IB Bubble, Limited Skillset
Hey all, would welcome some advice.
Work in the M&A team of a BB but find that with the increasing emphasis on LBOs and sponsor deals with each passing day my knowledge of markets / macro / real world has been going down. Most deals only really require perfunctory knowledge of the commercial niche / landscape (Commercial DD) and that’s about it.
If I were to interview for an HF, I would have little to no idea on a stock pitch or to discuss the macro trends (I mean happy to quote the high level WSJ, Bloomberg articles but really not confident when these discussions may require having an opinion backed by a quantitative thesis).
Any ideas on how I can go about improving this? The sort of resources I have in mind would be some combination of real world data insight / models plus commentaries or podcasts to stay on top of.
IB is pretty much a bubble and everyone here seems quite insulated often without realising this. I highly doubt most of my peers know what a greenshoe is, how to read credit ratings / agreements, how to explain a synthetic CDO (beyond Big Short levels). Trying to round out my profile a bit. Let me know if any questions.
EDIT: Thank you for the helpful responses. Somebody commented below so I thought I would add it here; any SS / Event Driven HF prep related market resources, materials etc.?
Man what the fuck does perfunctory mean
minimal I think.
^ Largely this.
Basically, its typically used with an action or some kind of colloquial gesture that's executed with minimum effort
Bump
Pick your favorite company, and write a stock pitch. Literally no better way to do it.
Are you trying to look for example stock pitches? I think some of the examples Sohn has on their website are decent, and VIC is always a good resource. Would be happy to send over some write ups too.
Would also appreciate some write ups - feel free to DM
Thank you, OP here. Is it OK if I PM you?
Would love a DM on the writeups as well
^ would love to see the write ups if possible
h
Never ever offer to send over stuff on this forum.
Lmao
Here, go dig them up yourselves, each newsletter has pitches in them: https://www8.gsb.columbia.edu/valueinvesting/resources/newsletters
Hi there. Been thinking something similar, but not as well-positioned as you (i.e., my bank is not nearly as reputable).
Been interviewing with a couple of HFs though. My experience and thought so far:
1. It really depends on the fund style.
If they are a modeling heavy fund where juniors are basically number crunching all day and don't have active inputs whatsoever, your skill-set is enough already. I've encountered one interview where I believe the fund just checks out the model and gives it a rating. You don't want this kind of experience, no?
2. Some funds look for intellectual power, dedication, and really, who you are.
I say this because I recently have had this marvelous yet weird experience. I was talking with a PM for a 1st round interview. A fairly big L/S equity fund. During our conversation, it was mainly fit driven and he seemed to be gauging how I think about things and look at this world. No stock pitches (I did prepare), no technicals, no nothing.
He didn't think I was 100% dedicated to HF. I actually am, 99%. Left that 1% off because I cannot know if that is something I 100% want to do unless I do it first. This is a bit Catch 22.
HOWEVER, the guy gave me his email and told me to talk again in a few days when I feel like it. I'm honestly surprised. I have never ever run into a situation like this before, and I really like the fact that he spoke super candidly. I did too.
No guarantee for anything, perhaps another fresh point of view.
This is brilliant, thank you!
fairly big? what fund is this?
A no name ~5bn fund.
Deleted
You would think being a great IB professional would mean you know how to assess a company’s fair value for an acquisition which would transfer nicely for a hf role.
I would read the little black book that beats the market, Warren Buffett’s shareholder letters, top investor quarterly reports from Tiger Cubs, Pershing, Greenlight, etc. And just surround yourself with people who are interested in this stuff as well. Good luck.
Where is the best place to find those quarterly reports?
I can understand your concern. Below are my thoughts strictly to stock picking/pitch. I would note, however, HF is a massive umbrella/differentiated strats/products/etc. and this is highly unlikely to be a 'one-size-fits-all' type of guidance.
High-Level Overview
- Question from the interviewer could be 'give me a long idea' and/or 'give me a short idea'. You should be prepared for both
Steps to pick a pitch
1) Research the fund's overall strategy
2) Ideally look for a sector you know about or--if that doesn't align with the fund's strategy--something that is in their wheelhouse
3) Screen for small/mid-sized enterprises in that target industry. Large enterprises likely have coverage / are crowded. You--ideally--want something that's at least a bit unique to talk about
4) Determine the top ~3 key drivers of the core revenue line of the business. Again, small/mid-sized companies work here because they are more likely to be 'pure play' than a large conglomerate with tons of revenue drivers
5) No matter what, drop companies from your screen that have unusual/convoluted financial statements, low liquidity, etc.
6) Look for value-altering catalysts for each remaining company and pick the one with the highest likelihood of success (long play) and one on the opposite end (short play)
7) Develop a) summary recommendation/key takeaways, b) company background, c) investment thesis, d) valuation, e) risks and hedging of said risks. These should all echo your value-altering catalysts/reasoning
Resources
- Screen: CapIQ, Bloomberg Terminal, FactSet, Reuters
- Examples: Buy-side research reports, Sum Zero, etc. Would avoid Seeking Alpha and--with all due respect--sell-side research may be unintentionally biased (e.g. tends to be more optimistic, could be muddied if the IB was the lead book runner for example)
- Models: This is a bit tougher, but don't overcomplicate things. You don't need some 30+ tab operating model with the most precise absolute valuation. Get a range of values and be sure to know the drivers/sensitivities
Good luck!
Thanks mate, this is helpful
You're welcome!
OP here, thanks for the brilliant comment. +1
You're welcome!
How do you find these?
And then for valuation, how do you determine value? I come from a PE background and it's all basically market clearing price, not actually intrinsic value - do HF analysts actually make DCFs for things? Or could you just comps to figure out, hey, this should be trading within the band of comps?
Good question.
Hard catalysts: direct company news, M&A, corporate governance/actions, balance sheet efficiency
Soft catalysts: news that impacts the companies industry, market movements, etc.
For valuation, I will admit it likely leans more into relative valuation (e.g., comps). Maybe you make some basic absolute valuation models (e.g., simply DCF) to flesh out your company drivers, but you're making a football field/range of values here, not something overly precise/detailed. The point is to show you thought through drivers, developed the 'why' a company is over/undervalued, and have some tried-and-true technical methods of backing it up.
Already good responses, but it’s also worth mentioning a few things specific to valuing/pricing public securities:
(1) Certain stocks and sectors tend to trade on a dominant “narrative” and KPI that the market is fixated on. Could be monthly active users, retention rates, various yield metrics, premium/discount to NAV. If the dominant narrative is a logically correct one, that means sometimes looking at it from EBITDA or earnings multiple will make it seem out of whack. Cross-checking and triangulating on what you think is actually the right way to value the business and judging which side of the debate is right/wrong or how a strategic would look at it in a private transaction is fertile ground for investigation to arrive at a differentiated view.
(2) Cyclical vs. secular stories can trade under different valuation paradigms. Cyclical businesses will often trade at high multiples at cycle high earnings and vice versa due to sentiment when logically it should be the inverse in a perfect market. Secular stories don’t discount much information about potential cyclical ups/downs along the way and the debate usually fixates around valuation based on “Year 5-7 Revenue/Earnings” for example. Obviously, all companies deal with both cyclical and secular issues in their industries to varying degrees at all times, so this false dichotomy contain logical inconsistencies that will eventually reveal themselves. This is another way you can put on a different valuation lens than how market is viewing things if you have a compelling and differentiated insight on why the dominant paradigm will turn out to be missing something.
Whether in PE or public markets, the US capital markets are efficient as hell for the most part and glaring bargains/shorts are rare. If it seems easy, you should assume that you’re stupid and the market is right until painstakingly proven otherwise.
Not the OP.
Would anyone be able to opine from a perspective a Special Situations or Distressed HF? I am in a similar position but looking to break into an Event Driven / SS focussed HFs however not coming from RX. I am coming purely from M&A.
If you want to learn about credit, pick a big financing deal you heard about for some public company, go on EDGAR and pull the 8-K where they have to file the credit agreement, and focus on reading the pricing/collateral (if its secured)/financial covenants sections. Maybe take a few notes and understand the big picture of what the lenders are getting out of this and then try to compare it to another deal in the same industry, or a different industry. As for ratings reports, if you work at a BB you should have some database where you can pull examples or at worst a research team that can send you one, maybe find one to look at it in the context of the CAs you compared.
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