valuations are high, then sponsors might collaborate with one another to get transactions done. High valuations coupled with low deal volume (number of deals being completed) might even signal too many dollars chasing too few deals.

Fundraising and cumulative overhang (the total amount of capital raised by funds to date minus the total amount invested) also reflect financial sponsors’ appetite for deal making. You could even look at the vintage of private equity funds… but that might be over-analysis.

Sector interest also tends to run in cycles and you see industries like technology heating up (the dot-com boom) and cooling down (the dot-com bust) at various points in time.

Finally, legal and regulatory developments might influence how much risk funds undertake and how aggressively they invest.

Q: I noticed you didn’t mention anything about venture capital firms above – do you work with them at all?

A: Very seldom. My firm works with larger funds and a few mid-size ones, but most banks do not focus on venture capital in FSG.

Generally the deals they do are too small to be of interest to a large bank, which is why we focus more on late-stage investment and buyout firms.

There are firms out there, however, that do focus on advising small businesses and transitioning them into venture funding – the one that comes to mind is Pulse Advisory.

The Assignments

Q: So what do you actually do as a junior-level person in your group?

A: If you want to see a great example of a presentation that we’d create, please see this set of sector conditions from Insight Equity. As you might have noticed, how the sector operates is discussed from a broad perspective.

We would contribute to presentations like that by finding data and trends on what sponsors are investing in, determining multiples and leverage for deals, and so on.

A lot of the work is summarizing current holdings of financial sponsors, how much they paid for various companies, and what these portfolio companies do.

We rarely create company profiles since the traditional coverage groups at our bank handle that type of work.

Q: So reading between the lines here, it sounds like you don’t do much technical or modeling work?

A: It’s less technical than what you would get in a traditional coverage role.

The problem is that anytime a sponsor-backed deal is underway, the traditional coverage team (or even the product group) does most of the heavy lifting.

I wouldn’t say that you never do modeling per se, but it’s less modeling-intensive than M&A, Leveraged Finance, or something like Mezzanine.

If your firm is smaller, the Financial Sponsors Group might take on some of the assignments that the industry coverage team would normally handle: coming up with due diligence questions, coordinating meetings, and reviewing term sheets for debt issuances.

But generally, there are lots of “cooks in the kitchen” with sponsor-backed deals, at least at large banks, so you wouldn’t get to contribute as much as an analyst on an M&A deal between two strategics (normal companies) might.

NOTE: These comments generally apply to FSG, but there are always exceptions if you read through the comments below. In some groups you do get to do more technical and modeling work, and many analysts still exit into top private equity firms. But it is group-dependent, and your experience will vary based on the bank and group.

Q: Right, but that’s assuming you’re advising the firm on acquiring or selling off normal companies – what if they want to buy another financial sponsor?

For example, what if a hedge fund or private equity firm wants to buy another hedge fund or private equity firm?

A: It depends on the firm, but my guess is that the Financial Institutions Group would take on the tougher parts of the assignment – under the classification “alternative asset management.”

For a flavor of valuation, please see this set of materials covering the GLG Partners / Man Group transaction.

Q: So reading through that document and assuming you actually get to do technical work on deals, it seems like the main valuation multiples are…

A: The key metrics include P/E, Enterprise Value / AUM, and then items such as dividend yields.

A lot of what you’ve covered in the FIG article might be included, but we don’t work with commercial banks or insurance firms so those methodologies don’t apply here.

The Leveraged Finance team might address the more modeling-oriented aspects of this type of deal – so if you were staffed on a leveraged recapitalization, you might not even see the model at all.

As you mentioned in the equity capital markets interview, any role is what you make of it.

It’s possible to learn more about valuation and modeling in FSG, but you’ll need to take extra initiative to pick up a model and dissect it on your own time.

Q: Great, thanks for clarifying.

I also wanted to ask about how the Financial Sponsors Group earns fees. For normal deals in banking, fees are all “success fees” and you only get paid when a deal closes.

But since you’re advising sponsors on an ongoing basis, is there any type of retainer or non-success fee involved?

A: If a financial sponsor is looking for a particular target, it might hire an investment bank on retainer to do some late-stage screening, so the bank could still get paid even if nothing happens.

But as with standard groups, usually a fee is paid if the deal gets done.

So all of the pitching, positioning, and indicative terms on financing you might provide are just part of the sales process as your firm attempts to get hired.

Financial Sponsors vs. Everything Else

Q: As I mentioned in the beginning, I think there’s a lot of confusion over what you do in FSG vs. DCM vs. LevFin vs. FIG – and maybe even what you do in private equity vs. what you do in FSG.

What’s the difference between all of those?

A: Financial Sponsors and FIG are both coverage groups, but FIG is a lot more specialized and technical and you advise commercial banks, insurance firms, and other financial institutions on deals.

In Financial Sponsors, by contrast, we do not specialize in just banks / insurance /other finance firms – we work across industries and with firms that have invested everywhere.

The work is less technical and it’s more related to the big picture of the industry, trends, and building relationships with private equity firms, hedge funds, and sovereign wealth funds.

DCM is a product group that focuses on investment-grade debt and is more markets-based.

LevFin is also a product group but it focuses on high-yield debt and tends to be more modeling-intensive, with many juniors leaving for PE and mezzanine funds.

The bottom-line: if you’re dead-set on a PE exit, Leveraged Finance is your best bet.

FIG is more specialized and it’s tough to get into a firm that does something other than financial institution investing from there, and with DCM your mileage will vary depending on how your group operates.

A 3-5 Year Exit?

Q: You just mentioned the famed “PE exit” – you’d think it would be easier coming from FSG since you work with PE firms all day, but it sounds like it’s not that common?

A: If you’re interested in buy-side opportunities, you should definitely look into a more modeling-oriented group.

A good number of people transfer into this group from the Financial Institutions Group, looking to work more closely with financial sponsors.

You do get more airtime with these buy-side clients and you get to know the space better than someone who covers, say, real estate, but you don’t get the same modeling / deal exposure.

NOTE: These comments generally apply to FSG, but there are always exceptions if you read through the comments below. In some groups you do get to do more technical and modeling work, and many analysts still exit into top private equity firms. But it is group-dependent, and your experience will vary based on the bank and group.

Q: So are there any advantages of working in Financial Sponsors instead of at a private equity firm?

A: Well, for one, not that many PE firms hire straight out of undergrad. There are exceptions, but most of the time they want to see that you have a few years of experience in banking, consulting, and so on. So that option isn’t usually available to you early on.

Also, if you’re in the Financial Sponsors Group you’ll be tapping into the knowledge base of senior bankers who understand how a variety of financial sponsors invest. If you’re at a private equity firm, you understand only how your own team invests.

But aside from that, unless you really like learning about the industry and what different firms are doing, most people would prefer private equity since you’re directly involved in the investment process.

Q: OK… so if PE exits are uncommon, where do most people go afterward? Do they just transfer internally?

A: The majority of my peers in my group actually do move to the buy-side, but more on the hedge fund side (long/short, and distressed debt mostly).

Sovereign wealth funds don’t really recruit as strongly from the team because they tend to look for the geographic specialization that goes hand-in-hand with being a part of a traditional sector coverage group.

However, if you’ve worked almost exclusively with one sector – technology, for example – then the odds tilt in your favor when it comes to recruiting.

The good thing about a Financial Sponsors Group is that it helps keep your experience broad.

You can even leverage your experience to move into international offices on the buy-side… assuming you’ve mastered the language.

Q: Great, thanks for explaining that one. Any tips on what to read if you’re interested in Financial Sponsors?

A: PEHub is really good. I also am a part of Sumzero, which is like Renren for buy-side professionals and anyone who works with them.

Another item that comes to mind if you’re interested in covering this sector is Dartmouth’s Center for Private Equity.

Last, but not least, you’ll find the website Insider Monkey pretty useful – it hosts a collection of profiles of various hedge funds. These profiles are very close to the profiles I prepare.

Q: Awesome, thanks for your time!

A: My pleasure.

About the Author

has worked in investment banking for several years covering the industrial sector. In addition to being an avid mentor for his alma mater, he volunteers for the Association of Latino Professionals in Finance and Accounting. In his spare time, he enjoys fencing and attends networking events in New York. He graduated from Stanford with a BA in Economics.

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42 Comments to “The Financial Sponsors Group: Masters of the Financial Universe, or Humble Servants of PE Firms and Hedge Funds?”

Comments

  1. Chronic says

    Insider Monkey classifies Berkshire as a hedge fund? Taking this a step further: Do they recruit from FSG groups?

  2. roger says

    Hi Brian.

    I have a question: I have the phone # for the hiring manager of a job posting in S&T that I am totally qualified for and want. If I call and get an automated message via his answering machine, what should I say? I’m thinking of briefly intro. myself and qualifications.

    Finally, if I talk to him in person, how do I phrase the part about me getting him to give me an interview? (What about:”I was wondering how could I position myself for xyz job?”)

    Much appreciated.

    • says

      Voicemails are generally ignored, I would only do that if you can’t get through after multiple tries. See the cold-calling articles for suggestions on how to ask for a job.

    • M&I - Nicole says

      I think you should not leave a message. You should call him (at different times of the day) till he picks up.

      Just tell him you came across his job posting and you think you are totally qualified for the job. Tell him you’ll send through your resume (if you haven’t already done so) and ask him if he is interested in your background!

  3. says

    As an undergraduate student, which do you guys believe will help breaking into this group more, middle market muni IB or VC work? Also, which if either is safer in general?

    • says

      Muni IB work since VC has little overlap. I don’t think either one is “safer” but VC is generally more stable because you are not dependent on deals to keep getting paid.

  4. Analyst says

    Not trying to rock the boat, by any means, but experience in sponsors at the junior level depends largely on the bank. At my bank (a BB), the sponsors analysts do get their fair share of LBO modeling work. However, when working with a company in a more specialized space, the corresponding coverage group will do the heavy lifting.

    My perception of sponsors used to be the same as the interviewee’s until I found out that sponsors analysts at my bank had placed into Ares, Leonard Green, Apollo, and Freeman Spogli, among others.

    • says

      Yup, it is bank-dependent. But I think overall you will still do less modeling because more people tend to be involved with sponsor deals.

      As the interviewee mentioned, lots of people do get roles at firms like those. It really depends on what experience you get.

  5. Connor says

    Question:

    So, the best exit opportunities for IB are when you’re at analyst status. Let’s say you move to a PE firm after being recruited. What’s the promotion like there? Oh, and is it common for people to move back to IB after PE? Or is PE really good at retaining people.

    • says

      Moving back into IB after PE is extremely uncommon and you’ll face a lot of questions with a move like that. The “best” exit opportunities really depend on what you want to do… some groups are better at placing into PE, some are better at getting you into corporate development, some are better with hedge fund placement. Promotion is 100% dependent on your performance on the buy-side, and that applies even as you move up the ladder at a bank.

  6. Yup says

    I would like to point out that some FSG are much more modeling intensive than others. For example, some groups its much more broad while the group I used to be in FSG ran most if not all of the models / DD for LBO’s regardless of the industry leading to strong PE exit opps.

  7. Phoenix says

    One of my contacts at the bank I’ll be working at is a senior banker in FSG, so thanks for the primer!

    A slightly less related question: I did my summer internship at a BB but have moved to a boutique for full time. I am one of only a few FT hires who did not intern there, and I’m a little worried about being able to get into a good group / being able to fit in culturally since so many analysts already have relationships with the bankers. Any advice?

    • M&I - Nicole says

      This is a valid concern. I’d network intensively within the firm by attending most, if not all, of the firm’s events. I’d also go out of your away and ask VPs, Ds, MDs in different groups for coffee to see who you click w most and try to get on their respective teams. Grab lunch with your fellow analysts and associates too! Re fitting in culturally, I don’t think you should worry too much. You either fit in or you don’t. If you try to fit in but you naturally aren’t aligned with the firm’s values & culture, you will suffer anyway so I’d suggest you to be true to yourself!

  8. couchy says

    Hey,

    I know M&I is partnered with a whole bunch of other sites. M&I has a distinct focus on IB and PE, is there an M&I for trading?

  9. John says

    I took a look at this post a week before my internship started. Wanted to know what to expect, what I would be expected to know, etc. The first day at my group desk I was asked to make an LBO (granted, they gave me a half done template to work from). They said they do all the modeling, and wanted to start prepping the interns right away. Will add more after a few weeks for anyone wondering how Sponsors is at this BB.

  10. Johnson1 says

    You mentioned that one of the reasons you joined FSG is “change of pace.” I have heard from various sources that FSG usually has the best lifestyle/hours of any coverage group. Can you comment on what this is like at analyst, associate, and VP levels and compare it to coverage groups at your firm? Additionally, how does credit/fees get divided up and how does the bonus pool of FSG get decided?

    • says

      I don’t know if the interviewee would agree with that – banking is still banking and FSG is not likely better than other coverage groups. It may be a bit better than M&A and Leveraged Finance.

      Credit / fees division – it’s probably an even split between the teams since FSG maintains the relationships and brings in many of the deals. Usually fees are split when one group sources and one executes.

  11. Adamantis says

    Have you planed to make an interview with a TMT banker ? It’s one of the few industry product that is missing on this fantastic website !

  12. sam says

    my priority is developing strong technical skills.
    I have been offered the opportunity to work in an London based BB in the leveraged finance and financial sponsors team.
    The team offers sponsor coverage – strategy, assess LBO opportunity and concentrates on the process and execution of deals. They do NOT offer acquisition financing, bridge financing and refinancing activities.

    Is this kind of work more leveraged finance work or financial sponsors related?

    • M&I - Nicole says

      It depends on the structure of the firm. If your group is a coverage group (directly dealing with PE firms) that also does the execution, I believe your work is related to both areas. Re products they don’t offer – I believe readers will have better insights to that

  13. Future iBanker says

    Hey Brian!

    Love your site, I’ve been reading your articles religiously for a couple years now. I recently graduated from a non target school with a BBA in Finance and a minor in Accounting. I had a pretty solid internship (not IB related) during school but unfortunately was not able to break into IB. I was recruited by a Top 10 Hedge Fund right out of school, into their corporate accounting group. The perks, pay, and culture here are great but, I’m stuck in the back office working a mere 65 hours a week, not getting any client/deal exposure. I’m still trying to fight my way into IB, hoping my resume will NOW catch a recruiters eye when they see the Firm I’m with.

    Do you think applying to IB FSG openings would be the right move? Would I stand out more to a recruiter having worked for a major HF?

    Any advice/ suggestions would be greatly appreciated.

    Thanks!

    • says

      It’s a decent approach and I think you will stand out from having worked at a major HF. But you may have just as much like applying to smaller HFs where they will be more open to you transitioning into the front office.

  14. MC says

    I worked in FSG at one of the big three commercial / ibanks (JPM, Wells, BofA).
    We actually had a balance sheet, so any LBO financing where we had a good relationship with the sponsor was done out of our group. That obviously led to a lot of LBO modeling, but with a focus on credit work (covenant analysis, credit stats, etc.) and help with bank books, OMs, etc.
    I think they are pitching more now (buyside ideas, financing), but it was good overall group. Hours were great because you weren’t cranking out a stupid pitch every day and you could usually get a quick model / memo together in about 5 hours and get out of there. Good experience for PE, too.

  15. Nero says

    If possible, could you list the differences by BB in New York? It would be really helpful to not only know that there are differences but also know what those differences are.

    • says

      We generally don’t like doing this because it changes quickly and the information therefore has a limited useful life. Also, most banks are very similar except for the people.. and they change rapidly.

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