Is there any part of the financial industry that is growing?

So me and my colleagues were discussing over lunch how things are generally worse off in the industry since its heyday.

Investment Banks face more regulations.
Equity research and S&T revenues are dropping (atleast for European banks)
Hedge funds and AM are seeing money move to passive funds

The only places growing seem to be PE and/ or FinTech (though very small right now)?

I was wondering what you guys think about the future of the industry as a whole and buy-side/sell-side?

 

M&A advisory, despite regulatory constraints and shifting economics. When I was at a BB, my boutique firm counterparts were absolutely crushing it.

There will always be a supply of businesses for sale, and a demand to buy them. Whether they are good or bad transactions does not matter. M&A advisory is a profession that is almost always a necessity (in the case of public company transactions) and a highly value-add service for private companies unable to maneuver within the sponsor/strategic landscape.

It is also a profession that takes years of development, so there are high barriers to entry (no one can just become an astute advisor). Beyond financial modelling, advisory requires stamina, strong intuition and negotiation skills that can only be learned through a decade of experience.

 

Secondary PE has awesome macro trends:

  1. Increasing supply of primary private equity
  2. Not publicly traded so not susceptible to the onslaught of machines the way public equity markets are.

The great irony is that many of the best banking analysts went to primary private equity, and less desired ones into secondaries, but it seems secondary PE is a much riper (and growing) field. Primary private equity today is extremely crowded from both a capital and personnel standpoint.

 

Yes and no in my opinion. Currently work in PE secondaries and the amount of dry powder in the space is unbelievable. There's just not enough supply, as PE is typically a "buy and hold" asset class rather than one you trade in and out of easily.

Groups are bidding up the price on portfolios because of leverage to the point where the unlevered IRR they're underwriting to is below 8% in some cases. If you assume more PE dry powder = lower PE returns, then the secondary portfolios which own these now lower returning PE portfolios will also experience lower returns, with an added layer of fees, and a lot of them will struggle to hit their own preferred return (usually 8 - 10%) over the next few years.

That's just my opinion. The space was unbelievable easy to make money in 5 - 10 years ago, as you were buying portfolios at a discount that hadn't been written up at all yet; however, today the space has gotten way more efficient

 

There's a somewhat interesting dynamic in Secondaries regarding barriers to entry. Secondary PE is different than "primary" PE in that basically anyone can go out and raise ~$200M and start buying companies. It's difficult to do that in Secondaries because you have gatekeepers, the GPs. A reputable GP isn't going to let just anyone into their fund, they want a known entity, and the GP is free to reject anyone they want really. There's also an issue with access to information. There are many cases where a seller isn't interested in sharing information on a fund, so existing investors in particular funds are highly advantaged.

Long story short, the currently entrenched Secondary funds have a significant advantage over newly started funds. It's not impossible to start a new Secondary group, but its quite difficult. The majority of the increase in dry powder is from established Secondary groups raising increasingly larger funds.

 

Last comment - I'd say for the most part supply is keeping up with demand. As the primary PE market grows, Secondaries will continue to grow. Secondary market transaction value tracks pretty closely to the primary market, I believe 5-7% of the primary PE market will eventually transact through Secondaries. Strong pricing right now also shakes a fair amount of volume loose.

 

This is due to the fact that MM and smaller PE firms are amazingly targeted, the big players in the PE world are too jack of all trades for the market conditions. In every industry specializing, the big PE players are either ignorant or digging in their heals for the sake of deal prestige. Given that people in PE are some of the brightest people on the planet I would argue it is the latter.

Follow the shit your fellow monkeys say @shitWSOsays Life is hard, it's even harder when you're stupid - John Wayne
 

How do you feel about the future of S&T?

I`ve heard about how technology is making that space bleaker for those wanting to get into the industry.

Thoughts?

 
Embiv:

How do you feel about the future of S&T?

I`ve heard about how technology is making that space bleaker for those wanting to get into the industry.

Thoughts?

There's parts of the business that I have no idea how they could survive. Cash equity sales? Basically selling equity product to institutional investors; I don't know how this survives. Cash trading? All moving towards algorithmic low touch execution. I guess overall I think the traditional button pushing execution trading is going away soon.

Relationship driven jobs will always exist. As will any sort of derivative/structured trading.

Lots of appetite in S&T for people that know about balance sheet optimization/efficient use of capital (thinking about prime brokerage here).

 

Technology is just squeezing the jobs. The funding is still there it's just going to a handful of PHD quants instead considerably more desk jockeys screaming into their phones.

Follow the shit your fellow monkeys say @shitWSOsays Life is hard, it's even harder when you're stupid - John Wayne
 
thebrofessor:

somewhat agree, somewhat disagree. yes, these fields will still be lucrative, but the question is are they growing? I firmly believe that wealth management is not growing because of robo advisors, regulation, and the move to passive.

So this is where things get dicey. Caveat, I'm biased because I work in Alternatives.

I don't buy this entire move to passive taking over active management. Yes, when vol is suppressed for years by CB's, buying the index looks like a genius call. When vol comes back, I think active management comes back in a meaningful way. I welcome the shutdown of funds recently, as its clearing out under performers, so to speak.

 

Talked with an alum that used to head up sales for some of the largest investment firms and he said he thinks family offices are the place to be. Talk about a plethora of opportunities there....

 

Venture, especially venture in Asia is growing quite nicely.

  • As to venture in the US: granted that we've seen a bit of a correction in terms of total $$ invested into startups last year, the number has been growing at a pretty rapid clip considering that venture in the US is not really in its "early days". Total venture dollars invested has grown at a 5-Year CAGR of 9.3% through 2016. I'm actually glad that the number fell in 2016 as too many dollars were chasing too few deals and valuations were getting ridiculous.

  • VC funding in Asia, on the other hand, has grown at a 37% CAGR and also thankfully took a breather in 2016. Valuations here have gotten ridiculous, I just met with one startup asking for a $1MM seed round for 10% of their company. Next-to-nothing revenues and extremely early stage product that doesn't fully work yet. The problem is that there are people out there (especially high net worth individuals trying to be cool and invest in startups because it's "the new thing to do now") that will just throw money at these guys.

Given that I work for a firm currently raising a new fund, we're kind of hoping that dollars invested (and therefore valuations) go down even more in the near future, but it seems to be picking up again. Seems like a good time to be an entrepreneur as well, access to capital is still abundant for quality founders & startups.

"Be the Disruptor, not the Disrupted" - Clayton Christensen
 
DeepValue:

Venture, especially venture in Asia is growing quite nicely.

  • As to venture in the US: granted that we've seen a bit of a correction in terms of total $$ invested into startups last year, the number has been growing at a pretty rapid clip considering that venture in the US is not really in its "early days". Total venture dollars invested has grown at a 5-Year CAGR of 9.3% through 2016. I'm actually glad that the number fell in 2016 as too many dollars were chasing too few deals and valuations were getting ridiculous.

Hi, do you work for a VC in Asia? I'm interviewing for a VC firm as an analyst. Just wanted to get your feedback on the exit options and skills that I will pick up during the job. I feel that exit options are particularly lacking as most VC analysts either stay, or to another VC, do their own startup or BD at another startup, or MBA. Background: working in corp for out of undergrad for 8 months, finding something else because firm let me go. Appreciate your thoughts thanks
 

Venture Debt, Specialty Finance Companies, and Business Development Companies (BDC's). Won't be the bog rain makers, but will definitely be making good money, and more tomorrow than what you were making today. Also setting one of these companies up is a lot less harder and less pedigree required than starting up a fund. I know several founders of these types of companies. One has made ~$8 million the past several years consistently each year, and one at a smaller one makes over $1 million. Also the analysts at these firms are making below IB Analysts, but are working 60 hours a week, breaking about $100k and come from less prestigious schools. Definitely a slept on field.

We're not lawyers. We're investment bankers. We didn't go to Harvard. We Went to Wharton!
 

Look up Hercules Capital and its founder Manuel Henriquez. Dude has been making $8 mill on the reg. It's employees are making slightly below PE money, but up there. Of course the big shots in venture debt are no where near the big shots on the buy side, but venture debt has much less barriers to entry and more of us can realistically get a job in the field.

We're not lawyers. We're investment bankers. We didn't go to Harvard. We Went to Wharton!
 

The era of highly capable single family offices is still just beginning. You think there are a good bunch now but the generation shift of the 1980's PE Fund founders is not over. Many of these men are still in their mid-60's. A number of the $200M+ net worth PE founders are just building out their own family offices right now. And it makes sense too - they are highly flexible, can move fast and while institutional LPs are forcing fund managers to focus on specific strategies and capital structure plays in order to raise funds (i.e. - strict middle market 51%+ LBOs in vertical market software), family offices can take LP stakes in those funds, co-invest along side them and compete against them all at the same time.

"If you want to succeed in this life, you need to understand that duty comes before rights and that responsibility precedes opportunity."
 

Activism / Raid Defense within IB is growing. Lot of BBs / EBs building up their groups.

The master in the art of living makes little distinction between his work and his play. He simply pursues his vision of excellence at whatever he does, leaving others to decide whether he is working or playing. To him he is always doing both.
 

Surprised that private debt hasn't been brought up yet. Direct lending has been a huge area of growth due to bank regulatory pressures, and the space continues to develop as an attractive asset class for institutional investors. It seems like there is a new direct lender starting up every day (though that may be a bad thing when the cycle turns).

Lending in the middle market still requires a lot of expertise, and it isn't really an easy asset class to automate due to the private nature of the companies, expertise required to understand middle market borrowers, and relatively unsophisticated borrowers.

The lower middle market (EBITDA) has a lot of room to run, though risk for lenders in that space is typically much greater.

ideating - thanks for the comments, although I didn't mean to specifically look for answers to those individual questions; I was hoping to get more "in the trenches" insight from people who work in those groups (or others).

Maybe I should rephrase the main question more clearly: What are you seeing happening right now in the industry/product you cover and where do you see things going over the next 5-10 years?

Given that I work in LevFin I will comment on that sector. Large budge bracket deals will continue to be slow through the end of this year, analysts in this field are lucky to have jobs right now. I think that once the market figures out when the real estate crisis has hit its bottom deal flow will return to old levels. Also large banks need to clear all the hung paper they have on their books, this may take sometime. I would say that the market should show signs of improvement toward the end of the year but LevFin at the large banks wont fully recover( to its glory days) for another 18-24 months. LevFin at smaller middle market and regional banks have, and will continue to, show resilience in this market. It’s much easier to move $150MM of paper than it is to move $1.2B worth of paper. Either way the LevFin prospects over the next 9-18 months are pretty grim. Put it this way, if I make it to bonus season I definitely won’t be wasting it on models and bottles like I did last year.

 
wannabebankerman:
Macq blows.

Groups: Lev Fin, TMT

Thomas Reuters, announced vs. completed wannabebankerman's picture by wannabebankerman User's RSS Feed (Monkey, 58 Banana Points Points) on 11/12/09 at 12:34pm

Maybe someone can help me out with this. I'm checking out the Thomas Reuters league tables and I can't seem to understand the difference between the "Announced" Chart and the "Completed" Chart. The rankings sometimes differ a lot and I was wondering which was more important and what exactly these two differences are? Thanks.

 

No one can predict what will be the hot industries in 10 years time. But in the near future I'd imagine that Healthcare, Real Estate and Lev Fin will be 'hot'. Not necessarily in the megadeals sense, but in the sense that there will be a significant rebound from what's happening now.

__________ Just my 2c.
 

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One of those lights, slightly brighter than the rest, will be my wingtip passing over.
 

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One of those lights, slightly brighter than the rest, will be my wingtip passing over.
 

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