Startup to automate IB analyst work?

I wondered when some startup was going to try and tackle this. Pellucid Analytics is trying to add some automation to the pitchbook generation process. What do you think monkeys? Will this catch on? Will analysts be replaced by software?

 

Many of the big banks already outsource work to India. Reality is banks are in the sales process and cut data a million ways to show the most favorable scenario. Go find a CIM that doesn't talk about a company in the best light. Computers will pump out books showing companies as they are. Shit.

Also, a lot of the process is standardized. Templates, Excel plugins, etc. And analysts are the cheapest part of the puzzle.

 

Tough to automate pitchbooks when MDs tend to be very picky on phrasing and formatting. Pitchbooks are also often derived from templates and excel files so to incorporate all of this into an automated system will likely reduce flexibility.

>Incoming Ash Ketchum, Pokemon Master >Literally a problem, solve for both X and Y, please and thank you. >Hugh Myron: "Are there any guides on here for getting a top girlfriend? Think banker/lawyer/doctor. I really don't want to go mid-tier"
 

A couple of years ago we talked to a software development/IT firm who was looking into doing this. It was kind of an organic thing-they had developed some stuff for us internally and then they came to us asking about automating a lot of the IB/PE process. We sat down and brainstormed with them as a sounding board (most of my firm came from IB so they knew the process up close and personal, and we're the people that IB's show all of these things to) and as a potential money partner for them to develop it.

I'm not a tech person (very far from it) so I can't recall the details, but while some of it could be automated, a lot of it had to be so thoroughly reviewed and tweaked that it would still require analysts/associates to do it and so much of pitchbooks, CIM's, etc have to be developed one off that it would have been very hard and expensive to actually automate it to a near final project. It also became complicated because you'd have to keep it in a non-MS Office format for it to truly work, which would be ok internally but as you're passing CIM's around to the company, lawyers, etc who wouldn't have this program (and like I said, not a tech guy so I can't remember the type at all), it became pretty useless whey you're marking things up. Modelling was even more complicated.

At the end of the day and beyond the actual issues with making it work well, the cost to actually develop and maintain the software (for every upgrade that MS for example does, they'd have to make non-inconsequential tweaks to the software) while considering the potential issues of it not being fully automated were too much and outweighed the benefits of automation. Basically, it was cheaper and easier to just have analysts do it.

 

Isn't saying "analysts add qualitative value" to the process just another way of saying you have no idea? I'm pretty sure everyone who's job have now been replaced by a robot thought they couldn't be replaced.

 

LogoIntern, MappingIntern, and TombstoneIntern are three nice products that have been developed to automate a handful of time consuming analyst tasks, check them out.

"I don't know how to explain to you that you should care about other people."
 

Isn't this argument built on the assumption that every model is built the EXACT same way? Once anything becomes ad-hoc, then a human is needed right? A computer can put the same ole inputs in the same exact way into the same ole model, but can it make the judgement call that a certain company's unique business model requires you to build the LBO model differently?

 

swagon, good point. I think a better way to phrase it would be 'when will it get to the point that the work of 10 analysts will be able to be completed by 1 guy running multiple modeling programs' or something like that. I know next to nothing about computers so that may not make sense but you get my point.

If I had asked people what they wanted, they would have said faster horses - Henry Ford
 

Not surprised that many large tech companies are going without advisors. These companies have gigantic corp dev budgets and guess who makes up these groups...former bankers.

Most companies don't have the size to have an internal group that can go at it alone. Even a 1bn EV company (a common size for BB transactions) likely need a team of bankers to effectively run a sell-side process.

As for automation, im skeptical. Technology will make company searches easier and make it easier for bankers to search for buyers/comps. As the world continues to globalize, this will make it easier to locate foreign buyers (subject to regulations,etc) and possibly expand the landscape of possibilities.

But at the end of the day, banking is not like trading. It is very much an art and you cant automate negotiation skills and client relationships, that's just the nature of the business.

 
All this isn’t to say that investment banking is dead. In fact, great bankers can be incredibly valuable to a process in negotiation, extracting as much value as possible for the client, deal structuring to minimize tax burdens and integration. But as with all other large industries, modernization and technology has finally reached the doorstep of Goldman Sachs.

This is key paragraph here. Certain menial tasks will be automated, valuation, negotiation, deal structuring, and financing will still require investment banks.

 

I think this is exactly right. Tech companies like in the Dealbook are really an anomaly when looking at the market as a whole. Investment banks will remain especially important for the middle market. 99% of those companies won't have the budget or expertise to run a deal internally, and that is where the most growth in deal flow has been coming in recent years.

 

Firstly, tech currently hires bankers for their corp dev team. However, who they will hire in the future may change, e.g. an internal employee with a lot of experience within the company, an industry expert, a lawyer etc may all also be very useful.

Think about it through a companies perspective selling to Google/Twitter/FB/MS etc - I worked at Google/Twitter/FB/MS etc for 10 years and know I our company can do XYZ for your company vs I worked at GS for 10 years and this is the value of your company because this is how we do things. Who would you trust (note most of these tech companies are startups or something so have a very different culture/mindset to acquisitions then a typical firm)?

Secondly, tech have their own internal teams because an 'internal banker' is likely to understand the business better and will probably give better advice then some external banker who doesn't have any real tech industry experience/knowledge (yes that includes people who think working in TMT for a year makes them an expert). That doesn't mean to say banking is threatened - it just means a particular type of business will go to tech firms but there are still plenty of deals that will require bankers.

I fully agree with the other skills part. Valuation methodology can be taught but the art of negotiating/squeezing value form a deal is a tough one. But banking is the only career where you master these other skills.

 
Dingdong08:

No they won't. And fortunately as a 16 year old you have a lot of time to figure out what you want to do. Work hard in high school, get the best grades you can, get into the best college you can and then figure out what you want to do. And have some fun.

Great advice.

Also, you WILL get your heart broken.. It's okay, though.

We've all been there.

 

In short - no. There was another post about GS investing in some tech company that works with vast number of variables, constructing models, etc. - but you really don't understand what an IB analyst does if you think a computer can do what they do.

Additionally, even if they could, which is very unlikely, think how unlikely it would be that between now and when you graduate (~in 6 years) that they would have designed, created, tested, implemented, and trained others to use the technology enough to render the entire flock of IB analysts obsolete.

Lastly, who cares? You're only 16. If for reason computers do take over all banks, you're not stuck in this field. There are buy-side opportunities and other careers that are available to you that would probably give you the same things you're looking for. It's just a matter of adapting and getting rid of the IBD or bust or GS or bust mentality. Unless at 16, you already know you want to wear a suit to work, format decks, and update analyses until 3 am, you have a lot of open doors ahead of you.

 

^LOL haha. Even computers would likely burnout after 2 years of updating decks, creating CIMs (god these are a pain), and endless comments from Associate Computers / VP Computers and MD Computers who need everything done "ASAP"

 

Possibly, in as far as advances in networking through the internet pose a serious disintermediation risk to investment banking.

A significant amount of investment banking work is taking advantage of a market where (i) people who need money in large amounts don't have access to (ii) the people who have money to invest (in small or large amounts), and that class (ii) also doesn't have the capability to do thorough due diligence to ensure opportunities offered by class (i) are legitimate.

A lot (but certainly not all) investment banking work involves the banks sitting in between class (i) and class (ii) and charge fees for matching either side to each other ie acting as intermediaries.

Alternatives ways for connecting class (i) and class (ii) without having to deal with bankers are in their early days. Crowd funding is one example. Its arguable whether those alternatives will ever scale up enough eat into the market share of investment banks, even at the middle market.

However, I think there is a good chance that in 10-20 years time, we will see investment banks losing parts of their traditional market due to other internet-based incursions into the traditional space monopolised by investment banks.

As a historic example, Google's IPO was done by Dutch auction via the internet (ie lots of computers). While the IPO auction itself was seen as a screw up by many, what is more concerning to investment bankers is the possibility it represented. Rather than relying on investment banks to go out and sell the shares to the market, Google accepted investor bids through a Dutch auction over the internet. This cut out part of the investment banks' tradition intermediary/broking role. And also cut out a large part of their fees.

Fortunately for IBs, that experience hasn't been repeated much. Yet.

However, this is just the disintermediation story. There's a lot of other IB work (eg advisory) which is less susceptible. The threat of computers replacing analyst pitchbook work through automation is certainly low.

Those who can, do. Those who can't, post threads about how to do it on WSO.
 
Best Response

On the Google IPO and disintermediation point, see this article which discusses the topic more broadly than my post: http://www.cnbc.com/id/101912149#.

The disintermediation theme is something threatening more areas of financial services than just investment banking.

For example, in the insurance space, a lot of suburban insurance brokers in the retail space (eg home insurance, car insurance) have been disintermediated out of the market in the last 15 years as consumers can get commoditised insurance products online. However, there are significant areas of insurance which aren't susceptible because the products the insured need are not commoditised and require high touch eg commercial P&C.

And the threat isn't just posed by computers. In the weath management space, the rise of ETFs in the last decade now means that mom & pop investors and not-quite-high net wealth investors (like me) can invest into speciality sector funds that are listed on the NYSE, NASDAQ or NASDAQ ARCA through a cheap Fidelity trading account. In the old days, I'd have to pay a 1-2% management fee to a private wealth manager to get access to that sort of product because those types of funds/investment opportunities used to be unlisted. At the high net wealth end of town (like @thebrofessor's clientele), clients are still happy to pay for good advice and access to high return, unlisted products which plebs like me can't get access to.

Those who can, do. Those who can't, post threads about how to do it on WSO.
 

These days access is getting more and more open with liquid alternatives, but I'd argue that the value of a broker has always been in the advice side. If you're well trained and emotionally disciplined, you can get the same access, but most people aren't willing/able to devote that much time to their finances. I put a lot of this in my blog but I agree that the advent of robo advisors won't threaten my business.

 

Sorry for the multiple posts, but thoughts keep coming to me.

What does pose a threat for investment banking jobs outside the areas immediately threatened by disintermediation is the reliance of some banks' investment banking model on the business provided by intermediation businesses.

For example, when I was working in IB in Hong Kong, my IB shop was highly focused around our ECM business, largely because our colleagues in S&T had a killer equity distribution business that could distribute the equity very well. Most of the work my IB did was IPOs and block trades ie work in which intermediation is critical. If we'd lost of ECM work, then the bank's HK IB branch as a whole would likely have shut down because the ECM fees were what was keeping the IB office viable. The fees from the occasionaly advisory work we were landing alone was not going to keep the lights on.

Similarly, if our S&T business performance had fallen over, the symbiotic relationship with our IB division would have died and, again, we'd be turning off the lights.

So, what happens if we end up seeing a large scale shift of IPO work away from IBs to more internet-based disintermediated solutions? Or if we see a lot of S&T clients move away from brokers to direct dealing with buyers and sellers? Perhaps then IBs would only getting much smaller fees for corralling the various due diligence advisers, writing the offering memorandum and dealing with the exchange. Likely you'd see lawyers and accounting firms eating into that space because, really, it's much more about execution at that stage than any skills particularly innate to banking.

In that case, you'll see quite a few IBs downscale or even shut down. Which means less jobs in IB.

I'm not saying this is inevitable, but it is a risk. And it's a risk that the people paid to think strategically at most investment banks have been keenly aware of in the last decade.

Those who can, do. Those who can't, post threads about how to do it on WSO.
 

And if anyone wants to get a little philosophical/long term historical perspective about this, disintermediation has been happening for centuries and has been essential to the development of capitalism.

Here's a high level, brief and possibly not entirely accurate overview from around the 800s onwards.

Agrarian feudal times - To get money to develop your enterprise you had to (a) get access to front up to some cashed up noble (which probably involves bribing a whole load of people - do you have capital for that?) and (b) convince the inbred noble, whose main intellectual pursuits are whoring and hunting, on the attractive risk/reward proposition of your business idea. And you'd better hope the lord isn't off for 10 years on a Crusade or something.

ie high intermediation, very low availability of capital to fund growth.

Urbanised feudal times - Things are a bit better, but it's still all about informal networks. The Church is still restricting Christians from usury/lending at interest, so you either have to give away the lion's share of equity in your business or wander down to the Jewish ghetto, unless you're lucky enough to have a Medici or other Italian banker in town who has worked out tricky financial products that charge interest under another name. And you also have to deal with the shitty guilds and sumptuary laws which impose anti-competitive caps on your business and complete bans on certain type of innovation.

ie still high intermediation, slightly better availability of capital to fund growth.

1600s through to Industrial Revolution - The Dutch East India Company, the English copy of that and some interesting innovations in financial products by the Dutch have started the journey to disintermediation and the "democratisation" of investment. Common stock companies, diversified ownership, emergence of exchanges - great stuff for providing capital to people with good (and bad) ideas. I'm not sure when the Catholic Church objection to usury disappeared, but probably no later than the Reformation. Rule of law underpins this development, as you have to rely on the strength of contract to enforce obligations between virtual strangers to convince stranger A to hand over cash to stranger B and promise stranger B will hand it back. However, occasional hitches (eg South Sea Bubble) reinforce the need for intermediaries to act as gate keepers and also as quality assurance.

20th century - hey day of investment banks. Everyone wants to get into the markets and investment banks are the key intermediaries for both companies raising funds and people investing in companies. Investment banks like Goldman transition from a guy walking around Lower Manhattan buying IOU notes at a discount from tailors to cash in at the commerical banks, to respectable, large scale institutions. Longer life spans combined with laws requiring pension saving lead to dramatic growth in cashed up pension funds ie funds with a lot of money who are compelled to invest it to generate returns to meet pension pay out obligations and who need investment banks to show them where to invest it.

21st century - oh fuck, the internet. Too early to tell what that's going to do.

Key point here is never to think that the way things are is the way they will always be. The trend has been moving from intermediation to disintermediation for millenia.

Given the weight of the historical trend and the apparent means for change to accelerate (ie the internet), anyone who thinks that that trend has now stopped bears the burden of proof.

Those who can, do. Those who can't, post threads about how to do it on WSO.
 

@Dingdong08 - you're more on the investing side than the fund raising side for your funds, but what have you heard on LPs and disintermediation?

What I hear from our funds business and the PE firms I deal with is that the bigger LPs are insisting on coinvests ie "We'll give you $500m and we'll pay our 2% plus carry on that, but you must also give us $200m in coinvests which we don't pay fees on". This has been a consistent theme for at least the last 5 years.

Those who can, do. Those who can't, post threads about how to do it on WSO.
 

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