Bottles and Bottles? How You Really Win Clients and Land Mega-Deals as an Investment Banker
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Why does the mainstream media hate Wall Street so much?
You can think of dozens of reasons, but one of the biggest is that they don’t understand what bankers really do to earn their fees.
They see news of million-dollar bonuses and assume that financiers earn those bonuses by sitting around and playing Monopoly.
But you don’t earn massive fees by playing board games all day – it’s a process that takes years, which is one reason why bankers make the money they do.
And the infamous “pitch” has very little to do with it.
It’s All About the Pitch, Right?
The most common, wrong suggestion I’ve seen before is that “Bankers win clients by pitching them.”
But that’s like saying that you got into Harvard or Oxford by submitting a really good application – technically true, but not the full story.
Yes, the application is critical and if your essays suck, you’re screwed – but you got into a top school because you spent years developing the skills and experiences to do so, and you then presented them in the best possible light.
It’s the same with winning clients as a banker: your pitch needs to be on-point for you to win the deal, but the process of putting yourself in the position to pitch for the deal starts long before that.
What Really Happens
As you move up from Associate to VP and beyond, gradually you’re tasked with more and more sourcing work: finding potential clients, getting to know them, and then pitching for a deal when the time is right.
Managing Directors spend almost no time on deal execution – unless it’s a massive transaction that requires their involvement – and instead spend most of their time on finding new clients and serving existing ones.
If you already work with a company on all their M&A deals and your bank has been advising them for the past 20 years, you’ll probably continue to do so in the future.
Like legacy admissions in university or Roger Sterling and Lucky Strike, it’s a good bet that you’ll receive the benefit of all that history unless you make a colossal screw-up.
So it’s more interesting to look at how you find new clients – companies your bank has never worked with before.
This entire process is more applicable to smaller firms than to bulge bracket banks, because there the “legacy” factor is high and you mostly work with huge companies that everyone already knows about.
But even at huge firms, you still need to find new clients because existing companies get acquired, merge, and go out of business all the time.
Lead Generation
In sales, a “lead” is just a potential customer – someone who might sign up for the products or services you’re offering.
It’s the same idea in banking, but since your leads are fewer in number and are worth much more, some strategies don’t work so well.
What Doesn’t Work
Strategies like online marketing (paying for ads on websites, Google, Facebook, etc.), TV/radio/direct mail advertising, and posting flyers would never work.
It may sound silly to even point this out, but I’ve actually seen some banks use Google AdWords to market themselves to clients and I have no idea why they bother.
All these methods are too impersonal – it’s like walking into Armani and having a robot display a list of recommended clothes for you rather than having a real live person greet you, chat for a while, find out what you’re looking for, and then suggest something good.
When the number of clients is low and the per-client value is high, you need to get very personal to make deals happen.
PE / VC / HF Referrals
One way to do this is to go through your friends on the buy-side, see what portfolio companies they have, what sectors they’re interested in, and who else they’ve been speaking with lately.
Let’s say you’re an MD who has worked with a private equity firm for 10+ years. At your next catch-up meeting with them, you might casually ask how their portfolio companies are doing (translation: are any of these companies ready to sell, refinance debt, or go public?).
If the PE Partner likes you and wants to give you business, he might refer you to the CEO or CFO and say, “Hey portfolio company, this banker’s good – you should get to know him.”
Or if a deal is imminent, he might tell you directly: “They’re going public next year, and the pitch is coming up next month – we’ll be sure to include you.”
In tech and healthcare groups, venture capitalists are arguably more important and bankers get referrals to startups via VCs.
Cold-Calling/Emailing
Just like with your own networking efforts, cold-calling is less effective than meeting in-person first or getting referrals – but sometimes it works.
You’re far more likely to see cold-calling at smaller banks where you have to fight for every deal - and if you’re a summer analyst there you might get tasked with poring through lists of companies and finding contact information.
Cold-calling is also more common at small and middle-market private equity firms, some of which are notorious for making their newly hired associates cold-call companies all day long.
Conferences
Bankers also spend a lot of time on the conference circuit, meeting with executives at events (CES, Davos, etc.).
These are like information sessions: if you can stand out from everyone else and then follow-up appropriately, your chances of success go way up.
The real action at conferences happens offstage, so bankers skip keynotes and panels and schedule as many 1-on-1 meetings as possible during the day.
Inbound
Wouldn’t it be nice if banks just called you when they wanted to hire someone?
When companies want to sell or raise capital, they sometimes contact banks directly – this scenario is much more likely when a lesser-known company wants to work with a bulge bracket bank and has no other way to get on their radar.
Sometimes investors also contact bankers directly and provide the introduction, especially if they’re pressuring the company to sell so they can realize their returns.
Wining & Dining: Building the Relationship
Once you’ve contacted or been contacted by the executives at this potential client, you need to build the relationship.
If it’s an inbound contact and they urgently need to sell or raise capital, you won’t do this and you may be asked to pitch for the business right away.
But if the deal is further off in the future, you need to take time to build trust and convince the CEO that you’re not just another Gordon Gekko or Patrick Bateman character waiting in the shadows to decapitate him and steal all his money.
You do that by:
- Coming up with acquisition ideas and meeting with the executives to discuss what areas they might want to expand into.
- Giving market updates to the executives and telling them what’s going on in the M&A or capital markets.
- Meeting casually for lunch or dinner to catch up on what the company has been doing and their future plans.
- Being “on call” to answer whatever questions they have, whenever they have them.
The tricky part is that you don’t get paid for any of this – and the entire process could take years before you see any revenue.
Sure, making $10 million on a single deal sounds great – but if it takes 10 years of relationship building to get there, the NPV is much lower than $10 million.
This is the slowest and most extended part of the “client-winning” process, and if you’re not interested in relationships, this is where you’ll fail.
But if you like meeting and greeting and can’t stand Excel, then you might make a great MD – even if you’re a lousy analyst.
Deal Time
How does a company decide when it should sell, buy another company, go public, or raise capital?
Sometimes it’s forced to sell by investors who want to realize their returns (Amazon / Zappos) – going back to our theme of NPV, the longer an investment stays unrealized, the harder it is to get solid returns.
Other times the executives reach the decision themselves – the CFO looks at their cash flow projections and realizes their burn rate is too high, so they decide to raise debt or equity.
And still other times, bankers “plant” the idea in the CEO’s mind.
While you don’t have to plant this idea in a dream within a dream within a dream within a dream, you do have to be subtle about it – going out and blatantly pitching an LBO won’t work even if you really want a PE firm to buy the company you’re speaking with.
Instead, bankers are more likely to make casual references to private equity firms and leveraged buyouts elsewhere in the market when they meet with the company to discuss other topics.
Over time, if the CEO and Board buy into the idea or show interest, the bankers keep selling them on it and gradually start to reveal more and more information.
The best bankers – the true rain-makers – are the ones who are best at “selling” the company on a transaction, even if the management team had no interest initially.
Regardless of whether the idea was planted or original, once the company decides it’s ready to sell or raise capital, it then pits bankers against each other in a bake-off.
The Pitch
Sometimes if a company has a special relationship with just 1 banker and has never spoken to others, it will skip the pitch and give the business to that banker.
But that’s more common at private and smaller companies where there’s not as much oversight from the Board of Directors – at anything bigger the Board usually requires the management team to solicit competitive offers.
At this point they would contact all the bankers they’ve gotten to know over the years and tell them what they’re planning, send over relevant financial information, and invite them to pitch for the deal.
The number of banks invited depends on the deal type – IPOs have many banks, whereas in M&A deals there’s just 1 or 2 advising the buyer and seller – and whether or not the company wants to stick with the bankers it knows best or go for a broader set.
Who Wins the Deal?
This must come down to whether or not you’ve dotted all the i’s and crossed all the t’s in your pitch book, right? And whether or not you remembered to change the font size on every single page, right?
Nope – most of the time the pitch book itself is irrelevant to winning the deal, even if you pulled 4 all-nighters to create it.
What matters is how much the company likes the senior bankers, what the senior bankers say, and how they say it – and what they say compared to the other bankers pitching for the deal.
Let’s say you go in and claim that the company is worth $500 million and that you can complete the sale process in 6 months. Then another banker goes in and says the company is worth $400 million and that the sale process will take 12 months.
You might assume that you’ll win since your claims are more aggressive and will result in a better price for investors – and sometimes that’s true.
But the CEO and other Board members/executives could also look at your pitch and think that your numbers are unrealistic and that you’re not being honest – especially if everyone else there is predicting lower valuations.
So you need to use a careful blend of salesmanship and pragmatism to win deals.
After the Pitch
There may be a clear “winner,” but more often than not, the company will follow up with multiple banks to see what the fee structures are like and what their recommendations are in more detail.
For smaller companies and deals, the fees make a bigger difference and sometimes a bank will win the deal by promising lower fees or a structure that rewards them for better results (e.g. 0.75% under $500 million and 1.5% for the amount above $500 million).
Most of the time, though, it comes down to all of the above factors and the company considers everything when making a decision.
This is not a rational or logical process – just like selecting which applicants will receive interviews, it’s random and fraught with emotion.
If you think executives are rational just because hundreds of millions or billions of dollars are involved, nothing could be further from the truth – sometimes the more money that’s involved, the less rational the deal (AOL / Time Warner).
Sample Timeline
Putting everything together, here’s an example of how you, after you become a Managing Director, might meet a CEO, develop the relationship, and then pitch for the deal:
5 years ago you were having a catch-up meeting with a local VC and he mentioned that a tech startup in their portfolio was hot and would change the world of online media.
He gave you an introduction, so you met with the CEO, learned about his vision for the business, and got an idea of the company’s financial performance.
A year later, you caught up with the CEO once again and gave him an update on the capital markets and what IPOs were pricing at. The company was not yet cash flow-positive, but they had killer revenue growth.
The next year (3 years ago), the IPO markets were closed but the CEO wanted to use his stock to acquire smaller competitors – so you ran a buy-side M&A process for him over the course of 6 months. It never went anywhere since they couldn’t find anything good and got distracted by other issues.
Then, 2 years ago, the company finally turned cash flow-positive and started thinking about an IPO, which they told you about during your quarterly meeting with them.
You made your analyst monkey stay awake for 60 hours straight to prepare a 200-page pitch book laying out all the nuances, but then the CEO decided to hold off until the market got better.
Finally, a few weeks ago the CEO contacted you again just before another meeting and said that they are now serious about selling and want to hear your thoughts – so he invited you in to pitch for the deal.
Got Risk?
Not only did this process take 5 years, but there’s no guarantee that this planned sell-side M&A deal will even happen – or that the mandate will go to your bank.
Maybe no one will be interested; maybe the CEO will change his mind yet again; or maybe investors will pressure them to go public instead.
And you ran a failed buy-side M&A process for them a few years ago.
This is why investment banking is such a tough business: you could do everything right for 5 years and still lose the deal because your fees are 0.1% too expensive, or because the CEO gets emotional and happens to like an unknown banker more.
Wait, This Sounds Boring!
One time I was explaining this process to a friend who was still in university and he said, “Wow that sounds boring – I’d rather do modeling and analytical work.”
If your IQ is higher than your EQ, it may not sound too appealing to develop relationships like this and constantly pitch for new business.
But as Jonathan Knee points out in The Accidental Investment Banker (highly recommended), all deals start to look the same after a while.
You learn a lot at first and valuing and modeling companies seems exciting when you’re new, but they become routine and boring once you’ve done them 500 times.
We’re more interested in stories and inter-personal drama than we are in staring at Excel all day – so even if the process above doesn’t sound interesting right now, you may change your mind in a few years.
You might assume that you should move to the buy-side if you’re not interested in any of this, but that’s only partially true – in PE and VC you still do a lot of relationship-building, meeting with new companies, and so on.
So if it’s really not your cup of tea, think about hedge funds or trading – where you can make bank without talking to people or leaving your 8 computer screens.
Tags: bulge bracket, clients, cold-calling, hedge funds, investment banker, investment banking relationships, IPOs, leveraged buyouts, M&A deals, Managing Directors, middle-market, pitch books, private equity firms, venture capital
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3.18.2011
Mergers & Inquisitions || Bottles and Bottles? How You Really Win Clients and Land Mega-Deals as an Investment Banker
8.18.2010
Malta continues to grow market share in ucits hedge funds - Hedge Funds Review
Malta is considered the newcomer to Ucits hedge funds, although the country’s service providers were well acquainted with the products before EU membership in 2004. Joining up gave Malta’s financial services industry a stamp of approval. This also meant Ucits funds could be passported to other EU member states.Malta implemented the Ucits III regime immediately on accession. Malta’s choice as a domicile for a Ucits hedge fund is usually based on several factors including the efficiency and flexibility of the Malta Financial Services Authority (MFSA), quality support services available in the jurisdiction, relatively low set-up and maintenance costs and an exemption from income tax and capital gains tax at fund level and at non-resident investor level, irrespective of the legal form adopted. There is a possibility to set up self-managed funds and fund managers may be established as a Maltese company which allows tax refunds on distribution of dividends. Finally Malta, like other jurisdictions, offers the possibility to redomicile a fund from elsewhere relatively easily. A fund can migrate to Malta without having to be wound up, subject to certain relatively straightforward conditions.
Since EU accession Malta has also built up its hedge funds business. Dermot Butler at Custom House Global Fund Services, the Malta-based parent company of Custom House Group of Companies, says the jurisdiction is basically in the same place Ireland was 15-20 years ago when it first started its funds business. Then people said Ireland had little chance of challenging Luxembourg, remembers Butler, but Ireland went after the alternative sides and built up what has become the leading jurisdiction for fund administration of hedge funds and other alternatives products.
Malta has built up its hedge fund business primarily by attracting the smaller start-ups and emerging managers. The attraction is not just price, although some aspects of Malta’s offering may be cost competitive compared with Ireland and Luxembourg. One of its main selling points, if not the key one, is the regulator. The MFSA has a reputation for having the time to listen to ideas from managers thinking of setting up a fund structure in Malta. It is universally acclaimed to be open and approachable, flexible yet firm. This is a regulator, say those operating in Malta, that takes a sensible no--nonsense approach to regulation.
When applied to Ucits, MFSA is seen as keen to adhere to the spirit as well as the letter of the law. This is important. Some regulators in the EU, say many in Malta, tend to bend the rules in order to allow hedge fund strategies to use a Ucits wrapper even though there is more than a question mark about their suitability as a Ucits product.
The MFSA is still flexible in discussing terms with funds looking to set up a Ucits structure. However, it will seek “comfort” from other regulators or informally consult the committee of European securities regulators (Cesr) if it has questions over the suitability of the structure. “The MFSA is not afraid of referring or consulting. It doesn’t just approve a fund and let the operator face the music,” says Andre Zerafa, a partner at Ganado & Associates.
If there is any doubt that another regulator might not agree with the interpretation of Ucits being used, Zerafa believes there is an obligation to ensure other regulators in the EU will accept the structure. Otherwise, points out Zerafa, a fund could find it is rejected in another jurisdiction and that could cause problems. “The regulator should ensure that if a fund is given a licence it can be passported without any problem,” he says. There have been cases of a jurisdiction giving the green light to a suspect structure only to have other jurisdictions reject it.
Some like Zerafa wonder whether Ucits is a structure suitable for the majority of hedge funds. “Most hedge fund mangers would find it difficult to convert their hedge funds into Ucits hedge funds. It imposes conditions and restrictions they are not used to. At the moment hedge funds are not used to restrictions on how they managing their portfolios. Opening a Ucits hedge fund is a bit like a sex change operation for them. It is not something they do lightly,” notes Zerafa.
Joseph Saliba at law firm MAMO TCV agrees: “There is a question of Ucits hedge funds. To us it is a strange animal.” He says that some hedge fund strategies clearly cannot be made to fit within Ucits: “Ucits hedge funds still need to be tested by the MFSA to ensure the promoter is following the directive’s rules and there are no hiccups.” He points out that the MFSA also is proactive in issuing guidelines and notes to explain its reasoning when implementing directives as well as Maltese regulations.
Zerafa thinks the reason funds are looking at Ucits products reflects the uncertainty over the alternative investment fund managers (AIFM) directive stuck in Brussels. Under Ucits there is at least some certainty, he admits, compared with the uncertainty of whether offshore funds or even onshore regulated funds like Malta’s professional investor funds (PIFs) will be allowed when AIFM finally hits the statute books. PIFs are not regulated as tightly as Ucits funds and are targeted at financially literate investors. Hedge funds, private equity funds and property funds are normally structured as PIFs. These funds can be set up as standard or self-managed schemes.
He points out that if AIFM allows funds that comply with the -directive to be passported across the EU, that could be a better alternative to Ucits, particularly if the fund can operate under a less restrictive regime.
Simon Tortell of Simon Tortell & Associates thinks under Ucits IV, Malta. like others, may find that a master/feeder structure becomes the norm, particularly for US-based hedge fund managers. Under this the master would remain Cayman or -Delaware--domiciled with a feeder fund that is Ucits compliant to allow easier access by European investors.
Tortell also thinks Malta will be well-placed to take advantage of other aspects of Ucits IV, particularly as the country has always allowed hedge funds to outsource services to other EU jurisdictions. This means, for example, that a management company set up under Ucits IV in Malta could keep its fund administration in Luxembourg or Ireland.
Something everyone agrees on in Malta is the lack of choice of custodian. Without a wider selection beyond the two main providers – local domestic Bank of Valletta and international HSBC – few believe Malta will be able to attract a large number of Ucits hedge funds or platforms offering a quick route to a Ucits structure.
While HSBC is recognised worldwide, Bank of Valletta is less well known. “It is a question of a chicken and egg situation,” explains Saliba. “In this case the first step is the custodian which is the chicken. You have them and the eggs, the Ucits funds, will follow.”
Negotiations with a number of global custodians are underway with Malta and many confidently expect at least small operations by a few of them to open before the end of the year. The idea would be to have a relatively small presence and gear up once the business comes in.
Ucits funds are the new black in the Hedge Fund universe. Malta is the the forgotten treasure of Europe, and it has Ucits too.