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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Why Private Equity?
So you’ve made it through your first 6 months in banking alive. Your waist is bigger from all those tiramisu desserts, but luckily your bank account has gotten even fatter than your stomach.
And your bank account is set to get even fatter in the future – if you can successfully break into private equity.
Which is a problem – because the last thing PE guys want is a banker or consultant who wants to do PE simply because he/she hates banking or consulting or because everyone else doing it.
Why Does This Matter?
While PE firms want people who are technically proficient (one reason why consultants face a more difficult time getting in, at least in the US), fit is even more important than in banking because firms are an order of magnitude smaller.
Whereas the top banks have tens of thousands to hundreds of thousands of employees, the biggest PE firms in the world only have a few hundred – and there are thousands of PE firms with fewer than 10.
Unlike banks, private equity firms have no need to hire an army of analysts to do grunt work: they’re not creating pitch books and competing for sell-side, buy-side, and financing mandates all day, and if they’re understaffed they can say “no” to potential investments.
The interview process can also be much more of an extended affair in PE, with many firms below the mega-fund level conducting interviews over months rather than the days or weeks you see in banking (the mega-funds do it much more quickly).
As a result, fit is critical and if the Partners doubt your motivations for wanting to do PE, they won’t give you an offer.
What NOT to Say
As with some other interview questions, there’s a temptation to say something stupid in response to “Why private equity?”:
- “I don’t like the hours in banking, and I want a better lifestyle.”
- “You can make much more money in PE because you’re an investor rather than an advisor!”
- “Well… all my friends are doing it!”
- “I want to control companies rather than taking orders from my MD all day.”
I doubt you would say anything this bad in a real interview, but your actual answer may not be significantly better, either.
All the reasons above are bad answers, for different reasons:
- While the lifestyle may be a bit better at smaller firms, it’s still far from a 9-5 job. And at mega-funds it’s banking all over again.
- The pay is also not that much better, especially when you first start. Yes, Steve Schwarzman makes more than any MD in banking but he’s also the Co-Founder of the best-known and oldest PE firm in the world, with 30+ years of experience.
- If you want to become an investor, you want to demonstrate independent thought as opposed to following what all your friends are doing.
- You don’t “control” companies as an analyst or associate, you manipulate spreadsheets.
In short, any variant of “I don’t like my current job and PE would be better because [Insert Reason Here]” is bad because it’s too negative.
And anything where you sound like you expect to conquer the world and become a trillionaire also sounds bad because it shows that you don’t have a clue about how the industry works.
PE: The Promised Land? Fact and Fiction…
You might have had dreams of becoming a baller at KKR or Blackstone making $100 million per year, but you should pinch yourself and wake up since that will never happen.
I often group IB and PE together on this site because the work is not much different.
If you don’t like Excel, if you think EBITDA is boring, or if you have no interest in analyzing financial statements or reading about different companies, you should stop right now and do something more creative like advertising instead (I hear Don Draper is hiring…).
There are advantages and your role differs from what you do in banking, but if you fundamentally do not like analyzing and valuing companies, you’re going to hate it.
You do get more responsibility at certain firms, sometimes you’ll get to observe Boards of Directors and sit in on meetings, and you don’t get the stupid fix-the-printer-and-fetch-coffee tasks that you see in banking.
But please do not assume that it’s a night-and-day difference just because a bunch of 22-year old students in your finance club say it is.
Better Answers to “Why PE?”
To answer this question successfully, you need to avoid the clichés above and point out positive differences between PE and banking or between PE and whatever you’re moving in from (consulting, corporate development, etc.).
But you need to do that by highlighting what you’re looking for rather than what you don’t like about your current job.
Examples of solid reasons:
- You want to work with companies over the long-term instead of just on a single deal.
- You want to get exposed to the operations of companies and understand all aspects rather than just the financial ones (note: “exposed to,” not “control” or “improve”).
- You want to contribute to companies’ growth by looking at add-on acquisitions and other expansion opportunities that only an investor would be able to execute.
- You see yourself as an investor in the long-term, and want to learn all aspects of the process and how to evaluate whether a company can deliver solid returns.
It’s not “wrong” to make a direct comparison between PE and other fields (see the first 2 reasons) but you always want to downplay the negative part.
Ideally, you’ll tie the investments a PE firm makes to what you’ve done previously in school or work:
- The engineer-turned-banker has a much better story to tell if he recruits for a tech PE firm or growth equity firm and explains how he’s interested in applying his knowledge of IT and finance to investing in IT companies.
- If you’ve worked in Restructuring or Distressed M&A, you have a much better story if you recruit for a firm that specializes in turnarounds or distressed investments.
- If you’ve done consulting for restaurants or food chains, you’ll have a much better story to tell when you recruit for a PE firm that specializes in those types of investments, or even in the consumer sector as a whole.
- If you’ve done corporate development at a media or broadcasting company, you’ll have a much better story to tell when you interview with Bono at Elevation Partners.
The exact reasons depend on your background and where you’ve worked before, but you should combine these points – industry / company / deal focus + investing and working with companies in the long-term – to frame your answer:
- The banker would talk about how he wants to work with companies over the long-term and learn how to assess whether they can deliver solid returns so that he can become an investor in the future.
- The consultant would talk about how he wants to learn both the financial and the operational aspects of companies, and how he wants to be involved with decisions that a company implements rather than just recommendations.
- The corporate development guy/girl would talk about how he/she wants the opportunity to work with all different types of companies in the market rather than just one.
It’s not rocket science: highlight the positive differences between PE and your current field and why you’re interested in pursuing them as you transition into becoming an investor yourself.
If you’re coming from a banking or consulting background, you may get questions about PE vs. other exit opportunities:
Why PE Over VC?
If the PE firm you’re interviewing with asks you this one, say that VC is too far in the operational direction for you, and how you feel it’s more about predicting the next Google/Facebook/Zynga than analytical reasoning.
You prefer PE because it’s a blend of both operations and finance and because you can help Founders with well-established businesses make them even better via solid analysis and research rather than just guesswork.
And, of course, if you’re interviewing for VC you want to take the opposite position and say that PE is all about financial engineering with little value-add and that you can truly help early-stage companies take off because they’re more in need of help than established ones.
Why PE Over Hedge Funds?
This one is harder to answer because there are so many types of hedge funds and the strategies used and the fund sizes can make for completely different experiences.
But the main difference between most hedge funds and most PE firms is that in PE you invest in entire companies (at least, in developed markets) whereas at hedge funds you make much smaller investments and it’s often closer to trading.
You prefer PE because you want to understand how entire businesses work – at a hedge fund you would only get the financial aspect and your skill set would be more limited.
Why PE Over Corporate Development?
This one also has a more subtle distinction: the main difference is that in PE you look at all sorts of different investment opportunities and companies, whereas in corporate development the scope is more limited and you’re always looking at deals and partnerships for your own company.
So that’s exactly what you say in your answer: you want to gain a broader horizon and work in industries and sub-industries outside your own.
You’re more likely to get this type of question if you’re already in a corporate development role and you’re moving into PE – as a banker or consultant it’s not terribly likely unless you say you’re also interviewing for corporate development jobs (um, don’t do that).
Is Any of This True?
For all these “Why PE” examples I’ve been referencing the mix of operational and financial work and working with companies over the long-haul – so you might rightfully wonder if any of that is true.
It’s somewhere in between: some firms do focus more on add-on acquisitions and operational improvements, whereas others really are just about financial engineering and using as much debt as possible to boost returns.
Even if the firm you’re interviewing with is more focused on finance, though, you will still learn more about operations because you do a ton of due diligence before you actually invest (in banking you mostly just send these documents to other parties).
Unless you start or work at a real company, you’ll never learn the ins and outs of how it “really” works, but you will at least learn more than you would as a banker – so it’s more true than the bad “Why PE?” answers in the beginning.
Hopefully not because you have delusions of grandeur and you’re planning out which beach in Thailand you’ll buy with your first $10 million.
Focus on the positive differences, link your reasons to your background and long-term goals (just like with the “Why investment banking?” question), and don’t fall prey to any of the bad answers about pay or lifestyle.
For Further Reading
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Investment Banking Fairness Opinions: Profitable and Prestigious, or Glamorless Gruntwork?
“Morgan Stanley is acting as financial advisor to the buyer and Credit Suisse is acting as financial advisor to the seller, with the fairness opinion provided by Houlihan Lokey.”
So we’ve been over this “financial advisor to the buyer and seller” stuff before, but what about that fairness opinion bit?
You always see sentences like the one above at the bottom of deal announcement press releases – so what is this mysterious “fairness opinion,” why does it matter, and what should you do when your VP calls you at 2 AM and asks you to help out with one?
What are Fairness Opinions and Why Do Banks “Provide” Them?
A “Fairness Opinion” is just a detailed valuation of a company that’s being sold (if you’re representing the seller) or a valuation of the company that your client is buying.
Right before a deal is announced, the bank that prepares the Opinion presents it to the Board of Directors and concludes whether or not the deal is “fair” based on the purchase price and deal structure.
As you might guess, banks never say a deal is “unfair” – the Opinion is just a rubber stamp to justify the deal to investors.
While they’re not technically required by law, Fairness Opinions almost always get issued for deals that involve the sale of public companies due to lawsuits: no matter how much a company sells for, someone is bound to sue them.
Even if the company is worth $100 million and it gets sold for $1 billion, some random shareholder with too much time on his hands will argue that it should have been sold for $10 billion and will start a class-action lawsuit.
The bank’s Fairness Opinion is filed along with all the other documents related to the transaction (the definitive agreement that includes the terms of the acquisition, for example), and serves as evidence when lawsuits start arriving.
Why Should You Care About This Legal Nonsense?
Bankers have no love for lawyers, but you need to know what Fairness Opinions are and how they work because:
- The deals you work on determine your exit opportunities, your ranking and bonus, and how much you learn.
- You will be asked to work on or help out with Fairness Opinions from time to time, so you need to know whether to say “yes” or to claim you have other urgent deadlines.
- Some banks and groups do more Fairness Opinion work than others – you need to understand this upfront because it affects which bank and group you select.
When Do Companies Request Fairness Opinions?
99% of the time they get issued when there’s a public company being sold – you do not do Fairness Opinions for equity or debt deals, so if you’re in an ECM, DCM, or Leveraged Finance group you won’t deal with them.
If you work with mostly private companies, you also won’t see Fairness Opinions because private companies have far fewer shareholders (well, except for Facebook and its clever skirting around the rules) and are often closely held by the founders or VC/PE investors.
Fairness Opinions might also be issued when:
- There’s a management buyout or take-private (a PE firm acquires the company via a leveraged buyout and turns it private).
- A public company divests one of its divisions.
- There’s a bankruptcy, liquidation, restructuring scenario (less common).
- There’s a hostile takeover – in this case it would be called an “inadequacy opinion” instead and would be used to defend the target by claiming that the offer is not fair.
In short: whenever there’s a high chance of getting sued, companies request these Opinions and use them to defend themselves in lawsuits.
Outside the US, Fairness Opinions are common in some countries (Western Europe) and not common in other places (emerging markets). Whether or not they’re required depends on the legal system in the country, but you almost always see them for public company transactions in developed markets.
How to Issue a Fairness Opinion, Part 1: Before the Deal Comes Together
M&A deals come together in different ways: sometimes the company itself wants to sell, other times investors are getting impatient and force them to sell (Zappos), and sometimes a buyer jumps in with an attractive offer and starts a bidding war (YouTube).
If it’s the last case, where a buyer swoops in with an offer to buy the company, no one thinks about the Fairness Opinion until that point.
But if it’s one of the other scenarios, then the seller may hire an investment bank to find a buyer. If they do this, in the initial contract they might also give the bank the right to issue a Fairness Opinion in addition to advising on the deal process.
You see that sometimes, but many times the “financial advisor” bank and the “Fairness Opinion” bank are different.
The same bank advising a company on its sale and also saying whether or not the deal they get is “fair” is hardly objective – so executives and regulators believe that having a different bank issue the Opinion is more “impartial.”
If a different bank is providing the Fairness Opinion, they are not notified until the deal is about to be announced – doing so any sooner than that would create unnecessary work because M&A deals often fall apart in the early stages.
How to Issue a Fairness Opinion, Part 2: Just Before the Deal is Announced
Now comes the fun part. A couple factors make the actual construction of the Fairness Opinion especially painful:
- You are under extreme time pressure – you get a few days, and sometimes up to a week or a bit longer. This happens because the process is last-minute and occurs only when everyone is 99% sure the deal is going through.
- You must be excruciatingly precise – this is where bankers’ reputation for “attention to detail” comes from. This valuation could be used as evidence in lawsuits, so if you’ve added back the incorrect amortization amount when calculating EBITDA, you might be thrown into a snake pit.
Normally when you value a company you don’t have to be super-precise: bankers ask for quick valuations all the time, and if you spent hours going through a company’s SEC filings (or equivalent government organization abroad) you would never get anything done.
So you pull a lot of information automatically using tools like Capital IQ and Factset and rely on their numbers.
But when you’re working on a Fairness Opinion you can’t do that – rather than just pulling the LTM (Last Twelve Months) EBITDA from Capital IQ, for example, you have to look at a company’s income statements and cash flow statements (for the correct non-cash charge numbers) to calculate it.
And then you would have to look through the Notes to the Financial Statements and the MD&A to find all the non-recurring charges and other accounting shenanigans that you need to remove.
Another analyst will also check your numbers, your associate will check them, and even the VP may get involved depending on the deal.
To make things even more fun, this entire process will be a last-minute effort that requires all-nighters over the few days you get to complete it.
Oh yeah, and then the deal announcement itself is often delayed – so you need to monitor the seller and all the other companies you’ve used in your analysis and update the numbers when someone announces earnings, issues debt or equity, or does anything else that affects its numbers.
When you finish the Opinion and everyone has checked it over 52 times, you then present it to the Fairness Opinion Committee at your bank and explain all the numbers to them – if they see something they don’t like, you get to re-do that part.
And then when you finally get their approval, the senior bankers working on the deal will present it to the Board of Directors of the company and sign off on the decision.
Sometimes they actually present it to the company’s Special Committee – if one was formed for the deal – but usually it’s to the Board.
Internationally the entire process may be a little less painful, but it depends on your group and the country you’re in – in London, for example, there’s no difference and you will still spend hours poring over filings and adjusting for capitalized leases, pensions, and other trickery.
Why Do Banks Provide This Service?
Simple: it’s easy money and easy prestige for banks, especially for the senior bankers that don’t have to suffer through ultra-precision.
Fees paid to banks in a sell-side M&A deal are a percentage of the sale price (the equity value of the deal, not the enterprise value), and that percentage scales down as the size of the deal increases.
For a $500 million deal, the bank might negotiate a 1% fee and therefore earn $5 million if the deal closes. For a $5 billion deal, it might be 0.2% or 0.3%, for $10-$15 million. For deals in the $50 billion range – very rare – the fee might be around $50 million (0.1%).
With a Fairness Opinion a bank earns a much lower fee – it might be in the hundreds of thousands for smaller deals up to the low millions for larger deals – but it earns that fee with far less time and effort.
Let’s say that a bank is advising a company on a $50 billion deal – something that large would take years to put together (unless we’re in the late 90’s and it’s happening all the time), and they might earn a $50 million fee on the actual advisory work if the deal closes.
The bank that issues the Fairness Opinion might earn a few million – let’s call it $5 million – but it earns that fee with 1/100th the amount of time and effort that the financial advisor put in.
The other, really important point is that the bank earns that fee even if the deal gets announced but does not close – it’s not like M&A advisory fees where they only get paid out when the deal closes.
So a bank could make tens of millions of dollars by issuing Fairness Opinions for deals that never close.
The thinking here is that paying banks upon completion of the Opinion rather than when the deal closes makes them “less biased,” but it had the unintended consequence of making FOs extremely lucrative for risk-averse bankers as well.
In addition, the bank receives league table credit for issuing a Fairness Opinion – so a bank that issues 50 Fairness Opinions but doesn’t advise on any deals would look as good as a bank that has advised on 50 real deals, at least according to a table that ranks banks by # of deals.
If you look at a table that ranks banks by fees earned instead, the Fairness Opinion-centric bank won’t look as good – but you can bet they won’t be showing that version of the table in their pitch books.
Often Fairness Opinions are given to banks as “favors” for work done in the past.
A company might go with a bulge bracket bank for the M&A advisory work for political reasons, but the CEO might know a senior banker at a boutique and might have worked with them in the past – in this scenario the company might give the Fairness Opinion assignment to that boutique as a favor for their past relationship.
The boutique will still feel as if its toes have been stepped on, but the pain won’t be quite as acute if they can make at least some money off the deal anyway.
What Banks and Groups are Known for Fairness Opinions?
No, I’m still never going to rank the banks, so please go away right now if you’re expecting that.
But some banks and groups – for better or worse – are known for Fairness Opinions.
Houlihan Lokey is consistently ranked #1 in Fairness Opinion market share, beating even the bulge bracket banks and elite boutiques.
At HLHZ, the Financial Advisory Services (FAS) group does all the Fairness Opinion work and the other groups don’t touch them. And yes, the FAS group provides other services like solvency opinions, purchase price allocations, and more technical accounting-esque work as well.
Other banks – from bulge bracket to elite boutique (Perella Weinberg is also well-known for FOs) to middle-market – also do Fairness Opinions but no one else dominates the space as HLHZ does.
Groups such as ECM, DCM, and Leveraged Finance do not work on Fairness Opinions because they’re not required for debt or equity deals – so you only have to worry about them if you’re in an M&A, Restructuring, or industry group.
Of those, industry groups are the most likely to work on Fairness Opinions, although you may get asked to help out even if you’re in another group.
Outside of investment banks, some Big 4 firms also do Fairness Opinion work and dedicated valuation boutiques also issue Opinions from time to time.
Take Me to the Examples
Finding actual Fairness Opinions is not the easiest thing in the world, so here are links to good examples. Some of these are quite old, but corporate valuation barely changes over time so they are equally valid today:
- Credit Suisse – Fairness Opinion for LBO of SunGard Data Systems
- JP Morgan – Fairness Opinion for Merck / Schering-Plough Merger (Note the P/E, EBIT, and EBITDA multiples – see, nothing special for healthcare…)
- Perella Weinberg – Fairness Opinion for TPG’s $3B Buyout of J.Crew
You’ll see the usual valuation analyses there: public company comparables, precedent transactions, premiums, DCF, future share price, and so on.
Even if you have no interest in Fairness Opinions, I strongly recommend looking at those examples because they show you exactly how banks value companies in the real world, common multiples, and other questions you’ll get in interviews.
Sometimes Fairness Opinions also include mergers models and LBO models – merger models are more common on deals where it’s more of a merger as opposed to a behemoth acquiring a much smaller company, while LBO models are more common for LBO deals.
You do not include a detailed 3-statement model for the seller, nor do you show all the supporting work that went into the numbers – only the output matters.
If you want to find more examples yourself, you can search for S-4 or DEF 14A (proxy) forms on the SEC EDGAR site; for countries outside the US you will have to go to the company’s website directly and hope they have it there, or go through whatever online database has securities filings in your country.
So, Should You Work On Fairness Opinions?
I am not a huge fan of Fairness Opinions because they represent the worst parts of banking – last-minute all-nighters and combing through filings to make small tweaks to numbers that don’t make a difference in the final analysis.
It’s good to get exposed to a Fairness Opinion at least once, but similar to climbing Mt. Fuji or going ice swimming, you don’t want to get exposed repeatedly – especially at the expense of real deals.
Yes, it’s good to learn how to find all the hidden charges and shady tactics a company is using but 99% of the time they don’t make a difference in your final analysis – and on the buy-side you rarely go into such detail unless you’re about to close an investment and you’re in the final stages of due diligence.
So if your VP or staffer waltzes in and asks if you have any “bandwidth” to help out with a Fairness Opinion, cite an urgent deadline and say that you might be able to check some of it, but can’t do it all yourself because of [Important Client-Related Item] that’s due in 2 days.
And if you’re out of excuses, suck it up and do it – but make sure that you hand it off to the 1st years or interns next time around.
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