From Cold Call to Closed Deal: How a Private Equity Investment Comes Together, Part 3 – The Dotted Line
“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.”
“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.
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:
- From Cold Call to Closed Deal: How a Private Equity Investment Comes Together, Part 1 – The Idea
- From Cold Call to Closed Deal: How a Private Equity Investment Comes Together, Part 2 – The Deal?
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.
Free Exclusive Report: 57-page guide with the action plan you need to break into investment banking - how to tell your story, network, craft a winning resume, and dominate your interviews
From Big 4 Restructuring to Investment Banking: How to Make the Leap
“Help! I hate my accounting job and want to move into banking, what do I do?”
“What group should I transfer to if I want to get into finance?”
“My Big 4 salary doesn’t give me enough cash for bottles!”
If you’re at a Big 4 firm right now, you’ve had one of the thoughts above before – maybe multiple times.
We covered how to move from accounting to investment banking before, but this time around there’s a different twist – an interview with a reader who moved from a Big 4 restructuring group to investment banking.
Here’s how he made the leap, and how you can do the same:
Background & Culture
Q: Let’s start with your background – how’d you end up at the Big 4 firm, and what did you do before that?
A: Sure. I actually started out as an athlete, and played at the college level for a few years before I got a serious injury that ended my career.
Then, I transferred to a smaller and lesser-known school in the Midwest, and got more interested in finance once I knew that being a professional athlete was no longer an option.
The investment banking industry is smaller in the Midwest, but there are still a few local banks there and they were doing a lot of distressed M&A deals for the auto industry, so I started contacting them and asking about internships each week.
After a ton of networking, one bank finally caved in and decided that they needed an intern – so I joined and got to help out with a few live deals there.
As graduation approached, I continued networking and found a few guys who used to work at a very well-known PE firm.
They had just started a lower middle-market fund just for family/small-business investments, and they needed some analysis done on Project Finance-type investments (power plants and such). I volunteered to do the modeling for that, and they were impressed with my work and turned it into a full-time internship.
Since I had so much experience in restructuring, I went to a restructuring group at a Big 4 firm after my internship at the middle-market PE fund. I stayed there for around a year, and then recently moved to a bulge bracket bank.
Q: That’s a great story – before we jump into it in more detail, I think a lot of readers might wonder what it’s like working at a Big 4 firm in their restructuring group.
We’ve covered the work and culture in IB and PE before, so how would you say the Big 4 firm compared to those?
A: There was definitely a skill set overlap – we did lots of cash flow modeling, presentations to lenders, and distressed M&A deals where we advised the company on selling, restructuring, or bankruptcy options. We also worked with the big auto companies, so you got good exposure to their finance teams.
The financial modeling and deal skills were similar, but there was a big cultural difference because we only worked on 1-2 projects at once and the hours were very, very tame. I only worked on one weekend, and a “late night” was staying to 8 or 9 PM.
Q: Why do you think there’s that cultural difference? Deals are still deals, so I don’t understand how you could “choose” to be less busy if you’re working with Fortune 500 clients all the time.
A: It’s mostly because financial advisory services were a very small part of what the firm did. At an M&A boutique bank, 100% of revenue comes from advisory, but at this Big 4 firm advisory accounted for maybe 2% of revenue.
Their focus was accounting/audit and consulting – they had investment banking and restructuring services, but they were an afterthought next to everything else there.
Q: OK, so it sounds like they consciously chose not to take on as much business as they could have since it wasn’t their core focus.
Obviously you did well moving into banking from restructuring, but what other groups would be good if you wanted to make the Big 4 to IB move?
A: As you’ve mentioned before, Transaction Advisory Services (TAS) can be good since you get exposed to bankers in some scenarios.
But I don’t think it’s necessarily the best group all the time because many TAS groups focus on accounting and due diligence, and you may not get exposed to valuation, financial modeling, or other aspects of the deal. They may also spend a lot of time on tasks that bankers don’t care about, such as making sure that working capital requirements are met when a deal closes.
So I would recommend looking at the internal middle-market banks that all Big 4 firms have – they do mostly sell-side advisory, and while it’s not comparable to the experience you’d get at a real bank, it’s closer than most other groups at the Big 4. Here are links to each firm’s internal bank:
- Deloitte – Corporate Finance
- KPMG – Corporate Finance
- PricewaterhouseCoopers – Corporate Finance & Investment Banking Services
- Ernst & Young – Transactions
And then anything transaction-related – like the restructuring group I was in – could work as well.
Networking & Interviews
Q: Can you talk about the networking you did to get the bulge bracket offer? What was the best source for finding contacts and meeting bankers?
A: Keep in mind that I had been networking all along, ever since I got my original internship via aggressive cold-calling.
So it was just continuing what I had already started – I took the Big 4 offer knowing that I still wanted to move into banking and would have to continue networking.
It was difficult to find bankers at first because few alumni worked in finance, I didn’t have co-workers I could reliably ask, and headhunters were useless unless you had at least some full-time work experience.
Q: So where did you find bankers if not through the usual sources like your alumni database?
A: A couple ways:
- High School Contacts – Even though my university had few alumni in finance, there were quite a lot from my high school who worked in the industry.
- Random Online Contact – I would just go through LinkedIn and look up bankers in the Midwest and start reaching out them like that.
- Cold-Calling/Emailing – This is how I got my first internship. It’s time-consuming and has a low hit rate, but it does work.
- Upscale Gyms – I joined a few higher-end gyms in my area and ran into a bunch of financiers there. I met a few bankers, people in private wealth management, management and turnaround consultants, and even a PE Partner like that.
All of that helped, but the most helpful thing for me was always asking, “I’m interviewing with this group / interested in this area – do you know anyone else I could speak with?”
I got tons of referrals with that line at the end of each call or meeting. It sounds very simple, but you’d be surprised at how many people are too afraid to make simple requests in a conversation.
Q: I really like the tip about upscale gyms; it reminds me of Gordon Gekko playing racquetball.
So it sounds like your networking was pretty similar to what we’ve covered here before with getting names and contact information, setting up informational interviews, and then following up aggressively.
How did you spin your resume when you were applying, since the Big 4 firm was your only full-time experience?
A: I actually downplayed the Big 4 experience, because I felt my banking internship and my work at the middle-market PE fund were both more relevant. So I focused on those and described my transaction experience using the template you’ve suggested before.
For my Big 4 experience, I focused on the valuation and modeling work and left out anything that was closer to accounting/audit.
Even though I had worked in restructuring there, I was interested in moving to industry or M&A groups in investment banking, so I didn’t want to make myself look too specialized by writing 100% about restructuring or distressed deals.
Q: That makes sense, and it’s great advice for anyone who has worked in a more specialized group and wants to move elsewhere.
What about the interviews themselves? Were they mostly technical or deal experience-focused?
A: They focused a lot on my deal experience – and more my experience at the bank and PE firm rather than in my restructuring group.
There were technical questions, but they were more curious about why certain deals happened, potential complications, and what I thought of the valuation and the process for different companies.
For some of the industry groups, a key question was “Why this industry?” They get a lot of people who don’t know why they want to work with financial institutions or industrial companies or whatever they cover.
Q: We covered a few possible answers to that one before, but what did you say?
A: In my final year of university I had completed a finance course where we valued companies in different industries, so I used that as my “spark” to show them how I got interested at first.
It didn’t work for every industry group, but by using that I could at least talk about my interest in the more common ones, like energy, financial institutions, and industrials.
I also used a few of your industry-specific modeling courses to demonstrate my interest and they were really impressed with that, since hardly anyone else had gone to the effort of completing entire case studies on these companies.
Q: I’m surprised by that one, because we generally tell customers that the industry-specific courses are more helpful once you’re already working – but you found them useful for interviews as well?
And these were lateral interviews at the top bulge bracket banks – even there most other interviewees still hadn’t done as much as preparation as you might expect.
Q: Well, glad to hear the courses were helpful!
It seems like the interview process was straightforward for you, but I’m sure bankers had at least a few “objections” to your background. What were the key issues, and how did you overcome them?
A: Their main concern was that my academic experience looked very spotty.
I had taken a year off after I got my injury back in college, and then had to enroll in another school and ended up missing another semester, so it looked like I had taken forever to graduate and had been to school twice.
Some bankers just focused on that for 100% of the interview – they asked about all my gaps in education and why I had gone to schools they never heard of.
I answered those questions by explaining that for my first 2 years in university, I was practicing constantly, still doing well in school, and working 1-2 part-time jobs at the same time. So I spun a negative into a positive, and pointed out that I was working crazy hours a good portion of the time and could therefore handle the hours of a bulge bracket bank.
And then I also had my previous IB and PE internships, so they weren’t too concerned by the end.
What If? And the Future
Q: Since you had those internships, you had 100% relevant experience when applying to larger banks.
But what advice would you give someone who’s at a Big 4 firm in some other role, like audit? What should they do if they have no transaction experience and want to get into IB?
A: First, get out of audit immediately. Do something – anything – more stimulating.
People make fun of investment banking for being mindless work, but in my opinion audit is even worse because it’s so mundane.
At least with deals, you witness drama as different buyers and sellers express interest, back out, make different proposals, and negotiate. In audit you’re staring at numbers all day unless you happen to uncover the next Enron.
Most Big 4 firms are fine with internal transfers – it’s often easier than it is at a bank. Sometimes the Partner you’re working for may take it personally, but that depends on your group.
You should reach out to the other group you’re interested in first, contact people there, and make sure they know what you’re interested in doing before you even run the idea by your current boss.
The Big 4 firms all have lots of events and internal mixers where professionals in different areas can meet each other, so it’s easier to get to know other groups than it would be in IB – most people don’t work more than 50-60 hours per week, so they have the time to help you.
You really have no excuse not to move to a group that’s more closely related to banking – I would recommend restructuring, valuation, internal M&A, and TAS as your best options.
Q: It’s interesting to hear that the internal transfer may be easier at Big 4 firms, but I guess the culture is just more relaxed across the board.
So now that you’ve won this bulge bracket offer, what’s next for you? Will you stay at your new bank for some time, or are you thinking about moving to the buy-side?
A: Unlike most other bankers, I’m actually interested in staying in IB for the long-term.
Back when I was interviewing for this role, a number of distressed investment funds also approached me, but I wasn’t interested in PE back then and I’m not interested now, either.
My key issue is that you must put your own money to work to progress in PE.
It’s not just Partners investing the fund’s capital – they also put in their own funds, so a poor investment could wipe out a good chunk of your personal savings.
Yes, the pay ceiling is higher and you could make mind-boggling money – but let’s be honest, at the MD/Partner-level, the average is about the same in both industries. The outliers in PE make far more, but for me the risk isn’t worth it.
The other issue is that private equity is much less of a team environment than banking, and coming from an athletic background I enjoy working in teams more than the solo work that you see in PE.
Q: That makes a lot of sense, and that point you raised about putting your own money to work is a great one that often goes overlooked. Thanks again for taking the time out to chat, I learned a lot!
A: You’re welcome, it was my pleasure.
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From Cold Call to Closed Deal: How a Private Equity Investment Comes Together, Part 2 – The Deal?
“No, no, and no again,” shouts John, the Founding Partner.
“This is a crap deal in a tiny market with a Founder who wants to leave in 12 months? She stays, or we don’t even take another look at this. This business is worth $0 without her.”
David jumps in before you can say anything.
“We don’t know how serious she is about leaving. And don’t you think the LPs might like seeing a new industry that we haven’t invested in before?”
“Are you crazy?” John blurts out, “The problem is that she doesn’t know what she’s doing, which is much riskier than if we knew for sure, either way. And there’s no way the new Limited Partners will get behind this – they know jack about technology and don’t feel comfortable with the industry.”
“You realize she’s willing to sell at a 50% discount, right? We could still get a solid return.”
“50% of $0 is $0.”
Everyone turns to David, waiting to see what his next retort will be.
But he comes up with nothing and sits there with his hand to his chin, tapping his index finger on the table and waiting for another response from John.
“If no one has any other business, this meeting is over. Back to work.”
As everyone else shuffles out of the conference room, you sit behind and wait for David to leave first. He rolls his eyes at you and leaves without saying another word.
Meanwhile, on a Yacht…
Nancy, CEO of IonX Solutions, stands silently on the deck looking up as James, her new business partner, shouts orders at the crew below.
“So, James,” she says, “I’ve been thinking of what role I could take on at your next company. I’m happy to continue as CEO, of course, but I’m open to other…”
James cuts her off before she can finish.
“Yeah, I’m not so sure about that anymore. It was just an idea, I didn’t think you’d take it seriously.”
Nancy opens her eyes wide. “What? But you know I’m selling IonX to go do this with you, right?”
James chuckles and fires back, “Oh, really? So who’s the buyer? No other company would buy it, and no investor in their right mind would buy it if you left. They’d make you stay or they’d never invest.”
Nancy turns her back to him and gazes at the ocean. Still facing away from James, she speaks up once again.
“They’ve agreed to let me leave in exchange for a lower price. So I’m moving on and joining you as soon as the sale is done.”
James laughs and casts a smirk across his face before he replies.
“Yeah, I’ll believe that when I see the money in your bank account,” he challenges, “Besides – even if I wanted to give you a position here, fundraising is taking forever in this market and investors don’t seem interested.”
“Then I can invest with the proceeds I’ll get from the sale of IonX. I’ll move this forward even if no one else wants to.”
James looks down at his Blackberry, dashing off a few quick messages and pretending not to hear her. Then he looks up and walks over to Nancy, gently resting his arm on her shoulder.
“If anything changes, we’ll be in touch.”
Back to the Grind?
You’re about to start cold-calling once again, when the phone rings and you hear a familiar female voice.
“Hi, it’s Nancy from IonX,” she says meekly, “I just wanted to call you back and let you know that I’ve decided to stay on as CEO. And I still want to sell, so could you let me know what information I need to send you guys?”
News of this reversal has spread around the office, and others are wondering why you’re spending so much time on a clunker of a deal when there are so many… promising companies to cold call.
But as long as no one else is putting in the hours, they’re not telling you to stop.
You’re requesting everything imaginable from Nancy and her management team: historical financial statements, customer data, sample customer contracts, and a lengthy list of IP for the lawyers to sort through.
And you’ve made some discoveries that might just get this deal done – if someone at your firm will listen to what you’ve found.
Just as you’re about to get started creating 5-year projections for the company, David once again walks into your office unannounced.
“So what have you got for me?”
“Well,” you say, “It’s around 70% recurring revenue, so even if Nancy gets hit by a bus and all their sales reps jump off cliffs, revenue only falls by 30%.”
“That’s great,” he replies, “So there’s a significant chance of the company losing 30% of its value. Good to know for the investment committee.”
“They’d love 70% recurring revenue with any other company.”
“Yeah, except no other company has a Founder with more mood swings than a teenage girl.”
“Her mood could also swing us into a big discount.”
David sighs, puts his hands in his pockets, and walks over to gaze out the window in your office, facing away from you as he responds.
“Some people here are… starting to have doubts about what you’re doing. They wonder why you’re pursuing this. And with the new fund in place, we’re also bringing a new associate on-board so we have more… resources.”
Your eyes widen as you respond, “So now we’re getting a new associate after we no longer need the extra help?”
“I hear he’s very well-connected,” David explains, “And that his father travels in the same circles as some of the new LPs.”
“Is this a warning?” you reply, standing up and facing David as he turns around and meets your eyes with his gaze.
“Not at all,” he denies while smiling at your sweaty hands, “Just a courtesy call. And do make sure you say hi to Martin when he starts here next week. I think that’s his name, anyway.”
The Partners are assembled around the table, and you’re standing in front of them navigating through all the slides you’ve created for IonX. The lights are dim and you wonder if anyone will doze off before you reach the climax of your presentation.
“Even with conservative assumptions,” you reassure them, “We can get a 25% 5-year IRR because the margins are so high. And if she sells at a higher discount, we might get closer to 30% returns.”
You pause on your returns analysis slide while everyone else squints and stares at your work, looking for the hole that will sink your investment recommendation.
“You’re assuming a 10% growth rate each year, how can you possibly call that conservative?” John, the Founding Partner, questions.
“They’ve been growing at 15% the past few years and have 70% recurring revenue from long-term contracts with customers. So it’s not as if they need to go out and sell to completely new customers each year… and the market is only around 25% saturated at the moment, so there’s plenty of room to grow.”
“What happens when that growth rate drops to 5%, though?”
“We could still get 15% returns even with that, if you look at this sensitivity…”
David cuts you off before you can say anything else.
“Forget about these imaginary growth rates, let’s talk about your exit assumptions. Who do you think will even buy the company in the first place, and why would they pay 7-8x EBITDA for this business?”
You flip to your next slide and start to go through recent software M&A deals, pointing out that some multiples have been above even 10x – but that doesn’t satisfy David.
“How can you call those deals ‘comparable’? They’re all much larger companies with at least $100 million revenue in broad markets. That’s like saying a date with your buck-toothed sister is the same as hooking up with Scarlett Johansson.”
Now you’re starting to regret introducing your family to everyone at the last holiday party. But a personal attack deserves a rebuttal.
“Even if you lower the exit multiple to 5x we could still get a 15% return – and higher if we get that discounted price.”
Everyone turns to David and he and John glance at each other, waiting for the other one to speak up first.
“The numbers look decent and it’s not the worst deal I’ve ever seen, but we need to understand the market and the potential buyers better,” John concludes.
Deal or No Deal?
Back in your office, you flip between your YouTube window, your inbox, and the spreadsheet of companies you need to follow-up with.
You hear your door crack open and you get ready to feign stress in case your favorite visitor walks in once again, but it turns out to be someone else scurrying by.
In the clear, you call Nancy back.
“Hi there,” you start out, “Good news for you: the Partners here are much more interested now, and we’re ready to move forward if we can get some more information from you.”
“That’s good,” she replies in a monotone voice.
“Is something wrong?”
“You’ve been asking us for lots of information, and it’s a huge distraction for my managers. They’re starting to wonder what’s going on and if the company is being sold, and I haven’t even told them anything yet.”
You slide open your desk drawer and pull out your stress relief ball, squeezing it a few times before you start to toss it up and down.
“I understand,” you answer, “But that’s just how our business works – we can’t invest in or buy a company without doing our due diligence first. I realize it’s a distraction, but when you work with private equity firms…”
“Just tell me what else you need. Let’s get this over with.”
“We need to know more about the market and what other companies have been acquiring lately – we’re new to this industry and haven’t been able to find much data…”
“Isn’t it your job to find data? What else do you do all day in those spreadsheets?”
You toss the ball across the room, hitting the window with the full force of your throw.
“Sorry about the noise, someone just walked in,” you lie. “Yes, we do have data. But you’ve been in this market 10 years, so you probably have more data.”
“OK,” she says after a long pause, “But I’m getting less and less confident about this deal and I’m not sure how much longer I can keep my managers in the dark. I hope this doesn’t fall apart because of you.”
Meanwhile, the LPs are growing more disillusioned by the day. The Partners had gone around raising a new $750 million fund a year ago because they claimed to have found so many new opportunities.
But since then, the market has taken a nose dive and no one wants to do deals – and the LPs are wondering why your firm is letting so much cash sit there unused.
Technically, the LPs don’t have any say in the management or operations of your firm (hence the “Limited”), but they still look at your investments and may choose not to invest again if they don’t like what they see.
John calls David into his office for a quick chat.
“They want to see something from us soon,” he offers up, “And I want to see something from you soon.”
No closed deals and no exits in 3 years – if that wasn’t a slump, what was?
David pulls out his list of prospects and runs down it from the top, explaining why each one might be a great investment.
“That’s nice,” says John with a smirk, “But you know as well as I do that all of those are at least 9 months away, even if we jump into due diligence right now. You could get pregnant and have a baby in that amount of time.”
David wipes a bead of sweat off his forehead and continues looking down at his list before placing his hand on his chin and looking up at John.
“Then the only other option is IonX,” he admits. “Not exactly the bombshell we want, but at least it will show we’ve made some progress and aren’t just resting on our laurels.”
“Who’s the buyer? And how do we convince the pension funds to go along with this?”
“There are more buyers than I can count,” David retorts, “All we do is flip it to another firm and pitch it as an add-on acquisition – here’s a list of all the funds that have been active with consolidation.”
John puts on his reading glasses and looks at the list, and then lets his eyes wander over to the missed call list on his phone from the eager LPs.
“And I suppose you have a magical list of better comps in the space as well?” he lets out with a laugh.
“Right here,” David replies, presenting the data to John as if he were awarding him the Nobel Prize.
John looks through the stats and pauses for a few seconds at the bottom of the list before looking up at David once again.
“Good data,” he says, “But I wonder: how did you get this on short notice, and why are you now suddenly in favor of this deal?”
As you’re poring through the data Nancy has sent over and double-checking all your assumptions in the model, David walks into your office for his 3rd unannounced visit in the past week.
“Good news,” he chimes, pulling out your chair and sitting down with his arms propped up on your desk.
“John’s behind this now, and so are the rest of the Partners. We’re going ahead with the deal and will start bringing in the accountants and lawyers and negotiating the agreement.”
Your mouth drops open as you squint at him for a few seconds, searching for the proper words.
“So… um… what exactly changed? They seemed not to like the market or the potential buyers…”
David cuts you off, waving his hand in your face.
“It’s not an issue – we have enough data on the market and everyone’s comfortable with the numbers.”
“So you just happened to conjure up the right data to convince John that this is a solid idea?”
“Of course not,” David says, leaning back in his chair and folding his arms against his chest.
“I called Nancy myself and told her that all the Partners were committed to the deal now. She just needed someone a little more… senior. And some… reassurances. Once she had that, she was happy to hand over all the data.”
You look down at your desk drawer, searching for your new Eggshell with Romalian type business cards. In case David whips out his Bone with Silian Rail set, you have an ace up your sleeve.
“Well, that’s great news,” you lie, faking a smile and sipping from the Red Bull can on your desk. “Just let me know what else I can do to help.”
David stands up and walks toward the door, and then turns his head around to face you once again before leaving.
“Oh, I will. We’re bringing in all the troops now, so you’ll have to coordinate that. And by the way, performance reviews and bonuses are coming up in a few weeks – hopefully you’ll do better than the new guy! You have said hi to Martin, right?”
The Rest of the Series:
Check out parts 1 and 3 below in case you missed them:
Free Exclusive Report: 57-page guide with the action plan you need to break into investment banking - how to tell your story, network, craft a winning resume, and dominate your interviews