Public Finance, Part 2: A Day in the Life, Deals and Modeling, Exit Opportunities and More

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Public Finance CareersStill confused after reading Part 1 of this series on public finance?

Don’t worry: you are not alone.

When I was speaking with our interviewee the first time around, I got the big picture idea of just how different corporate finance and public finance are…

But I also wanted more details of what you do on the job, what an average day is like, and how deals and modeling (or lack thereof) work.

We’re going to cover all that and more in Part 2, including:

  • A day in the life of a public finance analyst – work, hours, and how sadistic the MDs are.
  • How financial modeling is different, and why the technical work may not be quite what you expect – to say the least.
  • The pay, from base salaries to bonuses at both boutiques and bulge bracket banks – and what makes it different from standard investment banking pay.
  • Whether or not you get any exit opportunities coming from a public finance group – and what your options are.

Here we go:

Got Lifestyle?

Q: So I think we stopped last time when I asked about an average day in your life.

Can you comment on that? The hours must be way better since it’s not corporate finance, right?

A: WRONG!

Hours might be a little better on average, but on most days I arrive at the office around 8:30 – 9:00 AM and I rarely leave before 10 or 11 PM. A bad day might be staying until 2-3 AM or spending the night there.

So you’re still looking at many 14-hour days, and consistent weekend work.

Sure, it might be a bit better than investment banking hours because all-nighters aren’t quite as frequent, but “the hours are much better!” is the biggest myth about public finance.

An average day: I arrive at the office, check emails before getting coffee, and make sure that there’s nothing urgent that my boss is asking for.

From there, I’ll start going through the week’s set of RFPs (Requests for Proposals) from issuers who want us to compete to underwrite their debt; I might have to complete 2-3 per week.

These RFPs are very time-consuming because you do tons of research, look at the league tables, create debt profiles, and gather lots of data.

Aside from the RFPs, I also spend a fair amount of time on presentations and follow-up work that potential clients request from us after seeing RFPs.

Then there are also market updates for potential clients – we might create slides suggesting various options for debt refinancing given their existing financial profiles.

Finally, there’s the actual underwriting process but ironically I spend the least amount of time on that since we can leverage a lot of the RFP work and re-use it in prospectuses.

Overall, I spend around 50% of my time on RFPs and the rest is split between everything else above.

If you want to see a few examples of pitch books and prospectuses in this sector:

And a few good sources for finding more information on the sector (I mentioned these last time as well):

Q: Wow, I’m surprised because you usually associate “government work” with 40-hour work weeks and not much stress.

Do you still see those intense hours even at smaller boutiques? What about at bulge bracket banks?

A: I don’t think they’re much different. I guess if it’s a really small boutique the hours might improve if you don’t have much “RFP flow” yet, but then you’re also not going to get paid much either.

And from conversations with friends at bulge bracket public finance groups, it seems the hours are the same or worse there.

Modeling and… Fund Accounting?!

Q: Well, I guess that one’s a disappointment to anyone who wanted to do public finance to get better hours.

You mentioned in Part 1 that you don’t do much “real” modeling – can you explain  that in more detail?

A: Sure. A lot of people seem to have the impression that we spend all day creating complex models for infrastructure projects such as airports, toll roads, and so on, but that’s not really true – the Project Finance group does that sort of work.

We mostly use Excel to create charts and to run debt service analysis to see whether a government has enough revenue to cover interest and principal payments.

We do most of the analysis via a program called DBC – this is not like investment banking where you create massive Excel spreadsheets to model revenue, expenses, and transactions.

DBC is similar to ARGUS for real estate: it’s a lot of data entry and it takes a bit of time to learn the program, but ultimately the computer creates the output for you.

The tricky part is figuring out how to input data based on refinancing alternatives and how to translate everything into what you use in the program; you also need some practice to figure out what the output should look like and to see whether or not it’s reasonable.

Q: So let me get this straight: you don’t use Excel for much of the analytical work, but instead input everything into this DBC program.

What about structuring bonds and figuring out what terms you should use in the first place?

A: Yeah, it’s still all done through DBC. You can enter everything imaginable from construction costs to sources/uses to types of bonds to the interest rates, different tranches, and so on, and come up with estimates there.

My firm does some infrastructure assignments as well and I did a bit of work there, but I never modeled actual facilities as they were constructed – again, that’s more in the realm of Project Finance.

Q: I’m still not quite sure I buy into this completely, but sure, I get that you may rely more on this program to do the analysis.

In Part 1, though, you mentioned “fund accounting” and said that the way that some governments and non-profits are structured makes it hard to determine how much debt they’ve really issued – what do you mean by that?

A: Sure… so this is really broad topic, but basically governments, non-profits, institutions of higher education, and so on use a different accounting system called “fund accounting.”

Their goal is not to make a profit – it’s to make revenue match expenditures as closely as possible.

An organization like a city might have several different “funds” that are each used for different purposes (a general fund, a capital projects fund, an enterprise fund, a debt service fund, etc.) and sets of financial statements for each one.

The statements themselves look similar (even though they have different names), but on the income statement they’ll list an operating surplus / (deficit) instead of operating income / (loss); you also see entries for transferring capital in and out of a fund and for other financing sources and uses.

At the end you get to net surplus / (deficit) which is similar to net income / (loss) for a for-profit company.

The balance sheet is similar but they’ll list the fund balance rather than retained earnings at the end, and that fund balance is broken into unrestricted and restricted assets.

Just like with retained earnings, the fund balance increases by the net surplus or decreases by the net deficit in each time period.

There’s more to it than this – for example, most of these entities use modified accrual accounting rather than traditional GAAP / IFRS accrual accounting and they need to determine whether revenue is both measurable and available.

And unlike a normal company, they don’t necessarily view a surplus as a positive – they might take it as a sign that they got the tax rates wrong and need to change them in the future.

For more, see fund accounting on Wikipedia and fund accounting on Investopedia.

Q: See? I finally got you to tell us what’s more complex on the technical side.

Moving on, what about the deal process itself? How is it different when you’re underwriting municipal debt?

A: It’s very similar to an IPO or debt issuance; you have a kick-off meeting with the issuer and lawyers on all sides, and your bank is allocated a certain percentage of the bonds to sell.

If it’s a lead-managed deal, you’ll be more involved and will run the numbers, prepare for credit ratings presentations with S&P, Moody’s, and Fitch, and hopefully get good ratings for the issuer.

For a co-managed deal you’re not as involved and you might just help with the due diligence side.

Once you get the ratings done, your team starts the roadshow and the entity you’re representing may issue the bonds in a few weeks after pitching the deal to institutional investors.

Then, just like with other capital markets deals, you price the bonds at the end of the process right before they’re sold.

The sales & trading side handles much of this marketing and roadshow work, just as with debt and equity deals.

So it isn’t much different; the differences in public finance are the pitch process (RFPs) and some of the technical details I discussed above.

The most different aspect of each deal is the type of bond that the issuer wants to issue: at a basic level you have general obligation (GO) bonds and revenue bonds.

GO bonds are backed by the “full faith and credit” of the issuer and can be repaid via all revenue sources, whereas revenue bonds are linked to a specific asset such as a toll highway or airport, so they’re considered “riskier” than GO bonds.

And then you get even more variety with different structures, terms, tranches, and more.

Public Finance: Politics or Meritocracy?

Q: Right, thanks for those details – it’s interesting to hear what’s different and what’s the same.

What about the culture and hierarchy? Are those the same as in investment banking?

A: The hierarchy is the same: Analysts, Associates, VPs, sometimes Senior VPs, Directors, and then Managing Directors or Partners at the top.

The way you get promoted and the timeframe for promotions is also similar: 3 years to move from Analyst to Associate, 2-3 years to get promoted to VP, 2-3 years for Director, and another few years to reach MD status.

I’ve seen a few people reach Partner status faster than that, but they’re true rock-stars and are very rare exceptions to these guidelines.

The culture varies greatly from bank to bank; my firm has a great culture and despite the long hours, they try to distribute the workload evenly between different junior-level people. We also have lots of great perks such as free meals (more than what you’d get in IB).

The MDs are generally more lenient compared to the types you’d see in investment banking – they still have high expectations but they’re not into making your life miserable quite as much.

But once again, this varies greatly by bank: I would guess that MDs are not so lenient in bulge bracket public finance group and that the culture is more intense overall.

Q: Yup, that makes sense.

And now for the question we all want to know about: the pay.

I’ve heard everything from “Public finance pay is the same as IB” to “You get paid way less” to “Sometimes you can make even more!”

What’s the real story?

A: At my specific firm, it has been roughly the same as investment banking pay the past few years, at least at the analyst level.

So you might earn a $70K-$90K USD base salary, and in a good year you might get 70 – 90% of that for your bonus. In a bad year, bonuses might be dramatically lower (think $10-20K USD).

However, my firm is an exception among boutiques.

Many other boutique public finance firms pay less than this, sometimes significantly so; you’ll still probably crack the $100K mark but the pay won’t be as good as what we earned here.

I am not 100% certain about bulge brackets, but I would guess that on average the pay is closer to investment banking base salaries and bonuses.

So, I hate to give an “It depends” answer but that’s what I’ve seen based on my experience – it really does vary by the firm.

Q: OK, so it sounds like average all-in compensation is still at a discount to what you’d earn in IB… why is that?

Do you just earn lower fees on deals?

A: Yes, essentially. If we’re running, say, an $800 million bond deal, we might earn less than $1 million in fees.

Whereas if an investment bank were advising on an $800 million corporate M&A deal they might earn a fee that’s many times that number (perhaps in the $5 – $10 million range), and even higher than that if it were an $800 million corporate bond issuance.

It also varies by the sector within public finance; utilities and transportation might have above-average fees compared to some of the others.

Q: And I’m assuming the lower fees are mostly because these institutions have less money to go around?

A: No, not really… governments have plenty of money and could pay higher fees if they wanted to.

It’s all a matter of politics. If a big city issues bonds, everything about that issuance is public information and if they pay us a fee that’s “too high” it would cause a huge uproar and upset everyone in the community.

So the lower fees are mostly a matter of not wanting to step on toes.

You don’t see that on the corporate side because everyone expects much higher fees, and because for-profit entities don’t take as much flak for paying for them.

Exit Opportunities: A Big Black Hole?

Q: Right, that makes a lot of sense. I’ve seen high fees upset executives even on corporate deals, but I can imagine how it would be much worse when you work with governments.

Now onto my favorite topic (no, not the CFA): exit opportunities. Do you have any if you work in public finance?

A: Yes, but they’re limited because it’s such a specialized area.

The most common exit opportunities I’ve seen:

  1. Go to another public finance group at a bulge bracket or boutique bank.
  2. Become a trader and work at a fund (asset management or hedge fund) that trades muni bonds.
  3. Go into public policy or move into a Finance / Treasury role for the government.

You could theoretically move into normal investment banking, but I haven’t seen many people pull it off successfully because the skill sets are quite different.

You would probably have the best chance of moving into a debt capital markets group because at least you’ll know a lot about bonds.

Bottom-line: if you go into public finance and decide that you’d rather do normal IB instead, leave as soon as possible or it will get harder and harder to switch over.

Q: So private equity isn’t possible?

A: It’s uncommon – at least, I haven’t seen it much.

You would think that infrastructure PE would be a good opportunity, but once again the skill sets are different and it would be easier if you worked in Project Finance rather than municipal underwriting.

Q: OK, interesting. So just like some of the other areas we’ve looked it, it’s definitely a niche area and unless you’re very interested in doing it long-term, you probably want to move elsewhere early on.

Where do you see public finance heading in the future, given all the budget problems with state and local governments in the US? Is it still a good field to get into?

A: Keep in mind that all cities / counties / state governments still have to issue money to fund their ongoing operations, so it’s not as if budget problems will prevent them from issuing bonds.

In fact, those budget problems might cause them to issue more bonds as they run into budget deficits and run out of ways to plug the gap.

The bigger threat is that some state governments will downsize and eliminate the types of projects that would typically be funded with municipal bonds.

So there’s definitely some cyclicality associated with the sector, even though it’s “government work.”

But if you’re very interested in it and you’re a good fit, I would still recommend public finance despite local government budget problems.

Q: You just mentioned being a “good fit.” Based on our discussion so far, who would be a good fit for the group? Who’s the ideal candidate?

A: It’s best if you’re interested in both finance and politics.

You deal with a lot of high-profile people at all levels – they may not make as much money as corporate executives, but they have a lot more power and can implement policies that influence huge numbers of people and big corporations.

If you’re interested in infrastructure, working in public policy, or going to the Treasury or Finance departments of the government it’s also a good fit.

The best part of this job is that there’s a big learning curve – there are an amazing variety of different types of bonds, structures, and so on.

So you have to be eager to learn all about bonds and related securities.

If that’s you, public finance could be a great group.

Q: Awesome. Thanks for the interview! I learned a ton, and I won’t be (as) confused now whenever we get questions on public finance.

A: Any time. Enjoyed speaking with you!

Public Finance Series:

About the Author

is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys learning obscure Excel functions, editing resumes, obsessing over TV shows, and traveling so much that he's forced to add additional pages to his passport on a regular basis.

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34 Comments to “Public Finance, Part 2: A Day in the Life, Deals and Modeling, Exit Opportunities and More”

Comments

  1. Scotty says

    I have also heard that it is easier for an analyst to get a direct promotion to an associate in public finance. Is there any legitimacy to this?

    • says

      There may be – I didn’t mention this, but the interviewee also stated that it’s tough for public finance groups to retain good people due to the issues above on exit opportunities and pay. So I could see that one being true.

  2. KM says

    Are privatizations/nationalizations managed under Public Finance or is it the M&A group?

    Regarding fees, I read that Lazard Freres ,being the advisor of Greece (Managing Director: Michele Lamarche), collected a nice 25mil. euros of fees for the debt restructuring.

    • says

      I believe those are managed by the M&A group but not 100% certain. Public finance is more for underwriting, not advisory or restructuring work. But someone else might be able to give you a better answer there. Debt restructuring fees can be quite high so that’s not surprising.

  3. Billy says

    Its real weird GS has public finance under their iBanking division and also has it as an industry group. Suppose you were at GS and after 2 years wanted to go to grad school, would it look good since its under the ibanking division? thanks

    • says

      I would agree – probably at least in the same league as other people who did banking and you get the GS name which carries the prestige benefit as well. But for business school it’s more about your essays, activities, and recommendations than which specific division you were in.

  4. Jennifer says

    Is a background in credit analysis/credit training helpful for Public Finance? Or would that be more helpful for Project Finance?

    I currently work in Credit Risk and am trying to see if there is an applicable skillset I could point to. Project Finance seems to combine elements of traditional IB and Credit Risk – was wondering if that applies to Public Finance.

    Thanks!

    • says

      I think it could be helpful for both since you have to work with debt a lot in both fields. May be slightly more applicable to Project Finance but still applies to Public Finance.

  5. Dan says

    What would be the best way to enter either the public finance or corporate bond area of a BB or boutique firm ? Would like to see if my corporate banking/credit skills would help.

    Thanks

    • M&I - Nicole says

      I’m not quite sure what sort of skills/experience you have so I can’t really answer your question here on the comments section. However, I’d suggest you to network a lot, get your name out there, and speak to people in public finance to see if they have any openings suitable for you. If you have had experience with DBC and basic knowledge of public finance, that’d make your presentation stronger when you speak to people in the industry

  6. Serena says

    Hi Brian,

    I have a time-sensitive question that I’m hoping you can help me with.

    I have been trying to find some sample responses to RFP in public finance in order to get ready for an internship in this field.

    Haven’t had any luck at all. I can only easily find RFP on any State’s website. However, I would like to read a sample response, or at least some details as to how to prepare it, and MORE IMPORTANTLY, what constitute a good response.

    Thank you in advance! I appreciate it.

    • says

      I don’t think it’s possible to find sample responses because they don’t release them publicly. An actual response would be very short and would just be something like, “Looks good, but can we reduce the fee by 1%” or something else of that nature. It might even just be a phone call or something else that’s not in written form.

      Overall I wouldn’t worry about this one too much because the responses are less important than the RFPs in the first place.

  7. Andy says

    If I accept a BB public finance SA position, how difficult do you think it’ll be to be considered for traditional IB for full-time?

  8. Q says

    Hi Brian – thanks for the post, very informative. I have a question about lateral hiring. I will be starting as a public finance analyst at a bulge bracket this summer. I want to work there for two years to fulfill my contract and not screw over the people that helped me get the job. Then I want to transfer to IBD as an analyst. How would you suggest going about it? I know the odds are against me, but it won’t be the first time I defied probability.

    • says

      Start looking at least 3-4 months before the end of your 2nd year. I wouldn’t even bother with headhunters, just go through friends at other banks and explain that you want to make a move as your two years there are up. There are a few articles on lateral hiring on the site as well.

  9. Anonymous says

    In my experience hours have been better in Pubfin . I work at a top 10 firm and on average work 50-60 hours a week. Yes there were some bad weeks hitting 75-80 but never an allnighter and rarely work weekends. At the analyst level our pay and bonus is pooled with capital markets.

  10. Anonymous says

    Hours have been better in Pubfin . I work at a top 10 firm and on average work 50-60 hrs/wk. Some bad weeks hit 75-80 but never an allnighter and rarely work weekends. At the analyst level our pay and bonus is pooled with capital markets.

  11. Michael says

    Hi, I noticed that the link to the Goldman Sachs – Infrastructure Sector Discussion Materials pitch book is not active. Would you mind reposting that link?
    Thanks

  12. Evan says

    How would you list a Public Finance position on a resume? I have one currently as a junior in my fall semester, and will be recruiting for traditional IB this summer…can I call it Investment Banking and say Public Finance under it or something?

  13. PubFinance87 says

    After reading this article it is clear the professional being interviewed either works for a newly formed group or a is in a very junior role. The most significant errors in his description of a career in public finace are:

    Analytical: While DBC is the industry standard for bond structuring and knowledge of the program is absolutely required, all but the most vanilla deals require additional modeling. DBC provides a very clean looking final report but is extremely limited in terms of optimization. The most obvious limit is the exclusive use of linear optimization. Advanced excel add-ins such as what’s best and or custom models through matlab generate significantly more efficient structures and all BB and many larger middle market firms employ senior quants who exclusively perform advanced optimization techniques. The results obtained in the more advanced software is then plugged into DBC for a clean report that is easy to comprehend. The majority of large issuers have a significant derivative portfolio and the ability to determine the opportune time to exit and enter swaps is an important part of the industry. Anyone with an interest in a quantitative role in public finance must be well versed in bond math and optimization techniques.

    Relationship Development: The interview states that getting deals is more about the RFP than relationships. This is completely untrue. The decision makers in assigning an underwriting syndicate include financial advisors, government officials in the finance department and elected officials such as City Councilman. Many municipalities have long-term relationships with public finance law firms and these lawyers may also have influence. Senior bankers must continuously meet with all of these “players” in order to understand the needs of an Issuer and establish a reputation for knowing the ins and outs of each specific credit. If the senior banker consistently presents ideas and attends board meetings the RFP is simply a summary of the ideas presented in the last year or so. A perfect RFP can get a firm in a syndicate as a co-manager but in order to run the books relationships and interaction with the key decision makers is crucial.
    Day in the Life: Teams that work in Firm’s with a consistent senior managed deal flow spend the majority of their time in working group meetings going through the details of the bond documents and modeling multiple structures for a transaction that are presented to the Issuer and its financial advisors for consideration. Preparing presentaitons with unique ideas and monthly updates on the status of a clients portfolio are my main focus. As stated earlier, the RFP is simply a summary of the ideas presented in the past along with “boiler-plate” firm statistics. An established firm should already have all but the most recent 1 or 2 transactions input into their systems so you aren’t starting from scratch and updating this database should take less than 30 minutes.

    Fees: Fees are significantly lower in municipal finance than traditional corporate finance. Political factors do play a role, however if the fees did not compensate for the risk associated with underwriting a transaction banks would not stay in the industry. Investment grade municipal bonds are extremely safe investements and property taxed backed transactions are extremely simple when compared to a corporate debt deal. Lack of complexity and relative safety of the investment make fees lower. Additionally, Large banks have the ability to bundle other financial products such as commercial banking, derivative and liquidity products with a bond underwriting. Many times these fees are significantly higher than the underwriting spreads and compensate for lower take-down. Total underwriting spread for the highest rated muni deal with a par of $800 million should produce a minimum of $2.5 million split between the syndicate.
    Ideal Fit: Attention to detail and ability to read through complex legal documents, strong math knowledge, solid writing skills and the ability to multi-task and communicate with senior bankers are the most important qualities for a jr level role.
    Senior bankers must be willing to spend a large amount of time traveling, have the ability to present well, explain complex financial ideas to clients with a wide range of finance knowledge and possess intricate knowledge of the issuers they cover.

    • says

      Thanks for your feedback. You’re correct that the interviewee was more junior and that he worked at a newer firm.

      However, we run the site on a “Take what we can get” basis. It is not humanly possible to cross-check every single fact or figure or anecdote across the entire industry – at least, not if we publish more than 5-10 articles per year (currently we publish more like 60-70 per year). That’s why we rely on comments and additional reader contributions to get the full picture.

      I’ll see if we can add some of your comments to this article.

      And, of course, feel free to volunteer an interview yourself if you would like to share your own story and present your experiences in public finance.

  14. Sophomore says

    Hey guys,
    I’m currently a sophomore at a target and received an offer to work in Public Finance banking at a MM this summer in Chicago (think BMO, Jefferies, RBS, Blair). I ultimately want to do M&A at a BB or an elite boutique and don’t want to get pigeonholed. Any advice?

    I’m also looking at roles in prop trading, but I doubt that would be better.

    • M&I - Nicole says

      I’d ace your interview and network internally during the summer. If you have the opportunity to do so, network externally and also send short messages to people via LinkedIn to increase your chances. I’d try to leverage this opportunity to get an internship in M&A next summer so you can move out of the sector. Otherwise you can be “pigeon-holed” as you’ve said.

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