Still 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:
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?
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:
- Goldman Sachs – Infrastructure Sector Discussion Materials
- City of New York – General Obligation Bonds
And a few good sources for finding more information on the sector (I mentioned these last time as well):
- The Bond Buyer – Good place to review data, read news of recent deals, and more.
- Municipal Securities Rulemaking Board – You can look up “official statements” (similar to offering memos) for bonds that have already been issued here.
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.
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?
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:
- Go to another public finance group at a bulge bracket or boutique bank.
- Become a trader and work at a fund (asset management or hedge fund) that trades muni bonds.
- 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: