Frequently Asked Questions

Refers to the Big Three consulting firms McKinsey, Boston Consulting Group, and Bain.

SA = Summer Analyst
FT = Full-time Analyst

In the broadest sense, this is the division that is responsible for all possible investment banking practices. That could involve raising capital (debt or equity), mergers & acquisitions (M&A), restructuring, etc.

Private equity is a broad term that refers to any type of equity investment in an asset in which the equity is not freely tradable on a public stock market. Passive institutional investors may invest in private equity funds, which are in turn used by private equity firms for investment in target companies. Categories of private equity investment include leveraged buyout, venture capital, growth capital, angel investing, mezzanine capital and others. Private equity funds typically control management of the companies in which they invest, and often bring in new management teams that focus on making the company more valuable.

A hedge fund is a private investment fund charging a performance fee and typically open to only a limited number of investors, e.g., in the U.S., hedge funds are largely open to accredited investors only. Hedge Funds have grown in size and influence on the public securities and private investment markets.

Hedge Funds are not currently subject to any direct regulation by the SEC, the NASD, or other federal regulating commissions, unlike mutual funds, pension funds, and insurance companies. Some funds that trade commodity futures contracts are considered to be commodity pools, regulated by the Commodity Futures Trading Commission and National Futures Association.

The term is not tightly defined, but is used to distinguish such funds from retail investment funds, such as mutual funds that are available to the general public. Retail funds tend to be highly regulated, limited to holding a specific range of financial assets such as bonds, equities or money market instruments. Retail funds tend to have a restricted ability to borrow, leverage or hedge their investments, though they may have the ability to hedge via derivative contracts.

Hedge funds are limited only by the terms of the contracts governing the particular fund. Hedge funds may be either long or short assets and may enter into futures, swaps and other derivative contracts. In this way, hedge funds can follow more complex investment strategies.

The funds, often organized as limited partnerships, typically invest on behalf of high-net-worth individuals and institutions. Their primary objective is often to preserve investors' capital by taking positions whose returns are not closely correlated to those of the broader financial markets.

Because of the substantial risks involved in unregulated, complex, and leveraged investments, hedge funds are normally open only to professional, institutional or otherwise accredited investors. This restriction is often implemented through limits on participating investors or minimum investment amounts.

Venture capital is a type of private equity capital typically provided by outside investors for financing new, growing, or struggling businesses. Venture capital investments are generally high-risk investments but offer the potential for above-average returns and/or a percentage of ownership of the company. A venture capitalist (VC) is a person who makes such investments. A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans.

"Bulge Bracket" refers to the largest investment banks or the investment banks that compete for the largest deals. Although the exact list could be debated, here is a list of Investment Banks that are typically considered to be "Bulge Bracket": Goldman Sachs, Morgan Stanley, Bank of America Merrill Lynch, Barclays, Credit Suisse, Citigroup, Deutsche Bank, J. P. Morgan & Co., and UBS.

"Middle Market" can refer to Investment Banks that specialize in "middle market" deals or are hired by "middle market" companies ie, not your household, huge Fortune 500 companies, but the companies that make up the majority of the world's economy. The Middle Market is huge and the phrase "middle market" is often used to get across the point that the firm, Investment Bank or deal is not from a Bulge Bracket. Sometimes the companies that do middle market deals are called "Boutique" Banks or "middle market" banks.

Advising on Mergers & Acquisitions or "M&A" is one of the services that Investment Banks typically offer. They can be on the Sell-side, where they are hired by Company X to help sell the Company X (or a part of it) on behalf of the shareholders or, they can be hired on the "Buy-side" to help advise Company Y on buying another company or division. The almighty motives behind doing M&A: Economies of scale, Increased revenue/Increased Market Share, Cross selling, Synergies, Tax-benefits, Geographical or other diversification.

A Leveraged Buyout is one type of transaction that is typically use by Private Equity funds (or "Financial Sponsors"). A leveraged buyout is a strategy involving the acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans, in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital. In an LBO, there is usually a ratio of 70% debt to 30% equity, although debt can reach as high as 90% to 95% of the target company's total capitalization. The equity component of the purchase price is typically provided by a pool of private equity capital.

Typically, the loan capital is borrowed through a combination of prepayable bank facilities and/or public or privately placed bonds, which may be classified as high-yield debt, also called junk bonds. Often, the debt will appear on the acquired company's balance sheet and the acquired company's free cash flow will be used to repay the debt.

An investment banking practice that focuses on firms in the general financial services space. Typically firms divide up into i) insurance, ii) banking, iii) specialty finance, iv) financial technology. Some firms only practice in this area (ex: Sandler O'Neil, Keefe Bruyette Woods, etc). The valuation approaches are different from non-FIG because FIG companies are valued through equity multiples. The balance sheets are built differently as are the firm's operations (ex: banks rely on interest income and rely on the yield spread as their chief revenue driver).

Latest league table (SNL Financial):
http://www.snl.com/press/20070117.asp

The group in an Investment Bank that specialize in Telecommunications, Media and Technology transactions

In finance, leverage (or gearing) is using given resources in such a way that the potential positive or negative outcome is magnified. It generally refers to borrowing.

LevFin or the Sponsors Group refers to the division that is often dealing with Private Equity funds or other Financial Sponsors that often structure leveraged transactions.

Division within the Investment Bank that helps raise debt capital.

Debt capital is raised in many ways; from unsecured, high-yield, subordinated debt, to bank debt (which often has some sort of collateral)

Division within the Investment Bank that helps raise equity capital.

Equity Capital Markets Equity capital is raised in many ways; the major types of equity capital are unlisted equity, listed equity and hybrids. Equity capital market practices traditionally advise in a full range of equity, debt equity-linked, hybrid, asset-backed, credit-linked and derivative products that are offered in capital markets.

An initial public offering (IPO) is the first sale of a corporation's common shares to investors on a public stock exchange. The main purpose of an IPO is to raise capital for the corporation. While IPOs are effective at raising capital, they also impose heavy regulatory compliance and reporting requirements. The term only refers to the first public issuance of a company's shares; any later public issuance of shares is referred to as a secondary market offering or a rights issue. A shareholder selling his existing shares (rather than shares newly issued to raise capital) on the Primary Market is an offer for sale, but if the company is being newly listed this is still considered to fall under the "IPO" umbrella.

The discounted cash flow (or DCF) approach describes a method to value a project or an entire company using the concepts of the time value of money. The DCF methods determine the present value of future cash flows by discounting them using the appropriate cost of capital. This is necessary because cash flows in different time periods cannot be directly compared since most people prefer money sooner rather than later (put simply: a dollar in your hand today is worth more than a dollar you may receive at some point in the future). The same logic applies to the difference between certain cash flows and uncertain ones, or "a bird in the hand is worth two in the bush". This is due to opportunity cost and risk over time.

DCF procedure involves three problems

- the forecast of future cash flows,
- the incorporation of taxes (firm income taxes as well as personal income taxes),
- the determination of the appropriate cost of capital (see WACC).

Discounted cash flow analysis is widely used in investment finance, real estate development, and corporate financial management.

A method for determining the current value of a company by using a sample of ratios from comparable peer groups (either from publicly traded comparables = "Trading Comps" or transactions for companies that are similar = "Transaction Comps").

The specific ratio to be used depends on the objective of the valuation. The valuation could be designed to estimate the value of the operation of the business or the value of the equity of the business.

When calculating the value of the operation the most commonly used ratio is the EBITDA multiple, which is the ratio of EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) to the Enterprise Value (Equity Value plus Net Debt). When valuing the equity of a company, the most widely used multiple is the Price Earnings Ratio (PER) of stocks in a similar industry, which is the ratio of Stock price to Earnings per Share of any public company. Using the sum of multiple PERs improves reliability but it can still be necessary to correct the PER for current market conditions.

The weighted average cost of capital (WACC) is used in finance to measure a firm's cost of capital. It has been used by many firms in the past as a discount rate for financed projects, since the cost of the financing seems like a logical price tag to put on it.

Corporations raise money from two main sources: equity and debt. Thus the capital structure of a firm comprises three main components: preferred equity, common equity and debt (typically bonds and notes). The WACC takes into account the relative weights of each component of the capital structure and presents the expected cost of new capital for a firm.

A "Superday" is usually used in reference to final round interviews for an incoming analyst class at an investment bank. The day usually entails anywhere from 5-20 interviews for multiple hours. Offers are generally extended within a few hours after the interviews or up until a few weeks after.

The pitch is where the banker puts on their Sales hat. A pitch is the presentation that an Investment Banker gives in order to try and win business. The "pitch book" is the presentation (usually in PowerPoint) that the investment banker brings to the pitch in order to try and help him/her convince the Company that they are the BEST Investment Bank for whatever transaction is being contemplated. (Merger, acquisition, debt / equity raise, restructuring, etc).

Oftentimes, there is a negative connotation associated with "pitching" or pitch books because they often involve numerous long, painful, sleepless nights to prepare (at the junior levels)¦and can result in no revenue for the Investment Bank if the engagement is not won.

Where a team of Investment Bankers or finance professionals travel to multiple meetings in multiple destinations to try and sell their services (often accompanied by a beautifully bound pitch book).

The Restructuring Group division within an Investment Bank typically provides services to distressed companies -- often approaching Bankruptcy, in Bankruptcy or emerging from Bankruptcy. If hired by the distressed company, the investment bank will typically negotiate on the companies behalf against its creditors to try and cut the best deal for the Company. The "best deal" usually meaning as much debt forgiveness while trying to salvage some if any equity value (usually all or most of the equity value gets wiped out).

Restructuring can also be used as a "nice" term to cut costs (fire a lot of people), or try and reduce overhead to make the firm more profitable (try to avoid bankruptcy). Restructuring can mean shutting down divisions, or "restructuring" the organization in a variety of other ways to save money.

There is much confusion around these two terms but I figured WallStreetOasis would try to take a stab at how we think of "Buy-Side" and "Sell-Side."

A sell-side engagement for an Investment Bank means they are were hired to help sell a company or division. The opposite is true for the buy-side.

Oftentimes, ALL of investment banking in general, however is referred to "Sell-Side" work while industries like private equity, mutual funds, hedge funds, etc are referred to as "Buy-Side" industries. The rationale is that even if an Investment Bank is hired for a buy-side engagement, they still are selling their advisory services to that specific company. On the other hand a private equity fund (for example) is putting their own capital at risk (or their own investors) in a given transaction by actually going out and buying a company.

This gets more complicated in the Bulge Brackets where "Sell-Side" and "Buy-Side" are under one roof and can sometimes overlap. [further clarification / argument is welcome at wallstreetoasis@wallstreetoasis.com -- if you explain it better, we'll put your explanation up]

Small graphic (usually shaped like a tombstone or box) used to highlight different engagements an investment bank has worked on. Tombstones are usually incorporated as part of the pitch book as part of the attempt to show that they are the BEST option to work on any given transaction.

A "Boutique" Investment Bank is smaller than a Bulge Bracket or Middle Market (MM) Bank and typically works on smaller deals. Although certain private or larger boutiques compete with the big boys from time to time, the main focus of a Boutique is usually on the smaller end of the range in terms of deal size and/or in a specialized niche/industry.