One question I’ve gotten a lot over the years is what different groups at a bank do.
Yes, everyone knows that M&A is supposedly more technical than other areas, but what about other industry and product groups?
Here’s what it’s like, how it’s different from other groups, who does the work, and how you get recruited into these groups:
Q: I get a lot of questions on which group is “the best” and how modeling and technical work is split among industry groups and product groups (M&A, LevFin, etc.) at a bank.
What has your experience been so far? Do the product groups do most of the heavy lifting?
A: Generally the product groups, such as M&A and Leveraged Finance, are more modeling-oriented – but the analysts there also don’t get much of the industry exposure that you would get from being in a strong coverage group.
The three-statement model or standalone operating model is the standard model used in any industry coverage group, so you do get exposure to that.
Many people assume that more modeling is always better, but like anything else it’s a trade-off – for me, the “best” group is the one that gives the most well-rounded experience and lets me work with companies I’m interested in.
I like being in an industry group because I get to work on a wider range of deals, rather than just M&A or just debt offerings.
I’m also more interested in industrials than other groups – I prefer to read about railroads rather than semiconductors.
While the work itself in a technology group and an industrials group may not be that much different, I find myself far more interested in the latter.
Q: Is an industry group always “an industry group?” What determines how much marketing work (pitch books) you do vs. how much deal and advisory work you do?
A: That’s a good point – there are actually a couple group variations:
- Origination – These groups just do marketing and pitch for new clients, especially on financing assignments.
- Advisory – This is the traditional M&A work that banks are associated with.
- Coverage – In this group there are elements of both origination and advisory work, but you’re focused on a particular sector.
Since I’m in a coverage group I do both marketing and client work – I bring this up because a lot of people incorrectly assume that an industry group is 100% marketing and a product group like M&A is 100% deal execution.
That said, there is definitely an emphasis on knowing the sector in coverage groups.
Q: Right, so it sounds like “industry groups” should really be labeled “coverage groups” if we wanted to be more accurate.
What kinds of companies do you cover in industrials and how is the group divided into different sub-industries?
A: Most investment banks divide industrials into capital goods (machinery, equipment, anything used to produce other goods) and transportation (railroads, trucking, and so on) groups.
Sometimes there’s overlap with related groups such as natural resources and chemicals; for example, a metals and mining group might fall under industrials or it might be classified under natural resources.
One of the areas I work on is aerospace and defense, which is usually a sub-group within industrials (capital goods).
Q: What types of deals do you work on and how is the work divided between your group and product / other groups?
For example, let’s say you’re working on a sell-side M&A deal – who would be responsible for the buyer list, the Information / Offering Memorandum, model, management presentation, and final negotiations?
A: We get exposed to all types of deals, but my group is strongest in M&A advisory followed by high-yield debt; we don’t do many equity issuances.
There is also some restructuring, for example, in the airline industry – though that is more of a transportation sub-sector. Aerospace works with the parts manufacturers (ex: Precision Castparts, Spirit Aerosystems, etc..) instead.
The split between different types of work depends on the deal and who’s busy at the moment, but usually coverage analysts run operating models for clients because we’re more familiar with the industry.
The rest of the work and other models may go to the M&A team, with input from us – especially on industry-specific issues such as identifying appropriate buyers.
If I were working on a high-yield debt offering, I would still be responsible for the operating model but the Leveraged Finance team would come up with the optimal pro-forma cap structure and do the analysis on credit ratios and other debt-specific modeling (ex: pricing).
If the assignment were even more specialized – for example, a restructuring deal – then the restructuring team might manage the entire process with the coverage team helping with tasks like finding buyers and summarizing the state of the market.
Q: That makes sense – I think the division of labor is dependent on the bank as well, but those are some good guidelines for anyone who’s wondering about this.
Is there anything specific to valuation or deals with aerospace and defense companies that you don’t see elsewhere?
A: The mechanics of models are similar – a merger model is a merger model, after all – but there are specific metrics and drivers for aerospace and defense companies that you don’t see elsewhere.
For example, for airlines you use metrics like revenue passenger carried, revenue passenger miles, and available seat miles.
When you’re making projections for aerospace companies you use drivers like the order backlog, capacity utilization, and the airline sector’s overall health (N.B: measured in the number of planes in the air, or how many are kept parked).
Defense companies rely on government contracts – which have long lead times – and the defense budget, so you need to factor those into any models you create.
You also have to be up on the industry and the latest trends to figure out which specific areas within companies might have room for growth (e.g. persistent intelligence, surveillance, and reconnaissance) and which might see decreased spending (e.g. C-17 Globemaster).
I would highly recommend the equity research report “Deciphering Defense – An Industry Primer” by Ronald J. Epstein, Bank of America Merrill Lynch, September 2009 if you’re interested in learning more about the sector.
Another quality guide is this BoA-ML report on the Commercial Aerospace sector from April 2009.
A few further resources and example pitch books for the industry:
- Consolidated Engineering Services
- Aerospace & Defense – M&A Environment and Company Valuation
- Aerospace, Defense & Government Industry Overview
Lifestyle, Pay & Recruiting
Q: What’s your average day like? Do you work more, less, or the same as analysts in other groups?
A: Hours are comparable to other industry groups – in other words, long, and definitely longer than more markets-based groups such as ECM or sales & trading.
I’m not sure how it compares to M&A or other product groups, but once you get to a certain number of hours per week you can’t sense much of a difference.
I usually start each day by reading the news and looking for details of companies in my industry “exploring strategic alternatives” (banker-speak for “looking to buy or sell”).
I also pay attention to developments such as management changes, government contract awards, and inventions and patents within the set of companies I cover.
After that, it really depends on what’s going on at the moment – I might spend a lot of time on an operating model for a company if we’re working on a deal, or my day might consist of working with other groups and providing input on pitches or deals they’re working on.
Q: Right, that seems consistent with what you mentioned before about how coverage groups operate.
I also get a lot of questions on how bonuses compare in different groups. At the junior levels I would assume that most product and industry groups are very similar – is this accurate?
Q: Finally, how do you actually get placed in an industry group? Do they focus more on lateral hiring or recruiting straight out of universities / business schools?
A: Most of the time analysts are recruited directly from the undergraduate training pool (and associates from the MBA training pool).
Recently, with the market picking up, many firms have been hiring lateral analysts with experience in investment banking as well [N.B.: As of mid-2010].
Q: Great, thanks for your time.
A: No problem – enjoyed speaking.