by Brian DeChesare Comments (69)

The Buy-Side vs. The Sell-Side: The Worst Way to Categorize Finance Firms?

Wooden signpost with two opposite arrows over clear blue sky, Buy versus Sell messages

“Yo, you’ll make bank when you move to the buy-side! Screw this stupid investment banking job.”

“Yeah, I heard everyone at hedge funds makes at least $1 million and gets a castle as their signing bonus.”

“So when’s your interview?”

Ah, yes: that classic debate about the buy-side vs. the sell-side. Although the conversation above is fictional, similar exchanges are taking place in cubicles across the world as you read this.

You hear about the buy-side vs. sell-side distinction everywhere, whether you search online, browse through you message boards, or even (gasp) talk to people in real life.

The only problem is that “buy-side vs. sell-side” is the worst way to categorize financial services firms.

The Usual Divisions

Search online and you’ll find explanations like the one below to explain the buy-side vs. the sell-side:

“On the sell-side, you pitch products such as stocks, bonds, or entire companies in the case of M&A, and you persuade investors to buy them. On the buy-side, you raise capital from investors and then make your own decisions on where to invest it and what to buy.”

If Ari Gold is the sell-side, Dana Gordon is the buy-side.

To an outsider, this seems like a logical way to divide the industry: you earn money either via commissions on sales or by investing your own money and getting a return on that investment.

The implication is that the buy-side is “better” because you have the potential to make a lot more from investing than you do from earning commissions – which is technically true, but far from the average case.

Buy-Side vs. Sell-Side?

Beyond the high-level difference above – investing vs. selling, and earning money via investment returns vs. commissions on sales – you’ll also find alleged differences in the pay, hours, type of work, structure of firms, and more.

Here are some of the more hilariously wrong (and sometimes, borderline wrong) points I’ve seen:

  • Pay: You make mad bank on the buy-side because you’ll be a better investor than Warren Buffett and get 80% returns every year!
  • Hours: In addition to better pay, you also barely work on the buy-side because you’re such a baller that bankers, traders, and brokers answer your every call and deliver mermaids and private islands to your doorstep every day, all in a feeble attempt to win your business.
  • Type of Work: While the work is mind-numbingly boring on the sell-side, on the buy-side you’re doing intellectually stimulating tasks all day and changing the world!
  • Structure of Firms: There’s too much hierarchy on the sell-side, so it’s harder to advance. But on the buy-side you’ll move up the ranks quickly because the hierarchy is flatter and they reward top performers!

The only one of these that’s even close to being true is the last one – many firms on the buy-side do have a flatter hierarchy, but many groups on the sell-side also have a flatter hierarchy as well (I’m looking at you, equity research and sales & trading).

Most of the points above are not even real, significant differences – the real distinction is something else entirely, which you don’t hear much mention of…

The Real Distinction: Deals vs. Public Markets

Rather than this buy-side vs. sell-side dichotomy, we should be talking about whether you work on deals or in the public markets.

That’s the more meaningful distinction, and the one that goes unnoticed whenever this silly buy-side vs. sell-debate comes up (Don’t believe me? Try searching for “buy-side vs. sell-side” and then “deals vs. public markets” and see which one turns up more results).

Just like ranking the banks or ranking schools or ranking anything else, it’s easier and more fun to debate minutiae rather than discuss something that’s useful.

Here’s what the grouping above looks like when you use deals vs. public markets rather than sell-side vs. buy-side to categorize the firms:

  • Deals: Investment Banking, Private Equity, and Venture Capital
  • Public Markets: Hedge Funds, Buy-Side Research, Sell-Side Research, Trading at Banks, Prop Trading, and Asset Management

And yes, the “Other Types of Miscellaneous ‘Investment Firms’ ” one could go either way depending on what they do.

If they buy and sell entire companies (as in PE) or large chunks of private companies (as in VC) then they would fall into the “Deals” category, while anything else would be public markets.

Definitions: Say What?

In case it’s not obvious, “Deals” means that you work on M&A deals, IPOs, debt offerings, or Restructurings – major transactions where an entire company is being bought or sold or where they’re doing something otherwise massive.

You could argue that venture capital does not belong in this category since VC firms never acquire companies 100% outright – but the actual process of investing in a company as a venture capitalist is time-consuming and closer to the work you do in IB and PE than to what you do in trading.

In contrast, “Public Markets” means that you follow, recommend, and invest in the stocks of publicly traded companies or in other securities like bonds, derivatives, commodities, and so on.

Here’s why this is the better way to categorize financial services firms:

The Type of Work

When you buy or sell 100% of a company, it takes far more work than just buying or selling a few shares here or there.

You need to pitch it to dozens of potential buyers, create marketing materials, do financial modeling and valuation work, and then negotiate the terms of the definitive agreement with the buyer; if you’re the buyer, you can skip those first two steps but you’ll spend a lot more time on due diligence and digging into all the material available on the company you want to buy.

A single deal might take months or years of effort to close, and the entire process is more like a marathon than a sprint: you’re not always working 100%, there’s plenty of downtime, and sometimes it’s stressful but your overall busy-ness fluctuates over time.

When you’re on the Public Markets side, by contrast, your average day is more like a sprint than a marathon: there’s little downtime, you have to follow the market constantly, and you need to be 100% focused at work.

But investments don’t take months or years to negotiate – even when you’re accumulating a huge position in a public company, it requires subtlety and patience but not super-elite negotiation skills.

And when your work is finished, you go home. That may sound like a small deal, but in investment banking and private equity you often get pulled into work on weekends and late at night when major deals are happening.

Before you leave a comment saying, “But I work in PE and the hours are still much better than banking!” I’ll say that the hours can be better at smaller firms, but when you’re busy, you’re still busy, and at mega-funds the hours are like banking all over again.


…which neatly takes us into our next topic, the hours.

Going back to the buy-side vs. sell-side argument in the beginning, the usual claim is that the hours are much better on the buy-side because you don’t have to answer to the whims of clients 24/7.

That is sort of true – in theory – but it’s not the best way to look at it. It’s better to divide the hours by Predictable vs. Unpredictable.

  • Deals: The hours are more unpredictable because you never know when a huge deal will heat up and when you’ll get slammed with work at the last minute. Venture capital may be an exception, but even there you could always get busy when closing a deal.
  • Public Markets: Your life is more predictable because you work market hours. You may have to get in before the market opens and stay after the market closes, but it’s not like IB where you might get called in at 2 AM to fix a random problem that a client is complaining about.

In general, you will work more if you’re on the “Deals” side – yes, hours may be better in PE than in investment banking, but you’ll still work more per week on average than you would on the “Public Markets” side because of this unpredictability.

Most Public Markets jobs clock in at the 50-60 hour per week range – while some Deals roles may also be in that range, the average tends to be a bit higher, or a lot higher in the case of investment banking.

The size of your firm often impacts the hours more than the work itself.

Taking hedge funds as an example, people often claim that the hours are “good,” but at the biggest funds you’ll still be working a lot even if it’s a Public Markets role on paper.


That issue with market hours vs. unpredictable hours also means that the stress in each role is much different as well.

In banking (and PE, when you’re working on a huge deal) the stress is of the “Crap, something on this deal is falling apart and they need me to fix it ASAP even if it’s Saturday night at 10 PM… and now my VP is emailing me to get into the office” type.

In Public Markets roles, work doesn’t follow you outside the office as much – but when you’re at the office, there’s very little downtime compared to what you would see in a Deals role.

Traders, for example, need to watch their positions every second of the day and must find someone else to cover them if they leave for even a few minutes to run to the bathroom.

If you’re working at a long-only asset management firm, it may not be quite that stressful but you still need to monitor the markets closely and you can’t afford to screw around during market hours.

So pick your poison: do you want market stress or deal stress?


This is another oft-debated point, but it’s also a silly one because there’s no real answer.

People like to claim that much of the work you do on Deals is mindless grunt work – which is not untrue – but you could say the same thing about a Public Markets role.

Sure, you don’t have to fix the font size in a pitch book at 2 AM, but you have to do plenty of research and comb through filings and other reports to support the Portfolio Manager and/or Research Analyst and other senior people.

This one is more about what you personally find interesting: do you actively follow the stock market and invest your own portfolio? If so, you’re probably better off in a Public Markets role.

If you’re more interested in business in general but don’t find the stock market that interesting or you don’t invest much yourself, a Deals role is probably better.

I’ve always found “Deals” work more interesting because there’s a different story and different scenario each time, whereas (to me) the markets all blend together after a point.

But your mileage will vary and there’s no correct answer here.


Ah, now we get to the fun part.

And there’s a surprising conclusion here which makes this point different from everything else on this list:

The average pay on the buy-side and sell-side is not that much different, but the ceiling on the buy-side is much higher.

So this is the only point where the buy-side vs. sell-side distinction makes more of a difference than the Deals vs. Public Markets one: yes, I guess my argument falls apart here (shh, don’t tell anyone).

The ceiling on the buy-side is much higher because if you invest well, the sky’s the limit.

I hate to use John Paulson as an example yet again, but his performance post-crisis goes to show you how top hedge fund managers can make billions of dollars in cash in the right market with the right strategy.

On the sell-side, meanwhile, the ceiling is much lower for Partners and Managing Directors. No matter how good you are, you have a limited amount of time and you can only do so many deals or sell so many stocks in a day.

I hesitate to give exact numbers here because they change from year to year, but earning more than a few million USD per year as an MD-level banker is rare unless the economy is on fire and you’re a Group Head or have another even-more-senior position.

While it’s fun to debate who makes the most money and point to outliers like John Paulson and Henry Kravis as evidence that the buy-side is “better,” the more relevant number for you is the average pay on each side.

You can see typical numbers for investment banking here; private equity is not much different, and even in something less hierarchal such as trading you see a similar progression from bottom to top.

And despite rumors that everyone at hedge funds makes millions of dollars, the average pay is $326K, with only 5% earning over $1 million according to compensation data.

The bottom-line: you’ll be in the top 1% or so of earners in your country even at the entry to mid-levels in the finance industry.

You will never be a billionaire unless you start your own fund – but hey, a million dollars isn’t that much less cool than a billion dollars.


This is another one where the buy-side vs. sell-side distinction seems sort of true at first… until you look at it in more detail.

The buy-side does tend to be less structured in the sense that you don’t see lots of mid-level associates, VPs, and SVPs / Directors as in banking.

But, two points here show that this is not the best way to think about it:

  1. Many groups on the sell-side also have less hierarchy – equity research and trading, for example.
  2. While you may not see quite as much hierarchy in PE and VC, there are still more mid-level positions (e.g. “Principal”) than in, say, long-only asset management.

So once again, the Deals vs. Public Markets distinction is the best lens through which to view the hierarchies.

You need more headcount on Deals because more work needs to get done and more people need to be managed: lawyers, accountants, financing teams from other banks, and even the occasional clueless consultant.

But when you buy and sell shares or securities, you don’t need a deal team of 5-10 people to make decisions: you just need the Portfolio Manager and his or her supporting analyst(s).


That difference in hierarchy also means that advancement differs in Deals roles and in Public Markets roles.

In both of them – and really anything in finance – it’s an “up-or-out” culture. Deliver results, generate fees or high returns, or get out and don’t come back.

But the key difference is that advancement on the Deals side – mostly in investment banking – is more structured and tends to follow a set “path” in terms of number of years required to advance.

It takes 3 years to move from analyst to associate, 3-4 years to move from associate to VP, and so on, and you can’t do too much to speed up the process.

But in Public Markets roles, advancement is more linked to your own performance, external factors like whether your Research Analyst is leaving, your reputation, and luck of the draw.

So you could advance very quickly if you perform well and get lucky, or very slowly if you never do anything to set yourself apart.

Exit Opportunities

Exit opportunities have already been beaten to death on this site, so I’m not going to go into too much detail here other than to say that it’s difficult to move from a Deals role to a Public Markets role and vice versa – with a few exceptions.

This is why it’s so common for bankers to go into PE but much more difficult if you’re in trading or equity research; it’s also why traders might move from trading at a bank to a hedge fund or asset management firm but wouldn’t go into corporate development.

There are some exceptions – for example, bankers can still get into hedge funds, and it can be difficult to move from the buy-side back to the sell-side (PE –> IB, let’s say) on the Deals side.

But your exit opportunities depend on whether your a Deals person or Public Markets person, for the most part.


You knew we had to arrive at my favorite topic in the world (ok, maybe ranking the banks is still #1) at some point, right?

This one’s simple: whereas the CFA is relatively useless for Deals roles such as IB and PE, it’s much more useful and often expected or required in Public Markets roles (except for trading).

I have no scientific explanation, but one possible reason is that the CFA itself just doesn’t cover most of what you do on M&A deals as an analyst or associate: the material is more general and higher-level, which is great but also not that applicable to major transactions.

So yes, if you’re interested in a Public Markets role then you may want to consider the CFA – as long as you already have good grades, solid work experience, and brand names on your resume.

Financial Modeling Training Programs

Most modeling training programs, including Breaking Into Wall Street, focus on the “Deals” side – how to value companies and how to model M&A and LBO deals.

That’s because there’s more modeling required for Deals roles to begin with – if you’re just investing in stocks of publicly traded companies, you don’t need to know the in’s and out’s of deferred tax liabilities and book vs. cash taxes.

Sure, if you’re at a merger arbitrage hedge fund you’ll need to know more – but the modeling work is still less involved than what you see on major transactions.

And there’s more of a focus on valuation over transaction modeling – so the quantitative work is simpler because valuing a company is simpler than modeling an entire deal, especially since you can save time by not spending hours adjusting numbers in the comps.

I have gotten a number of requests for more material on “Public Markets Modeling,” so we may add that in the future. I’d say, “Just give it a few hours” in a nod to my friend AJ, but it’s probably more than a few hours away from happening.


The main flaw with this Deals vs. Public Markets distinction is that the pay differences are more strongly linked to the buy-side vs. the sell-side.

But other than that, the key issues such as predictability of hours, the work itself and associated stress, and advancement all have less to do with buy-side vs. sell-side and more to do with Deals vs. Public Markets.

Another flaw is that some roles such as Equity Capital Markets and Debt Capital Markets may be “in between” Deals and Public Markets – so you see a mix of the differences above.

Oh, and the water cooler debates will persist even after everyone reads about why it’s silly right here.

Which Side of the Street Are You On?

So the next time you hear people debating the buy-side vs. the sell-side or hyping up the buy-side, please punch them in the face and deliver a drop-kick or two.

And then send them a link to this article – they’ll need some reading material for when they’re recovering in the hospital.

For Further Reading

M&I - Brian

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys memorizing obscure Excel functions, editing resumes, obsessing over TV shows, traveling like a drug dealer, and defeating Sauron.

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by Brian DeChesare Comments (56)

From Cold Call to Closed Deal: How a Private Equity Investment Comes Together, Part 3 – The Dotted Line

How a Private Equity Investment Happens“She thinks $60 million is a discounted price? Can someone shoot her with an animal tranquilizer gun until she snaps out of it?” John says, looking around in disbelief at all the other Partners.

David turns to you and his eyes light up as a new idea percolates to the top of his head, and then sputters out of his mouth.

“You do know about the special analyst bonus, right?”

Everyone else in the room laughs, as you contemplate whether or not they really want you to tranquilize the CEO.

$60 million would be 6x EBITDA – a reasonable price for a larger company – but significantly higher than what you’d pay for a small, Founder-dominated business in a niche market.

David speaks up once again as the laughter subsides.

“And let’s not forget about her other demands: she wants to roll over 20% of her ownership and put aside 5% in an options pool for the management team.”

“So we’re paying for an overpriced business and then giving up 25% for no apparent reason. This sounds like a better investment than finding Google in 1998,” John replies while rolling his eyes.

Everyone else sits there in silence as you weigh your options before speaking up.

“Well,” you say, “On a positive note, I think I could call in a few chips to get the financing in place.”

“What bank would even look at this? It’s too small for any of the usual suspects,” David points out.

“Right now everyone’s desperate for business – in normal times they’d say no, but beggars can’t be choosers.”

Calling in the Chips

You crawl back to your office and wonder if you can pull off the financing for this deal – your line to all the Partners was a desperate bluff, and you don’t actually have much to offer bankers.

Plus, you’ll have to hear even more tales of $1500 bottle service bills now that you’re going back to the usual suspects to ask for help.

“This is definitely below the bar,” says your banker friend after you finish outlining the deal.

“I realize $30 million of debt is on the low side, but with the way the market is -” you respond as he cuts you off.

“Look, even if this were the apocalypse and banks were failing left and right, we still wouldn’t look at this – the fees are just too low and it’s not worth our time.”

“We’ve sent you guys a lot of business in the past few years – probably more than any other firm…”

“Yes, and they were all small deals. I appreciate the effort, but the MDs want us to pursue the big game from now on.”

You’ve left your door open for this call, so your favorite unannounced visitor happens to be walking by, overhears your conversation, and steps into your room.

David motions for you to step away and then puts the call on speakerphone.

“We’re willing to give you all future business from our firm over the next year, including refinancings and all sell-side mandates. No competition at all for you,” he promises without hesitation.

“Can you… actually guarantee that?” the banker asks with a rising tone.

You fold your arms and squint at David, wondering what he’s gotten himself into this time.

“We’re planning to flip it in a year or two, and possibly do a refinancing before that – should be at least $10 million in fees for you altogether,” he states without so much as a blink.

“OK then. I’ll run this up the chain and see what they think. Thanks for the offer,” the banker replies.

You turn off the speakerphone, spin your Aeron chair around to face David, and wait for him to explain what just happened.

“Don’t worry,” he reassures you, “They’re bankers – they’ll all be fired or will be at another firm in another year or two anyway. No harm done, and now this deal goes through if we can work out the price and rollover.”

Setting Expectations

“Sorry, but we just can’t get our heads around $60 million,” John says to Nancy, who’s sitting at the head of the table in your conference room in front of all the Partners.

“We could get to $50 million max, but even that’s pushing it. Nothing personal, but the numbers just don’t work out in that range.”

Nancy continues staring at the slide presentation in front of her and attempts to make sense of the returns analysis, but it might as well be Martian to her.

“Understood, but $60 really is the bottom of my range here. With the margins we have, I could just keep running this business for years and make more money than what you’re offering. And unless I can retain at least 20% ownership, my incentive just isn’t strong enough.”

Both sides of the table stare at each other for a few seconds before John breaks the silence.

“We’ll be in touch if anything changes.”

Nancy stands up and walks out of the room, waving goodbye to everyone before closing the door behind her.

“It’s 100% posturing,” David points out, “There’s no way she seriously expects to get $60 million for the business and keep 20% for herself. And we know she wants to leave anyway, so it’s not as if she’s seriously considering running it for another 5 years.”

“That may be true,” says John, “But the numbers really don’twork at those levels – there’s so much uncertainty around the exit that this only makes sense at $50 million max. So we either convince her or we don’t do this deal.”

It’s time to don your Captain Obvious Hat and point out what everyone else is missing.

“What if we just flip it after a year or two? It’s much easier to get to a solid return over a short time period, and that way we can even tell her that she can leave the company after a certain period – once it’s no longer owned by us,” you propose.

David sits back in his chair and puts his hand on his chin as he contemplates your idea.

“That’s true – I doubt she’ll even understand why we’d offer that. And she won’t understand the risk to her if she does leave, so it might just work if we pitch it the right way.”

He cleverly fails to mention how the bankers doing the financing are already expecting you to flip it quickly – hearing that might cause John to toss him out the window.

“OK,” John agrees, “Go back to her and propose $50 million with a 20% rollover and say that in exchange for the lower price, we won’t make her stay beyond 2 years or sign a non-compete.”

Limited Partners = Limited Support?

“And we see this as an exciting way to start investing in the technology space – without all the risk that a bigger investment would entail.”

John is presenting IonX and a few other investments they’re looking at – all of which are much further away – and hoping that the LPs remain confident enough to keep investing in future funds.

Most of them produce nothing but poker faces as John goes through all his slides.

“We’re getting this at a discounted price, and we think it could be a quick-flip for a 20% return in less than a year.”

One of the LPs at the end of the table immediately stands up, slams his binder of materials shut, and scurries toward the door.

“Is… something wrong, Paul?” John asks while folding his hands in front of him.

About to open the door and leap away from the meeting, Paul turns around, drops his binder on the table, and grabs the door knob before speaking up.

“Yeah, you. You and your firm.”

Everyone else turns around to face him as whispers fill the crowded room.

“You raised $750 million for your new fund from all of us, claiming that you had all these great opportunities – and what do you do? You sit on that cash without doing anything for a year, and then you finally bring us a piece of dog crap, put a ribbon on top, and try to call it a gift.”

John raises both hand, blinks, and motions for Paul not to leave the room quite yet.

“I understand why you might be upset, but with the way the market’s been lately…”

Paul cuts him off before he can finish, turning around and removing his hand from the doorknob. “Then why are our other private equity funds still doing real deals? I can’t veto this or tell you not to do it, but I’m not happy about it.”

John walks toward him, binder in hand. “Look, I understand why you might not like IonX, but we have plenty of other…”

Paul opens the door, storms out, and slams it shut.

Back at the Office…

You and David are reviewing the loan documentation from the bank and are looking at different financing options for the deal.

“With the margins they have we should just pick the cheapest option – I’m more concerned with broken covenants than with interest payments,” David points out.

You turn toward your monitor and look at an LBO model with the different financing options built in before swiveling around in your chair and responding.

“That’s true, but we still don’t even know if Nancy is going along with this. I’m not convinced she’s gonna take the bait.”

Just as David leans back and prepares to respond, your phone rings. Time for the speakerphone.

“Hi, it’s Nancy,” the voice announces. “I’ve considered your offer and I’m prepared to move forward as long as you don’t make me sign a non-compete.”

You and David look at each other with your eyes widened and mouths gaping open. But there must be a catch – what would it be?

“But,” she continues, “Some of my managers have figured out what’s going on, and they’re not about to accept a new owner. They know me and like me, and they’re nervous about what will change.”

David puts his hands down on your desk and responds, “We’re not going to change a thing. You will still be running everything; it’s just that you’ll have all of our firm’s resources at your disposal…”

“That may be true, but I think they’d be more confident if all of you came to meet them in-person,” Nancy retorts.

“That would be a great idea,” David says while rolling his eyes and searching for your stress relief ball. “We’re all looking forward to flying out and meeting you.”

“I’ll be in touch with some dates,” she responds, “And please make sure it’s everyone – we should plan for at least a week so they can get to know your team.”

As she hangs up, you and David sit there looking at each other and David turns his gaze toward your window.

“Think they’ll have any beaches there?”

One Door Over…

John is cycling through the call history on his phone and looks down at the 15 unreturned calls he’s made to Paul in the past week. Limited Partners might be “limited,” but that doesn’t prevent them from being passive-aggressive and ignoring contact when it suits them.

He walks over to his whiteboard and looks at the pipeline of potential investments, noting that everything else is at least 6-9 months away.

His phone rings and he slides back to his desk to answer it.

“So, John, ready for some more news on IonX?” David announces.

“Can you start with the good news first?” John replies.

“No good news this time. Do you have a free week in your schedule anytime soon? They want us to fly out and meet their team.”

John glances back at his whiteboard and then the call log on his phone. “Whatever it takes – talk to Suzanne about my schedule,” he says before hanging up.

Leaning back in his chair, he dials the main line, finally resigning himself to his “Plan C” option.

“Get me the new guy, Martin.”

A minute later, Martin shows up at John’s door and attempts to open it three times before finally gathering enough strength to push it open on his fourth try.

“You… wanted to see me, sir?” he stutters while wobbling into the room.

John laughs, stands up, and walks across the room to Martin, standing an inch away from him as he recites his speech.

“There’s no need for formalities. I’ve heard good things about your family. I’d like you to tell me more.”

He smiles and stares Martin straight in the eye, waiting for his response.

Field Trip?

It’s the next week, and all the Partners have flown out to meet IonX in-person. Apparently “everyone” means “everyone except for the person who’s actually doing the work.”

But the office is quiet again, and no one is checking your calling logs now that you and Martin are the only ones there. You’ve been handing off all the grunt work to him – anytime a banker or lawyer has a question, he’s the one in charge.

David has been updating you the whole time, and it looks like the management team is growing more confident that nothing will change post-transaction.

And you’ve been forwarding the in-progress definitive agreement that the legal team has been drafting.

“You should have seen these guys when they saw us,” David says at the tail-end of one of his update calls.

“It’s like they had never seen people dressed in suits before. They were waiting for us to morph into Gekko or Bateman and start murdering people.”

“Sounds like a fun trip,” you say, putting the call on speakerphone and standing up before moving over to your window. “Is it going to close?”

“90% certain now,” David reassures you, “And since bonus season is only a few weeks away, you can bet that we’ll remember everything you’ve done here.”

Your eyes light up as you peer out the window and see a BMW parking right next to your usual spot.

“That’s great,” you say, “So are there any beaches there?”

Pension Power Play

Paul strolls into the entrance of the Ritz Carlton, going on about another investment on his phone and simultaneously typing like a fiend on his Blackberry.

He’s met by a tall, lanky man walking in with a grey suit and a binder of printouts in his hands. He walks over to Paul but gets rebuffed as Paul points to his phone and rolls his eyes.

Finally the call ends, Paul turns toward him and shakes his hand, and they walk toward the interior of the restaurant.

“I was surprised when you called,” Paul says in a cheery voice. “I didn’t think I would see you again after what happened on the Fincher account.”

“Let’s let bygones be bygones,” says the other man. “We’d both do much better as allies rather than enemies.”

They sit down and order medium-rare steak along with a $1000 bottle of 1982 Haut-Brion.

“So why did you really call me, Simon?” Paul asks as he sips his wine and arranges his napkin on his lap.

“I wanted to tell you about a few new investments we’re looking at. In this market no one’s doing any deals except for the distressed funds, which are a huge part of our portfolio.”

“So you’ve just mysteriously decided to extend the olive branch and give me access to all these funds that are actually beating the market?”

Simon turns to the bottle and pours himself a glass, holding it up and reading off the label.

“This is the 1982. Have you tried the ’72 before? I hear it’s even better.”

Paul rolls his eyes, puts down his glass, and then reaches over and takes the wine bottle out of Simon’s hands and places it down on the table.

“Cut the crap. I know you’re not just giving me this gift out of the kindness of your heart, so what do you want in exchange?”

“I want you to look the other way on John and his firm’s performance over the past year. And when they raise another fund, I want you to invest – and I want you to let me into the deal as well.”

Paul starts laughing so hard that he snorts, with red wine nearly bursting out of his nostrils.

“So John put you up to this. Ignore his horrible investments, and you’ll give me a piece of these distressed funds.”

“I didn’t even hear about this from John,” Simon says, “But word of your… displeasure… has spread. They’ve had great performance in the past, and I want to get in on their next fund. The only way that’s gonna happen is if you continue to support them, and then bring me in as well.”

Paul stops laughing for a second, glances up at the chandeliers on the ceiling, and then over at Simon once again.

“Even if I were stupid enough to do this, what could you give me in return? No fund is up more than 10% this year…”

Simon opens up his binder, takes out a few documents, and tosses them across the table to Paul before he cuts him off with his response.

“Those 3 are up 50% year-to-date. They’re closed to new investors, but I can get you in – if you look the other way and keep investing in John’s fund.”

Paul stares at the fund performance documents before tossing them aside and looking up at Simon once again and smirking.

“This just seems too good to be true. And I don’t know why you’re offering me this deal. You’re sure your son isn’t working for John or something?”

The Dotted Line… and Your Bonus?

You stand outside John’s door, waiting for him to summon you in. It’s bonus season, and everyone in the office is acting like 10-year old kids on Christmas morning.

He opens the door and greets you in a cheery voice.

“Congrats!” he shouts, “We did it. The funds were just wired the other day, the loans are in place, and Nancy hasn’t even run off to a tropical island and abandoned everyone. Yet.”

He waves around the signed definitive agreement while leaning back in his chair and pointing to the dotted line on the page.

“So, about your bonus. We realize how much you contributed to the IonX deal, and we really want to reward you for your performance.”

This better be good – anything less than a 20% raise over last year might cause you to jump out your window after what you’ve been through getting this deal done.

He hands you a slip of paper, and you stare at it in disbelief as your mouth drops open and stays there until you look up to face him once again.

“This is down 10% over last year – I brought in the IonX deal and got it done. Without me, you’d have 0 closed deals this year.”

“We know that. But look at what happened to the market – it’s a train wreck everywhere. Everyone else’s bonus was down 30%. And let’s be fair, David also helped get this deal done. You know we can’t just give juniors arbitrary pay.”

An image of David sitting around on the beach while “getting to know” Nancy and her team pops into your head.

“And if it weren’t for Martin, we wouldn’t have had LP support. He did terrific work for a new guy!”

Up until now, you hadn’t even known that Martin contributed anything aside from confusion and answers to random due diligence questions.

“His family’s very well-connected. But I’m sure you understand that, right? You really have to be a team player to succeed as an investor.”

You thank John, turn around, and leave the room, trying your hardest not to slam the door behind you.

You walk back to your office, slump down in your chair, and pick up the phone to call your friend at a larger fund and learn what bonuses at normal places were like this year.

But as you place the call, you decide that there’s something else you’re more curious about first.

“Hey there,” you say, “Just wanted to find out about bonuses this year. But before we get to that, I just wanted to know – are you guys hiring?

The Full Series

In case you missed parts 1 and 2, you can get them right here:

Coming Up Next: The Web Series

I’m excited to announce that we are turning this 3-part short story into a 6-episode web series that loosely follows the storyline here, but is significantly different – “different” as in better.

I (Brian) am writing the series and financing it, and my good friend Goldie will be producing.

There were a few suggestions to write a novel, but I am much more interested in turning this into a series. And if you follow me on Twitter, you also know that I am borderline obsessed with serialized TV shows and films.

We are aiming to film and edit this by the end of 2011, and then release it in early 2012.

There will be a trailer, and if you’re good you might even get to read the script for the first episode.

Stay tuned!

M&I - Brian

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys memorizing obscure Excel functions, editing resumes, obsessing over TV shows, traveling like a drug dealer, and defeating Sauron.

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by Brian DeChesare Comments (96)

Debt Capital Markets 101: How You Break In, What You Do, and What You Do Next

3D rendering of abstract stock market symbols and graphs

This one has been a long time coming, but it’s finally here: the debt capital markets article you’ve been waiting for since this site began.

In this interview with a reader who works in DCM in Canada, you’ll learn:

  • How recruiting differs in DCM.
  • What an average day in a DCM group is like.
  • How DCM is different from Leveraged Finance, and pros and cons for each one.
  • Differences between DCM groups in the US vs. Canada.
  • The culture, pay, hours, and exit opps in DCM.

This one’s a monster and might just be the most in-depth interview ever featured here, so let’s get started.

How to Break In

Q: Let’s get started with your background and how you broke into the industry – any ninja tactics to share?

A: I graduated from a Canadian university that was among the top tier for IB recruiting in Canada.  Ironically, my school was one of the few that had active recruitment from bulge bracket banks in New York but was maybe only 3rd or 4th in terms of placement in Canada.

I broke in without a summer internship because I had a unique background – I had traveled back and forth between another country for much of my life – and my work experience stood out. Plus, the market was better back then and it was easier to get in with less work experience.

I interviewed for both investment banking groups and DCM, and ended up with a DCM offer after going through final rounds and speaking with several different groups.

Q: So it sounds like you were placed in DCM rather than selecting it upfront?

A: Back when I was interviewing, sometimes it was clear which group you were interviewing with in the first round, but it was difficult to tell which one you’d end up interviewing for in the final round.

That has changed over time; today they would make you apply for the particular group (IBD/ECM/DCM/Corporate Banking) ahead of round 1.

Q: Right, so how was the recruiting process itself different for Debt Capital Markets? I’m assuming that resumes were similar but that interviews were slightly different?

A: Pretty much – from having submitted my resume and from screening resumes myself now, I can tell you that there are almost no differences there.

Interviews, however, can be significantly different and you may get a lot of sales & trading-type questions.

That happens because DCM is a hybrid group, and so you may get interviewers from the Fixed Income trading side as well – I had interviewers from securitization (back when that was big), money-markets, and derivatives trading, in addition to investment bankers.

So I got questions about my general understanding of topics like how to hedge interest rates, FX rates, and so on – to be safe, you should learn the basics of those and other common Fixed Income products.

Ideally, you can find out from HR which area each interviewer works in – if you’re speaking with traders, make sure you know something about their trading products.

Q: That sounds pretty random – I don’t think people get those types of questions in ECM interviews.

A: Yeah, it’s because DCM is frequently a joint-report between investment banking and the trading floor at many firms – we’re the “eyes on the trading floor” for bankers and the first point of contact for Fixed Income trading.

Bankers tend to understand equity much better than debt, and on a technical level there is not as much to know  – so you won’t get such questions as much in ECM interviews.

What You Do

Q: OK, so you made it past these random interview questions and now you’re working in DCM. What’s your average day like?

A: Usually I’m at the desk by 7 AM.

Between 7 AM and 9 AM, most of the team meetings occur and DCM sits in with the sales force and traders to learn what’s going on in the market that day.

Then, those 2 groups leave and syndication and DCM stay behind to discuss possible and pending deals – this is inside information and so the traders and sales force must leave at this point. At some banks, a compliance officer monitors this meeting to make sure nothing inappropriate gets out.

By 8, we’re finished with the meetings and we spend most of the next hour catching up on the news, seeing what happened overnight, and monitoring what traders in other offices are doing.

We’re also watching for economic data and we might speak with clients around this time, especially if they’re launching a deal that day.

Deals start launching when the market opens at 9:30 AM, so that’s when it gets really busy if we’re leading any deals.

Q: Right, so let me stop you right there – before we jump into the rest of the day, what types of deals do you do in DCM?

A: Most of our work is issuing investment-grade debt for clients. Debt is split into several different categories, from lower-risk, lower-interest rate “investment-grade” debt, to higher-risk, higher-interest rate “high-yield debt.”

They appeal to different types of investors and can serve different purposes. Investment-grade debt comprises of the majority of the market and common uses of proceeds include funding business operations and working capital, while high-yield debt is more common for LBOs and dividend recaps and usually involves riskier companies.

So a client might come to us and say, “We want to raise financing to do X – what type of debt do you recommend, what terms (interest rate, term to maturity, covenants, etc.) could we get, and will investors buy it?”

Then we would help them issue the debt and get the best terms possible, and the sales force would sell it to investors.

Q: Right, that should clear things up for anyone wondering what DCM does. So what’s your average day like after the market opens at 9:30 AM?

A: A lot of time is spent monitoring the market, running back and forth between trading desks, and helping syndication allocate orders between different investors and build the books.

There’s also some administrative work from lawyers working on deals, and we have to help with drafting term sheets and sales force memos.

For example, the sales force might need to get up-to-speed on a certain debt issuance so they can pitch it to investors, so we would fill them in and get them all the relevant details.

Sometimes investors also come to us, via the sales force, and ask more about the borrower because they haven’t had time to do due diligence themselves.

Analysts usually don’t field those calls, but as an Associate you might start doing that if the desk is empty or everyone else is busy.

So we might get tasked with pulling credit rating reports for clients and interfacing with the lawyers and sales force on a deal. If we’re not launching any deals that day, it’s much quieter.

Q: So what happens on those “quiet days?”

A: On those days, we’re mostly working on market update presentations and sending updated slides to IB and ECM.

ECM often pulls us in to help with preferred stock and convertible debt deals, because those are both securities with debt-like components.

Another big time consumer is constructing case studies of recent debt transactions, updating credentials and conducting post-deal analysis for your clients.

Given the speed at which seasoned borrowers can access the market (2-5 business days if their documentation is up to date), momentum is key and the minute you’re done leading a transaction for one company, you have to hop on the phone and speak to its sector peers.

It’s not uncommon to see a bank rattle off several lead mandates in a sector simply because it led the most recent transaction for a company in that sector.

In Canada, dividends and interest are taxed completely differently, so we also spend time with ECM calculating and comparing the “all-in yield” to investors or the “all-in-cost” to borrowers after taxes for bonds, convertibles and preferred shares.

Especially in this environment, clients and investment bankers often take a keen interest listening to the various options for financing from their capital markets bankers.

Lastly, on a weekly basis, we’ll send out indicative pricing to clients. Over the week, we’ll talk with the traders and syndication to see what big trade flows go through in a client’s bonds and use those trade points as information.

We’ll also monitor where the bonds are being quoted at and in discussion with syndication, each client will get proposed pricing for a variety of terms to maturity each week.

It’s important for a DCM and syndication team to keep tabs on what the market sentiment is on a particular client, not just the trading comparables.

Putting down what you think the credit spread should be for a potential issue can be more art than science – but it’s a crucial art.

Show a credit spread that is too wide and the client will think you’re nuts; show a credit spread that’s too tight and you don’t look credible – and you’ll look even worse if the client asks you to help execute a deal at that spread, only to realize there’s no market demand at that expensive level.

Note: A “tighter” credit spread means that it’s a smaller spread over the government benchmark, which means a lower yield for bond investors – which in turn means a higher bond price, and vice versa.

Also note that clients and investment bankers often use these bond yields for their calculations of the company’s WACC, so you definitely want to give it some thought every week.

Some clients will also want to know how that cost of debt compares relative to issuing in the US or Europe, which means you’ll have to work with the derivatives desk to swap the pricing to the respective currency.

Q: That sounds like a different type of modeling, which I want to circle back to in a bit. But before we go there, I want to address the most common question I get on DCM: how it’s different from Leveraged Finance.

How would you summarize it?

A: The main difference is that Leveraged Finance works with mostly sub-investment-grade debt (i.e. high-yield debt), whereas Debt Capital Markets handles mostly investment-grade debt.

In Canada, the Leveraged Finance market is not as large and developed as it is in the US, so DCM often handles both types of debt here – most DCM groups have 1 or 2 high-yield debt specialists.

The modeling work can also be slightly different since Leveraged Finance focuses more on acquisition and LBO scenarios, whereas in DCM we do more “debt for everyday business” analysis which often doesn’t require any modeling.

And then the exit opportunities are also different, but we’ll get into that later.

Q: Right, so let’s say you’re working on a debt deal. What would the DCM analyst do and what would the industry group analyst do?

Let’s take mining as an example since that’s huge in Canada – let’s say a mining company wants to issue debt…

A: I’ll stop you right there because there are (virtually) no mining debt deals in Canada despite the size of the industry here – that’s because mining companies have all their needs in US dollars and issue USD-denominated debt to match revenue and expenses.

In addition, many of the large players have preferred to access the U.S. market because they can get larger transactions done.

You see more domestic debt deals with Canadian oil sands companies (which have payroll and CapEx in CAD) and with other industries altogether; the 3 biggest are government borrowers, banks and financial institutions, and utilities.

Most DCM groups here are divided into government vs. corporate coverage; corporate coverage can include both publicly listed and privately owned corporations and financial institutions.

On the other hand, some DCM groups are split between public debt issuers and private placement issuers. The teams are bigger, so the roles and specialties are more defined.

Q: Interesting to note that – so let’s say that you’re issuing debt for a commercial bank. What would the FIG analyst do, and what would the DCM analyst do?

A: It depends on the type of debt issuance – for something like unsecured senior notes (a type of debt that’s below secured senior notes since it has no collateral (unlike mortgages), but above subordinated notes in the capital structure), the FIG analyst would not be too involved since we can do all the analysis ourselves.

The FIG analyst would do more work when we’re issuing hybrid securities such as preferred stock and convertible notes on the ECM side or capital notes on the DCM side.

For banks, those are really important because they affect Tier 1 Capital, which all banks must maintain above a certain level. With the new Basel III rules, there’s more and more analysis being done as regulation of these securities changes.

For the average investment-grade company or project financing, DCM handles more of the credit analysis and answers questions such as, “How much debt can they raise, and with what terms? What will the cost of the debt be, and are there any ratings agency concerns? Will the market buy into this, and should we be worried about the covenants?”

For a debt issuance, the industry analyst would provide the industry / market analysis for the sales force memo and we would focus on the quantitative /credit work.

The other difference on deals is that often the investment bankers maintain relationships with the CEO and Board of Directors, whereas DCM covers the Treasurer to CFO of the company.

The Treasury team is responsible for day-to-day funding at companies, whereas the CEO and Board focus more on corporate strategy, which includes potential acquisitions or other similarly big moves.

Models and Models

Q: You’ve alluded to the modeling work in DCM a couple times now – how would you describe it? Is it similar to what you see in Leveraged Finance?

A: It’s not terribly complicated – it’s mostly just looking at standard credit statistics such as the interest coverage ratio, the leverage ratio, and so on; and with companies such as utilities, sometimes you don’t even need to do much modeling because they’re “safe” investments.

So we might say, “Let’s say this company issues $xx of senior notes – what will its credit statistics look like after that debt issuance, over the next 5 years?”

The modeling gets more advanced when you’re working with high-yield debt, because the companies are riskier and have more spotty cash flows in the future.

Project financings can also require more modeling – there, the debt is often secured against a particular asset or portfolio of assets. You see this frequently in the financing of power plants and other assets such as hospitals, toll roads and property portfolios.

One common question that clients have post-crisis is, “If we repay debt early and pay the prepayment penalty, and then re-issue the debt at lower interest rates, what is the cost of doing that? How much better or worse off are we if interest rates go up or go down in the future? What future interest rate is necessary for us to come out ahead?”

Q: So that’s happening because so many companies issued debt just for the sake of issuing debt during the bubble, and now they want to take advantage of falling interest rates?

A: Yeah, exactly. The cheap debt that was flying around in the early to mid-2000’s has already started to mature and many companies will need to refinance this debt in the period between 2010 and 2015.

A lot of companies also got into ridiculous hedging situations where they hedged at $1.50 CAD per $1.00 USD, thereby creating massive additional amounts of debt.

A $2B USD issuance of debt with this hedge would actually be a $3B CAD liability that needs to refinanced in the coming years or months.

So we look at different scenarios and tell clients when it’s better to repay debt early and take the prepayment penalty or wait, based on where interest rates are heading.

If you want to work in DCM, you should have a great handle on macroeconomics because it’s critical to everything we do – that’s not as necessary in investment banking industry or M&A groups, but it’s very important here.

You may even get specific macroeconomic questions (“What do you think the Bank of Canada will do this year?”) in interviews.

Q: Right, more like a sales & trading interview, though you could get macro questions in IB interviews as well.

What’s the time split between pitching and execution in DCM?

A: It depends on the market – in bad times, we might spend 75% of our time pitching because very few deals are happening.

When the economy is in better shape, it’s more like a 50/50 split between pitching and deal execution. Keep in mind that when there’s growth, clients also ask for more pitches.

The good thing about DCM pitch books is that they tend to be only 10 – 20 slides – you don’t see massive 150-page decks as you do for M&A and IPO pitches.

General market update presentations are not highly tailored to individual clients, so we cover macroeconomic indicators and what peer companies in the sector have done recently.

There’s more work involved when a client wants a pitch for a one-time event like an acquisition or capital restructuring – there, we do a lot more custom work and must work with bankers to come up with suggested financing plans.

In scenarios like this where the pitching gets more tailored, you’ll frequently go over the pros and cons of issuing debt securities of different terms, structures, seniorities, covenants and currency denominations.

Q: Most readers are familiar with the process of issuing equity, or at least with the IPO process – how is raising debt different?

Do you still create a presentation and sales force memo and pitch it to investors to build your book before the deal is launched, and then price the debt based on demand?

A: Yes, it’s a similar process, but debt deals don’t get nearly as much attention because they don’t seem as “sexy” as companies going public.

You could still find yourself doing roadshows and doing everything else associated with IPOs as well – the difference is that many borrowers issue frequently, you don’t need to do as much work educating investors.

But if it’s a company that hasn’t issued debt in some time or if they’ve just completed an acquisition, we have to spend time re-educating investors.

One difference specific to Canada is that there are 2 types of deals here – bought deals and agency transactions – whereas in the US, debt deals are usually done on a bought deal basis only.

Q: So what’s the difference between those?

A: In a bought deal, the bank acts as a principal and buys the debt first before reselling it to investors, thereby taking on much of the risk, whereas in agency transactions we act as the agent and attempt to allocate the debt to investors on a “best-efforts” basis.

All government debt here is issued via bought deals, but most corporate deals are done on an agency basis instead. This is important because the fees are different depending on the deal type, and if you take on more risk, you generally earn a higher fee.

To reduce risk in an agency transaction, we often pick a few investors who will stay quiet and then discreetly ask about their interest in the offering – we might sign up those selected investors early to make sure the company can find buyers for the entire debt issuance.

You also see the reverse, where an investor might give your sales force an order – this is called a reverse inquiry and the stronger your sales force, the more likely you’ll get these orders, which you can then reflect to the company in hopes that you get awarded the mandate to lead a transaction.

Show Me the Money

Q: Speaking of fees, how is the pay in Debt Capital Markets compared to other groups?

A: Generally there’s a 10 – 20% discount to all-in pay at the junior levels, and that gap tends to widen as you get more senior.

The top analyst in DCM can get paid about the same as the top analyst in IB, but on average pay for DCM is lower. The caveat is that DCM pay tends to be more stable and less volatile than IBD or ECM.

Governments and many corporations need to refinance debt and use debt for their operations, so there’s a steady base of issuance – even if CapEx and expansion are put on hold.

Generally, lower bonuses are not a surprise because margins are thin with investment-grade debt, and the fees are quite low.

To give you an idea, 0.5% is the most you can earn on an agency deal in Canada. So if we issue $100 million of debt, the entire syndicate would only earn a $500,000 fee on that before legal fees and before splitting it up among the members of the syndicate.

For public investment-grade debt deals, the fees vary from 0.1% to 0.9% depending on the term to maturity and transaction type. We earn more on bought deals due to the greater risk involved and fees can vary for private placements.

For high-yield debt, the fees can range from 1.5% to 3.5% but deal volume is much lower than in the investment-grade bond market.

These lower fees are specific to Canada and the different transaction types we have – in the US, fees are generally higher and margins are better, and so my guess is that you don’t see the same type of discount with bonuses that you do here.

The other point is that a bank has more ongoing commitments with bond deals since lending (via the Corporate Bank) influences who gets to lead a transaction, more so than in the equity space.

Q: That makes sense – lower fees and lower margins, at least in Canada, and so bonuses are slightly lower as well.

What about the culture of the group?

A: If investment banking is a marathon, DCM is more like a sprint. Bankers who move over here from M&A and industry groups find themselves working fewer hours, but feeling just as tired, if not more tired, since the intensity is much higher.

At my bank, the culture of our group is very different from what you find in IB because it’s separate and closer to Fixed Income, by virtue of being situated adjacent to the trading floor.

So we interact more with our traders rather than traditional bankers, at least on an everyday, in-person basis.

The DCM seating is also often structured like the trading desks too, sitting in rows and close to one another, regardless of rank. You don’t tend to have your own office or cubicle and as a result, you also have different habits.

As an example: in investment banking, you would never answer the phone for your MD. People simply don’t answer the phone for others, but in DCM, just like on the trading floor, we do not let calls go unanswered.

So if everyone on the desk is gone or busy, you might find yourself speaking with clients or fielding other peoples’ questions – Analysts and Associates are expected to do their best to pick up the phone and cover for the senior bankers who may be away or on their other lines.

That varies by bank, though, and if your DCM group works more closely with IB and is seated with the Investment Banking Division, the cultures will be more similar.

Q: Why do you think IB and DCM are so different? It seems like there’s less of a cultural difference between ECM and traditional IB.

A: Part of it is because equity investors and debt investors look for very different qualities, and investment bankers tend to understand equity investments much better.

Equity investors seek growth, and acquisitions and aggressive expansion plans excite them.

Investment bankers, of course, also like to pitch acquisitions and dramatic changes in the business because they earn fees when companies go through with these deals.

But debt investors, while also looking for some growth, are more concerned with stable cash flows and interest coverage.

Acquisitions and divestitures often scare them because they could disrupt a company’s cash flows and potentially violate covenants. Also, LBOs and other M&A transactions can result in significant changes in capital structure that may heavily subordinate existing debt.

So not surprisingly, investment bankers tend to feel more comfortable working with people in ECM, since they pitch investors and buyers in similar ways.

Q: That makes sense. What about the hours? Let’s look at best case, worst case, and average case scenarios.

A: The best case is 60 hours per week – that happens when the market is slow and few deals are happening. So you get in at 7 AM each day, leave at 7 PM, and don’t work on weekends – similar to traders.

When deal flow and pitches pick up, it’s not uncommon to work 90 hours per week, just like in M&A. The average case might be somewhere in between, so maybe around 70 – 80 hours per week.

To give a concrete example from when time are busy: even Associates here often work 7 days a week, from 7 AM to 9 or 10 PM on weekdays, and then 8 – 12 hours on weekends.

Q: It sounds like the hours are more intense than in ECM – why is that?

A: One issue is that bankers can do a lot of the heavy lifting with equity issuances since they understand them better, which reduces the burden on ECM.

Another reason is that DCM is higher-volume but lower-margin than ECM – and all else being equal, more deals means that you’re working more.

In Canada, the income trust structure is being phased out and that has also led to a boom in the high-yield debt market.

With so many companies interested in coming to market as they convert back into corporations, we find ourselves doing a lot more company-specific analysis and pitching and more debt IPOs.

Exit Opps: What You Do Next

Q: Right, that makes sense – more deals and less banker help equal longer hours.

What about the all-important exit opportunities? Where do you go after working in DCM?

A: At the junior levels, most of the exit opportunities are within the bank itself.

People often move from DCM to other desks on the Fixed Income floor – Syndication, Sales, Research and less often to Trading – and occasionally to industry or M&A groups in IBD or even ECM.

It is not common to move into private equity or hedge funds and I can’t think of a single analyst at my bank who did that.

Research desk analysts and traders are better-suited for hedge funds because they analyze companies and reach their own conclusions, whereas we’re more process and product-oriented.

But the good news is that post-financial crisis, analysts with DCM experience are looking more and more attractive to other groups within investment banking.

In the past, bankers used to come up with crazy financing scenarios for proposed acquisitions that would never work in real-life under normal conditions, but we were in a liquidity bubble back then with lots of cheap financing.

Today, there’s a lot more scrutiny out there; also, post-crisis, banks have higher capital requirements so you need to understand the impact of financing in more detail.

Q: I’m surprised that it’s so difficult to get into private equity and hedge funds from DCM – I would have thought you could leverage all that debt experience (no pun intended) to great effect when interviewing.

Do DCM analysts get any exit opportunities that you don’t see in other groups?

A: Yeah, the issue with PE is that many LBOs use high-yield debt and you don’t work with it as much in DCM, though there are exceptions if your group combines DCM and LevFin.

And few hedge funds invest in investment-grade debt, so there’s little direct overlap.

Some DCM analysts move into the Treasury departments of normal companies, which is something you don’t see elsewhere.

That’s because the Treasury is responsible for day-to-day funding for the business, and in DCM we spend a lot of time developing relationships with Treasury departments anyway.

If you wanted to move into corporate development instead, you would need corporate finance experience.

Q: Interesting to hear about the Treasury as an exit opportunity.

What are your future plans? Will you stay in DCM or try to move elsewhere?

A: I’ve enjoyed capital markets a lot, and working in DCM during the credit crisis was both a terrifying and interesting experience that taught me a lot about how important debt and liquidity are to the global economy.

However, I don’t want to become too specialized and as I mentioned before, DCM is a very product-specialized and process-focused job.

So I’m thinking about moving to an investment banking industry group for a few years, or maybe doing a rotation there, so I can learn more about strategy and corporate finance.

I’m not considering the buy-side, and it would be difficult for me to even go there without moving to another investment banking group first.

I may go to business school at some point, but I would just be leveraging that to move to a different group or a different bank.

Q: Awesome – thanks for your time.

A: No problem. Hope you learned a lot about DCM!

M&I - Brian

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys memorizing obscure Excel functions, editing resumes, obsessing over TV shows, traveling like a drug dealer, and defeating Sauron.

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