Equity Research Recruiting, 2018 Edition: Attack of the MiFID
Numi Advisory has advised over 600 clients by providing career coaching, mock interviews, and resume reviews for people seeking jobs in equity research, private equity, investment management, and hedge funds (full bio at the bottom of this article).
So, you’re interested in the public markets…
You’ve been trading your own portfolio and making investment recommendations since you were in middle school…
…and now you’re at a top university preparing to enter the finance industry.
You’re probably wondering: Is equity research right for you?
Or will it go the way of the dodo bird, driven to extinction by MiFID II, passive investing, and falling trading commissions?
We’ll address those questions and more in this article, but we’ll focus on recruiting and interviewing for ER roles – since the industry is still alive, despite rumors to the contrary:
What Do You Do in Sell-Side Equity Research?
“Equity research” in this article refers to the sell-side role at investment banks where you analyze public companies, speak with management teams and investors, and make Buy, Sell, and Hold recommendations on the stocks.
For example, you might cover the pharmaceutical industry in equity research at a mid-sized bank.
There’s a company that recently went public, and you believe it is undervalued.
You value the company, speak with management and other market participants (ex: institutional investors), and then you explain why the company’s stock price might increase from $100 to $150 over the next year, using the research and quantitative analysis you’ve done.
You then publish a report with your findings, and you also present them to institutional investors who read your research.
Now, repeat this process with 10-15 other companies in the sector, add update/maintenance work, conferences, and continued discussions with management and investors, and you’ve got the gist of the job.
This role is labeled “sell-side” because you do not invest your own money; you simply make recommendations to others.
If you predict that a company’s stock price will rise by 30%, but then it falls by 30% instead, you might look silly – but you won’t lose money.
Research teams are best known for the reports they publish, but the senior staff (“Research Analysts”) in these groups spend most of their time speaking with management teams and institutional investors and coming up with insights into the stocks under coverage.
Junior staff (“Research Associates”) spend more time on the modeling and report writing, but the work split varies by team, industry, and location.
If you want to see real examples of these reports, you can often find them through brokerages such as Fidelity, Charles Schwab, or TD Ameritrade, as well as services such as Capital IQ, Bloomberg, or FactSet, if you have access to one of them.
Here are a few real reports issued by banks in different time periods and industries:
- Morgan Stanley – Update on Lululemon Athletica
- Morgan Stanley – Initiating Coverage on Citizens Financial Group
- RBC – Initiating Coverage on Waddell & Reed Financial
- Lehman Brothers – REIT Sector Overview
- Lehman Brothers – Initiating Coverage on CBS Corp
And if you want imaginary-but-shorter-and-more-useful examples, check out our article on equity research reports.
We include sample research reports in most of the BIWS financial modeling courses as well, typically in the valuation/DCF case studies.
Is the Industry Dying? Will MiFID II Kill It?
The most common question we get about equity research is whether or not it’s “dying.”
In the old days, equity research existed to encourage institutional investors to trade with the bank.
Investor A might place stock trades with Bank B, resulting in commissions for Bank B, and Bank B would provide equity research reports to Investor A “for free.”
This research would then incentivize Investor A to place even more trades with Bank B (in theory).
The commissions generated by Investor A would then contribute to the compensation of the research team at Bank B (in theory).
As of 2018, this has changed in the European Union because of the new MiFID II regulations there.
MiFID (“Markets in Financial Instruments Directive”) II does a lot, but the main provision that affects equity research is the one that prohibits banks from bundling their research with other products.
So, instead of receiving research “for free,” institutional investors must pay for it separately, disclose the amount they paid, and pass the cost onto their investors or absorb it on their P&L.
Technically, MiFID II only applies to Europe, but it will make an impact on other regions because large banks are global corporations that must consider compliance everywhere – and similar rules could eventually take effect in the U.S., Asia, and other places.
If you look around online, you’ll find a wide variety of opinions: Some people think these regulations will completely kill equity research in Europe, others think they will help the “star” Analysts and hurt everyone else, and others think the impact might be overstated.
The truth is, it’s too early to tell because the rules were only implemented in January 2018. But the industry will almost certainly decline; it’s just a question of degree.
But the other truth is that equity research is affected by more than MiFID II – headcounts had been falling even before these rules came into effect.
The rise of passive investing has hurt traditional asset managers and hedge funds, and that, in turn, has also hurt demand for equity research.
Commissions from equities trading have been falling, and sales teams have been shrinking, and those make a strong impact on research as well.
We doubt that the industry will “disappear” because the client interactions and management meetings that the best Analysts and Associates can broker are still quite valuable.
However, many average Analysts are likely to be marginalized, while the top ones will command higher compensation.
The bottom line is that equity research will not be an area of explosive growth going forward, but its prospects are less apocalyptic than many headlines suggest.
Research will still offer entry-level roles, and it can still be a good steppingstone for various exit opportunities, but it is less appealing as a long-term career now.
The Recruiting Process and What They’re Looking For
The recruiting process for equity research is more random and unstructured than the one for investment banking.
The large banks may do some undergraduate and MBA-level recruiting, but they fill many of their spots “as needed” – if an Analyst or Associate leaves, they’ll look for someone new.
They look for the standard qualities that bankers also seek: A well-ranked university or business school, high grades, at least 1-2 previous finance internships, analytical ability, and technical skills.
The main difference is that you must demonstrate your passion for the public markets because that is the major distinction between ER and IB.
That means coming up with 2-3 excellent stock pitches, following an industry in-depth, and taking part in equity research competitions such as those sponsored by the CFA Society.
In theory, it’s helpful to intern at small hedge funds or asset management firms before applying to ER roles at large banks.
In practice, it’s often quite difficult to find those roles, so it might be better to apply to equity research at smaller firms and then move to larger banks from there.
Investment banking or private equity internships could also work, especially if you win an offer at a large, well-known firm, but they’re a bit less relevant.
Another recruiting difference is that writing and communication skills tend to be more important in equity research because you have to present your own ideas consistently.
While you also write a fair amount in IB to create CIMs (for example), much of it is mundane and consists of copying and tweaking text from other sources.
By contrast, research requires more originality.
Equity research teams sometimes recruit candidates with significant full-time work experience, especially in industries where deep technical knowledge is required to understand the companies: Biotech, pharmaceuticals, or semiconductors, for example.
In those industries, you’ll occasionally see Ph.D.’s or industry executives move into equity research – assuming that they’ve learned enough about finance to do the job.
Since ER recruiting is less structured, it’s more feasible to get in through the side door or the back door.
It’s hard to pin down the timing of the process, but it’s safe to say that it’s not quite as hyper-accelerated as the IB recruiting process.
You’ll still go through first-round interviews, often on the phone or via video, and then proceed to Superday interviews at the bank.
Finally, studying for the CFA and passing at least Level I will boost your profile when applying to equity research roles.
However, it shouldn’t be your top priority unless you’re already solid in everything else – grades, work experience, networking, technical preparation, and stock pitches.
The CFA can also be helpful if you’re coming from a non-finance background and need to prove that you know finance.
How to Network Your Way into Interviews
As always, you start the networking process by finding the email addresses of industry professionals.
You can do that by searching for anyone working in “Equity Research” on LinkedIn and guessing their email addresses, or you can go through services like Bloomberg, Capital IQ, or FactSet if your school provides access.
Old equity research reports also have contact information, and some bank websites list email addresses and phone numbers for ER staff.
To verify that an email address still exists, you can use tools such as Email Checker.
It’s best to focus on groups with specific job openings, but you won’t always know that in advance.
Once you’ve collected names and email addresses, you can write a 5-6-sentence email like the one below to an Analyst or Associate:
SUBJECT: [University Name] Student – Opportunities at [Bank Name]
“Dear Mr. / Ms. [Name],
My name is [Name], and I’m a [XX-Year] student at [University Name] who found your contact information via LinkedIn.
Over the past few years, I’ve become increasingly interested in equity research as a career, and I have been learning as much as possible to break into the field.
I have completed previous internships at [Company Name 1] and [Company Name 2], two hedge funds focused on long/short equity strategies in the technology sector. I’m specifically interested in your team because of the technology companies you cover, such as [Company Names 1 and 2].
I’ve attached here an example stock pitch (and the accompanying model) I completed for [Company Name], as well as my resume.
I know you are extremely busy, but if you have a few minutes to speak so I could learn more about opportunities at [Bank Name / Group], it would be greatly appreciated.
Thanks, and I look forward to connecting with you soon.
A few notes:
- Length: Aim for 150 words and never go above 200. If you write a page of text, no one will read it or respond.
- Timing: Avoid contacting ER professionals during earnings season, and, as with all email networking, send your messages in the middle of the day (between noon and ~1 hour before market close).
- Directness: This email does not request an informational interview – the person asks about jobs and attaches his/her resume and work samples. Since ER has a less structured recruiting process, you should ask directly for the internship or job when you know the team is hiring.
Some people recommend against attaching work samples in your initial outreach.
If you don’t know how to value a company, structure a stock pitch, or present your ideas coherently, then you should take this advice and avoid sending work samples.
But if you don’t know how to do these things, you shouldn’t be recruiting for equity research in the first place!
If you have a solid 3-statement model, valuation, and investment thesis, a work sample should help you 90% of the time.
For more on this topic, see our equity research report examples.
Once you’ve made this initial outreach, you need to follow up and contact other teams using the same approach until you get positive responses.
Interviews – “Fit” and Technical Questions, Stock Pitches, Modeling Tests, and More
Many of the standard “fit” questions will come up in equity research interviews: Your story, strengths/weaknesses, why equity research, team/leadership experiences, etc.
We covered these questions from an investment banking perspective in previous articles, but you can use nearly the same format and structure for ER interviews as well.
You just need to emphasize your interest in the public markets and your communication skills more heavily, and you need to explain why you want to work in sell-side research if you have previous buy-side internships.
For example, you prefer research because you do modeling, research, and writing, and you also speak with investors and management teams. You like the relationship-building aspect, which you don’t necessarily get as much of at a hedge fund.
The “Why equity research?” question is just the last part of your story: ER lets you combine your industry background with the public-markets analysis you enjoy.
Technical questions are largely the same in ER and IB interviews, so you should expect questions on accounting, valuation/DCF analysis, and M&A and LBO analysis.
You don’t work on deals in research, but you still need to understand them because the companies you follow will make acquisitions or be acquired over time.
The stock pitch is a separate topic that we covered in a series of detailed articles, so you should refer to those for ideas and examples.
You should come up with one “Buy” and one “Hold” or “Sell” idea and avoid stocks the interviewer covers directly.
You will never know more about a company than an Analyst or Associate who follows that company for 12 hours per day, so you set yourself up for disaster if you pick a company they cover.
It’s better to pick stocks in “adjacent” industries so that the interviewer has some familiarity with them, but not deep knowledge.
If you’re writing your stock pitch, you can use the same structure we always recommend:
- Recommendation – Buy/Sell/Hold and what the company is worth.
- Company Background – Brief description of the company’s products/services/geographies, its revenue and EBITDA, market cap, and relevant valuation multiples.
- Investment Thesis – The company is mispriced because of these 2-3 key factors, and the market is wrong about these points for these 2-3 reasons.
- Catalysts – And key events in the next 6-12 months will cause the company’s stock price to correct itself.
- Valuation – According to the DCF and Public Comps, this company is worth $XX – $YY per share, but its current share price is $ZZ.
- Risk Factors and Hedges – We might be wrong for these 2-3 reasons, so we could protect ourselves with other investments, call or put options, etc.
You can use this same structure in a verbal pitch, but you’ll only have 60-90 seconds to present everything.
That equates to 200-300 words, about the same as our recommended word count for your story. So, you can’t go into the numbers in-depth and explain every last point.
Here’s an example 281-word verbal pitch for a REIT:
“AvalonBay, a U.S.-based multifamily REIT, currently trades at $165 per share, but it is worth closer to $190-$200 per share and could reach that level in the next 6-12 months. The company focuses on Class-A properties on the coasts of the U.S. and has $2.2 billion in revenue, $1.3 billion of EBITDA, and EV / EBITDA and P / FFO multiples of 22x and 20x.
The market has incorrectly penalized the company for several earnings misses in its last fiscal year and expectations of rising interest rates and a coastal multifamily slowdown; however, rising interest rates barely affect the company because 83% of its Debt is fixed-rate with 10-year maturities, and even in downturns, its rental income has never declined by more than 2% per year.
The company will be able to raise same-store rents above consensus estimates and realize more NOI from its Development pipeline than the market has given it credit for; Year 5 revenue might be 10-15% higher.
Catalysts to increase the company’s share price include the stabilization of its $1.9 billion in deliveries last year, at a 6.0% – 6.5% yield, same-store rental increases above guidance, and expansion into new markets such as Denver, South Florida, and Baltimore.
The NAV and DCF indicate that the company is 20-30% undervalued in the Base and Upside cases, and only 10% overvalued in the Downside case with a 2-year recession. It trades in-line with the Public Comps’ median multiples despite 2-3x higher EBITDA and FFO growth.
Risk factors include a coastal multifamily recession, development delays and lower yields, and lower NOI margins due to rising concessions; we could hedge against these risks with put options or by shorting a multifamily ETF.”
There is no “quick” method for creating solid stock pitches.
You need to put in the time to research an industry, get to know different companies, and understand how the market values companies.
If this process bores you, you should not apply to equity research, asset management, or hedge fund roles.
Modeling Tests and More
Finally, some groups will give you modeling tests when you apply to equity research roles.
In most cases, these will be 3-statement modeling tests for public companies, similar to the example modeling test on this site.
Occasionally, they may ask you to value the company as well; M&A and LBO-related tests are unlikely for ER roles.
We prefer annual models, but research groups often use quarterly or half-year models, so you should practice with those as well.
The most common mistake in these tests is over-thinking the model and creating overly complex assumptions.
When in doubt, simplify, consolidate, and focus on the 2-3 key drivers that make the greatest impact on Free Cash Flow.
We often simplify complex Balance Sheets and Cash Flow Statements to ~5 or fewer line items in each section because many items are insignificant or non-recurring.
Whither Equity Research?
Equity research has seen better days – the 1990s or early 2000s, for example.
That said, the industry won’t “die” overnight because of MiFID II or the rise of passive investing; if buy-side firms are still willing to spend money on research, banks will still offer it.
There will be fewer opportunities in the industry in the future, but it’s still a solid entry point and it still offers a variety of exit opportunities – if you recruit successfully in the first place.
Up Next: The revamped version of Part 2 in this series, which is all about what you do on the job, including different types of reports, the hours, key projects, compensation, exit opportunities, and more.
Numi Advisory has provided career coaching, mock interviews, and resume reviews to over 600 clients seeking careers in equity research, private equity, investment management, and hedge funds. With extensive firsthand experience in these fields, Numi offers unparalleled insights on how to ace your interviews and excel on the job.
Numi customizes solutions to each client’s unique background and career aspirations and helps them find the path of least resistance toward securing their dream careers. He has helped place over 150 candidates in leading buy-side and sell-side jobs. For more information on career services and client testimonials, please contact numi.advisory@gmail.
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