Leveraged Finance (also known as LevFin and LF) is an area within the investment banking division of a bank that is responsible for providing advice and loans to private equity firms and corporations for leveraged buyouts.
Leveraged Finance Group Definition
LF departments work on acquisitions (leveraged buyouts), recapitalisations, and asset purchases. Companies looking to do any of those things can do so using debt, and it is cheaper to use debt than to use equity or cash.
Although LF and Debt Capital Markets teams both work in debt, the DCM team works more with investors and the markets while the LF team works with the actual company on the structuring of the deal. One of the most prestigious LF departments is within J.P.Morgan in Europe. Leverage is sometimes referred to as 'gearing' in European countries.
Leverage Finance Investment Banks
Because of the nature of LF - lending extremely large amounts of capital - boutiques can't have a slice of the pie. Besides the bulge brackets in the space, middle market firms like Jefferies, RBC, and GE Capital are big players. For exit opps and prestige, your firm goes a long way. Here's a fairly exhaustive list of the best names in LF.
- JP Morgan
- Credit Suisse
- Goldman Sachs
- Morgan Stanley
- Wells Fargo
These are the top players as of now. Use the WSO Company Database to find more information about each company. The paradigm is constantly shifting after all.
Hours, Salary, and Work of LevFin Bankers
What are the hours like in LevFin groups? How do those hours compare to M&A? Do those hours vary by firm? Answers to all of those questions from @exADbnkr13".
Hours are just as gruesome as M&A, 70-80 hour weeks are the norm, and 100+ when it comes to crunch time. As for what you spend your time on in LF, it's mostly credit analysis and modeling - although some firms don't do any modeling whatsoever. Salary is comparable to most investment banking gigs, all-in compensation coming out around $130k. In LF, analysts mainly do a combination of credit analysis, modeling, and other miscellaneous things. Here's a nice summary of what they do from @ginNtonic". I worked as an analyst, up to Sr. VP in Lev Fin - first at a mid-size bank, then at 2 BB firms. I had first started my career in M&A at a BB, so I have a good sense of comparing the 'brutality', if you will. I would say that Lev Fin is on par with M&A as having the most grueling hours. The reason is really the client base. If you're working in Lev Fin, your clients are predominantly PE firms, and they are (obviously) the most demanding, time-sensitive clients to deal with.
Thing is, there's a lot of variation in the above functions depending on the firm. Some groups do plenty of modeling; some do a little; some do none. Some groups don't let their analysts talk to investors; most do. Analysts structure leveraged loans / high yield bond deals for corporate and private equity firm transactions, such as M&A, LBOs, div recaps, etc. Analysts will write approval memos, offering materials, talk to institutional/bank investors, and model transactions.
Leveraged Lending vs Leveraged Finance Groups
At the base level, this is the key difference between the two: one is a firm (typically middle market) while the other is a division within a firm (typically bulge bracket). LevFin groups at a BB bank (BofA, JPM) operate more similarly to a GE Capital just on a larger scale, both in terms of clients and debt quantums. They will also provide clients with access to the bond market, which can include high yield bonds. Bonds are not a common method of debt financing in the middle market given that most companies will be private. However, Leveraged Loans and Unitranche debt have taken on a lot of the structural characteristics of a High Yield debt in Credit Agreement terms (e.g., cov-lite, basket definitions, Available Amount).
Exit Opportunities from Leveraged Finance
The three exit opportunities that LF sets you up nicely for are:
- Hedge funds
- Private equity
- Mezzanine funds
Mezzanine funds deal with mezzanine financing - a form of debt that replaces the equity owed investors. If the company defaults, the lender gets either ownership or equity. Mezzanine loan interest rates are typically 12-20%; it's a high-risk high-reward gambit. Besides the above three exit opportunities, there are always the typical investment banking exit opps: entrepreneurship, grad school, and all sorts of roles within a corporation. As for private equity as an exit opp to LF, your chances depend greatly on the firm you work for. See the list above under "Leveraged Finance Firms" for an idea of what firms are the best to work at in terms of exit opps and prestige.
Should I Work in LevFin?
How does LF compare to the other investment banking groups? For career opportunities, here's how it stacks up against other groups from @1styearBanker".
While M&A takes the cake for best investment banking group for many, LF groups are just as good in many cases and better in others. If you get an offer with any of the top firms we mentioned before, then you've set yourself up for some nice exit opportunities. From a general approach, LevFin with good experience will be just as good, if not better than M&A, but analysts from both groups depend heavily on deal flow and their experiences.
Internship Preparation Before Working in a LevFin Group
Secured a summer internship in LevFin and looking to get prepared? Fret not! Here's three tips for you.
- Brush up on your modeling skills. It always helps to be familiar with lbo models although the extent to which you will model will largely depend on your team culture / bank. (As mentioned countless times, some teams do more modeling than others.)
- I would also not forget to work on your PowerPoint skills. Although you do significantly less PowerPoint than in industry coverage teams, it still helps to be efficient at this level.
- Understand the differences between leveraged loans and high yield bonds, the processes, the technicalities, etc. This is probably the most important, as being able to understand the technical aspects can really make you stand out.
One thing to note is that you will likely be doing very little modeling, so don't worry too much if that's not your strong suit yet. Tips two and three, however, are golden. You should absolutely brush up on PowerPoint and understand the terms mentioned in three.
**To learn more about this concept and become a master at LBO modeling, you should check out our LBO Modeling Course. Learn more here.**
Module 1: Introduction
Module 2: LBO The Big Picture
Module 3: Valuation and Transaction Assumptions
Module 4: Sources and Uses: The Theory
Module 5: Sources and Uses: Application to Nike Case
Module 6: P&L Projections & LBO Adjustments
Module 7: Debt Schedule
Module 8: Balance Sheet and Adjustments
Module 9: Taxes
Module 10: Exit, Returns, & Sensitivity Analysis
Bonus Module A) Purchase Price Accounting
Bonus Module B) Dividend Recap
Bonus Module C) Add-on Acquisition Build
- Bridge Loan
- Debt Capital Markets (DCM)
- Investment Banking Division (IBD)
- Leveraged Buyout (LBO)
- Private Equity (PE)
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