Money, Hours, Models, Bottles: Investment Banking in New York, California, and Everywhere In Between
“Are you guys even in the office past 8 PM? Whenever I call no one’s there.”
“New York is hella lame, people are so much better out here.”
“If you say ‘hella’ again I’m going to make you pay for the bottles next time – and maybe the models too.”
“Fine, I’ll do some research and see what I can send over. NY is still overhyped, though.”
No, it’s not a short story or a new TV show about bankers – it’s a banker from NYC and one from San Francisco talking to each other.
And you read that headline correctly: today you’ll learn how banking differs in different regions of the US rather than going off on adventures to distant lands.
As one reader pointed out a while back, “Hearing about all these different countries is great, but what about how banking is different on the east coast vs. west coast of the US and everywhere in between?”
The Most Common – and Wrong – Arguments
Many people claim that the pay and hours differ significantly and that New York is more “hardcore” than other regions.
That makes sense intuitively: New York is the biggest financial center and the biggest deals tend to happen there.
But in practice, these differences are greatly exaggerated – pay is standardized at the junior levels in finance and bonuses depend more on your bank and group rather than the city you’re in.
At the senior levels, geographic differences become more important because certain offices have better deal flow and clients, and senior bankers’ bonuses depend 100% on performance.
New York bankers like to argue that they work way more than people in other regions, but there are no scientifically controlled surveys to support these claims.
Yes, maybe the hours are somewhat worse since more deals happen there – but we’re talking a difference of 85 hours per week vs. 90 hours per week: you still won’t have a life.
So the more substantial differences have nothing to do with pay or hours, but rather the industries covered, the cost of living, and the exit opportunities.
And yes, I’ll address the ever-popular models/bottles, networking, and a few other points as well.
This is the main difference – banks in the top 5 cities for finance in the US focus on a different industry:
- NYC: Diversified
- Chicago: Industrials
- Houston: Oil & Gas
- San Francisco: Technology / Healthcare
- Los Angeles: Gaming & Lodging / Media
There is no “best” because it depends on what you want to do in the future and how certain you are of your career.
Some of these fields are more specialized than others; something like oil & gas requires more specific knowledge than tech or healthcare since energy companies play by different rules and require different valuation methodologies.
So if you’re already interested in a specific industry, it may be a good idea to start out in the region that focuses on that industry – but if you have no idea yet, New York is the safest bet.
Just as actors get typecast, you will get more and more pigeonholed as you move up the ladder, so you need to consider these options carefully.
One friend worked on a telecom deal at a small VC firm, then got placed into the telecom group at a boutique bank, and was then placed into the telecom group at a bulge bracket bank.
Effectively, he became “the telecom guy” all because of one small deal he worked on ages ago.
And it’s even worse once you move beyond banking: good luck interviewing for that hedge fund that wants people with European telecom merger arbitrage experience if you don’t have any.
But What About Deal Flow?
“But,” you rightly point out, “There’s a difference between deal flow, hours, and industries covered – even if you’re working a lot, you might just be building pitch books all day. And what if your industry isn’t ‘hot’ at the moment?”
I don’t disagree with you there, but it’s almost impossible to determine deal flow of specific offices without talking to real people.
So if you’re such an overachiever that you’re going to pick your bank and group based on deal flow and exit opportunities, go talk to people at the different offices you’re considering and see what they say – but keep a critical eye open because they’re likely to oversell you on everything.
And no, I’m not going to rank cities and groups by deal flow here since that changes quite frequently and since you’re likely an obsessive-compulsive person already if you’re reading this.
Cost of Living
In ancient times, New York was the most expensive city in terms of real estate, taxes, food, and so on.
Now, however, San Francisco is actually more expensive, or at least as expensive, due to the tech boom and the number of high-paid startup employees there (as of 2015).
So you are not likely to save much money during the year in either place; it’s also a bad idea to live in New Jersey or another location outside the main city to save money, since you might go insane in what little free time you have.
The “cost of living” ranking looks something like this:
- NYC ~= SF > LA > Chicago > Houston
You will save the most money working in Houston because Texas has no state income tax, rent is ridiculously cheap, bottles are less pricey, and even the models are less demanding and will give your wallet less of a workout.
Cost of living shouldn’t be your top concern, but you should be aware of it.
Finance people are notorious for making millions of dollars and then blowing it all on luxury spending – so pay attention if you want to retire on more than $50K in that savings account you forgot about.
One other note: driving will be required in most of these places, especially in a city like LA where there is no public viable transportation.
So if you hate driving and owning a car, your best bet is New York.
NOTE: Ride-sharing services such as Uber and Lyft are actually changing this dynamic.
If you live relatively close to the office, you might be able to take one of those to and from work every day and gain some peace of mind in the process.
The main problem with exit opportunities is that it’s hard to interview when you’re far away.
You need to take time off work by using questionable excuses, hope people don’t notice your repeated absences, and then visit the firm enough times to seal the deal.
Since New York to SF or LA is a 5-6 hour trek, it’s not easy to hop from banking on one coast to the buy-side on the other coast. Pretty much all the analysts I knew in California stayed there, and pretty much all the ones in New York stayed on the east coast.
So you’re more likely to stay in your first region unless you can pull off in-person trips or interview entirely via video conference (unlikely for traditional exit opportunities).
Again, people like to argue that New York has “better” exit opportunities, but plenty of analysts on the west coast and elsewhere get into mega-funds as well; it’s just that they work at local offices rather than in NYC.
One legitimate difference is that there are more exit opportunities in New York just because it’s the biggest financial center.
And you also run into the pigeonholing problem if you start out in another region: go to Houston and you’ll more than likely recruit only for energy-focused PE firms and hedge funds.
But aside from those differences, the actual quality of exit opportunities doesn’t differ as much as you might expect.
Networking opportunities are another more significant difference, and one that people overlook all the time.
Since NYC is much bigger than the other regions, you’ll simply meet more people there and you’ll be better equipped to network your way into other roles.
Just as with other financial centers like Hong Kong and London, sometimes half the people you meet in NYC will be in finance (the other half will be “aspiring” artists or models, which is great for you as a financier).
How much does the quality of networking really matter?
It depends how certain you are of your “career path” – if you’re interested in doing tech banking and then doing venture capital in California, you’re better off starting in SF and networking with tech and VC groups there.
But if you have no industry preference, you’ll gain more options by starting out in New York.
How to Satisfy the Models
Ah, now to the fun part.
The main difference is that the New York models tend to be higher-maintenance, more expensive, and more demanding; LA comes close since everyone is required to get plastic surgery, but you’ll still spend more overall in NYC.
But flashing around wads of cash also doesn’t impress as much in New York because $200K is barely middle class – not enough to satisfy models who are expecting a new bag every day.
In all seriousness, you really will spend a lot more money going out in New York if you actually enjoy it.
LA and SF can also be expensive, while Chicago and Houston are more reasonable. Some also argue that people in the South and Midwest are “friendlier” but I don’t want to get into a debate over that one.
I’m not qualified to comment on the quality of men in each place, other than to say that SF is probably the worst place to find hot guys unless you’re into tech guys with a ton of money from startups.
(Yes, a female friend recently asked if there were a lot of tall, muscular blonde guys in SF and I started laughing.)
“Aha,” you say, “But even if the pay and hours are not much different, surely they must ask completely different interview questions in each region, right?”
Sorry to disappoint, but no, not really.
No one sits down and says, “Well, in Chicago we should ask this specific set of questions but in Houston it will be completely different.”
Once again, the main difference comes down to the industry focus: you don’t need to be an expert on the industry of focus in each city, but you should know something about recent deals and any industry-specific valuation methodologies.
It’s not really “easier” or “harder” to get into finance in different cities – there are fewer spots outside of New York, but there’s also less competition.
Yes, there are banks in places besides NYC, Chicago, Houston, SF, and LA – but the offices tend to be much smaller and they don’t always recruit on-campus.
Other cities with a presence in finance include Boston (similar to SF due to the industry focus), Washington, DC (aerospace/defense), Atlanta (lots of wealth management), Miami (healthcare, Latin America), Dallas (got equities?) and maybe a few others.
I can’t recommend starting out in these places if you have the option to go to one of the 5 major centers listed above.
Maybe if you’re interested in only a very specific industry, like aerospace and defense, then DC makes sense – but you’ll be at a disadvantage in terms of deal flow and exit opportunities.
A lot of boutiques are also based in other regions, so you should jump at the opportunity if you have nothing lined up in a bigger city – but otherwise, stick to the top 5 above.
Outside of IB: Sales & Trading, Hedge Funds, and More
You run into the same differences in other fields like private equity, sales & trading, hedge funds, and asset management: a different industry focus and more geographically limited exit opportunities.
Some cities also tend to be stronger in certain fields.
For example, Chicago is great for prop trading and the SF Bay Area is the spot to be for venture capital.
One downside to any type of markets-based role such as trading or hedge funds is that you have to wake up very early if you’re on the west coast because you work New York market hours.
If you’re fine waking up at 4 AM, getting off work at 5 PM, and sleeping at 9 PM every night, you might be OK; if you’re not a morning person, though, you may want to stay away.
So, Where Should You Work?
If you have absolutely no idea what you want to do and don’t mind spending more money, New York is your best option – there’s more networking, more opportunities, bigger deals, and you don’t even have to drive.
But if you have a more specific goal such as going into VC, joining a tech startup, or working in the oil & gas industry, you could make a good argument for starting out in a different city.
There may be slight differences in pay, hours, and how much you save in your first year (with bigger differences on that last one), but those don’t matter much in the long-term.
To figure out which office has the best deal flow, network with bankers and ask directly – that information changes quickly and you’re always better off going straight to the source.
And whatever else happens, make sure you don’t end up doing equities in Dallas.
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Planes, Trains and Capital Equipment: What You Do In the Industrials Group at an Investment Bank
One question I’ve gotten a lot over the years is what different groups at a bank do.
Yes, everyone knows that M&A is supposedly more technical than other areas, but what about other industry and product groups?
Here’s what it’s like, how it’s different from other groups, who does the work, and how you get recruited into these groups:
Q: I get a lot of questions on which group is “the best” and how modeling and technical work is split among industry groups and product groups (M&A, LevFin, etc.) at a bank.
What has your experience been so far? Do the product groups do most of the heavy lifting?
A: Generally the product groups, such as M&A and Leveraged Finance, are more modeling-oriented – but the analysts there also don’t get much of the industry exposure that you would get from being in a strong coverage group.
The three-statement model or standalone operating model is the standard model used in any industry coverage group, so you do get exposure to that.
Many people assume that more modeling is always better, but like anything else it’s a trade-off – for me, the “best” group is the one that gives the most well-rounded experience and lets me work with companies I’m interested in.
I like being in an industry group because I get to work on a wider range of deals, rather than just M&A or just debt offerings.
I’m also more interested in industrials than other groups – I prefer to read about railroads rather than semiconductors.
While the work itself in a technology group and an industrials group may not be that much different, I find myself far more interested in the latter.
Q: Is an industry group always “an industry group?” What determines how much marketing work (pitch books) you do vs. how much deal and advisory work you do?
A: That’s a good point – there are actually a couple group variations:
- Origination – These groups just do marketing and pitch for new clients, especially on financing assignments.
- Advisory – This is the traditional M&A work that banks are associated with.
- Coverage – In this group there are elements of both origination and advisory work, but you’re focused on a particular sector.
Since I’m in a coverage group I do both marketing and client work – I bring this up because a lot of people incorrectly assume that an industry group is 100% marketing and a product group like M&A is 100% deal execution.
That said, there is definitely an emphasis on knowing the sector in coverage groups.
Q: Right, so it sounds like “industry groups” should really be labeled “coverage groups” if we wanted to be more accurate.
What kinds of companies do you cover in industrials and how is the group divided into different sub-industries?
A: Most investment banks divide industrials into capital goods (machinery, equipment, anything used to produce other goods) and transportation (railroads, trucking, and so on) groups.
Sometimes there’s overlap with related groups such as natural resources and chemicals; for example, a metals and mining group might fall under industrials or it might be classified under natural resources.
One of the areas I work on is aerospace and defense, which is usually a sub-group within industrials (capital goods).
Q: What types of deals do you work on and how is the work divided between your group and product / other groups?
For example, let’s say you’re working on a sell-side M&A deal – who would be responsible for the buyer list, the Information / Offering Memorandum, model, management presentation, and final negotiations?
A: We get exposed to all types of deals, but my group is strongest in M&A advisory followed by high-yield debt; we don’t do many equity issuances.
There is also some restructuring, for example, in the airline industry – though that is more of a transportation sub-sector. Aerospace works with the parts manufacturers (ex: Precision Castparts, Spirit Aerosystems, etc..) instead.
The split between different types of work depends on the deal and who’s busy at the moment, but usually coverage analysts run operating models for clients because we’re more familiar with the industry.
The rest of the work and other models may go to the M&A team, with input from us – especially on industry-specific issues such as identifying appropriate buyers.
If I were working on a high-yield debt offering, I would still be responsible for the operating model but the Leveraged Finance team would come up with the optimal pro-forma cap structure and do the analysis on credit ratios and other debt-specific modeling (ex: pricing).
If the assignment were even more specialized – for example, a restructuring deal – then the restructuring team might manage the entire process with the coverage team helping with tasks like finding buyers and summarizing the state of the market.
Q: That makes sense – I think the division of labor is dependent on the bank as well, but those are some good guidelines for anyone who’s wondering about this.
Is there anything specific to valuation or deals with aerospace and defense companies that you don’t see elsewhere?
A: The mechanics of models are similar – a merger model is a merger model, after all – but there are specific metrics and drivers for aerospace and defense companies that you don’t see elsewhere.
For example, for airlines you use metrics like revenue passenger carried, revenue passenger miles, and available seat miles.
When you’re making projections for aerospace companies you use drivers like the order backlog, capacity utilization, and the airline sector’s overall health (N.B: measured in the number of planes in the air, or how many are kept parked).
Defense companies rely on government contracts – which have long lead times – and the defense budget, so you need to factor those into any models you create.
You also have to be up on the industry and the latest trends to figure out which specific areas within companies might have room for growth (e.g. persistent intelligence, surveillance, and reconnaissance) and which might see decreased spending (e.g. C-17 Globemaster).
I would highly recommend the equity research report “Deciphering Defense – An Industry Primer” by Ronald J. Epstein, Bank of America Merrill Lynch, September 2009 if you’re interested in learning more about the sector.
Another quality guide is this BoA-ML report on the Commercial Aerospace sector from April 2009.
A few further resources and example pitch books for the industry:
- Consolidated Engineering Services
- Aerospace & Defense – M&A Environment and Company Valuation
- Aerospace, Defense & Government Industry Overview
Lifestyle, Pay & Recruiting
Q: What’s your average day like? Do you work more, less, or the same as analysts in other groups?
A: Hours are comparable to other industry groups – in other words, long, and definitely longer than more markets-based groups such as ECM or sales & trading.
I’m not sure how it compares to M&A or other product groups, but once you get to a certain number of hours per week you can’t sense much of a difference.
I usually start each day by reading the news and looking for details of companies in my industry “exploring strategic alternatives” (banker-speak for “looking to buy or sell”).
I also pay attention to developments such as management changes, government contract awards, and inventions and patents within the set of companies I cover.
After that, it really depends on what’s going on at the moment – I might spend a lot of time on an operating model for a company if we’re working on a deal, or my day might consist of working with other groups and providing input on pitches or deals they’re working on.
Q: Right, that seems consistent with what you mentioned before about how coverage groups operate.
I also get a lot of questions on how bonuses compare in different groups. At the junior levels I would assume that most product and industry groups are very similar – is this accurate?
Q: Finally, how do you actually get placed in an industry group? Do they focus more on lateral hiring or recruiting straight out of universities / business schools?
A: Most of the time analysts are recruited directly from the undergraduate training pool (and associates from the MBA training pool).
Recently, with the market picking up, many firms have been hiring lateral analysts with experience in investment banking as well [N.B.: As of mid-2010].
Q: Great, thanks for your time.
A: No problem – enjoyed speaking.