BBs Building Out MM IB Groups
Have an upcoming interview with GS CMG, their mm group. Trying to understand the general strategy?
Is it to be able to flex downward when public companies aren’t doing much (like now?) Thus, is there a focus on sponsor-backed clients and sponsor relationships (like most MM firms?) Therefore not account-driven, like a coverage group? Haven’t tried BBs tried this before, and then they either sell or shutter? Why do they fail
Is there a strong outlook? If done right, with a strong investment, why wouldn’t GS CMG eat like Baird’s lunch: GS name, can develop relationships over 5-10 years, etc.?
Every time there is a downturn, BBs do this strategy. It never works, Running private company sponsor deals is a different skill than large cap corporate coverage or even lev fin coverage of sponsors. There isn’t enough talent at BBs that can do the job and believe it or not, very few senior people would leave Piper or Houlihan or Blair or Baird to go to a GS or MS. The equation is very different on a senior level comp and quality of life wise.
May I know what the differences are between running sponsor sellside and large cap corporate transactions?
The difference in process is frankly quite limited. Both banks have good connectivity to strategic or sponsor buyers, and are able to run a very competitive process. The real difference comes in client coverage, attention, and banker compensation. At a middle market bank, the senior banker has a much more directly invested basis in the transaction. He should make 5-25% of the total fee that the deal generates (I know it's a wide range, but let's use 15% as a middle ground). As such, he's highly motivated to spend a lot of his time on the deal, reach out to his pool of potential buyers, and work directly with the sellers to close a transaction. On the flip side, a bulge MD has very limited skin in the game. His cut is likely in the 2-5% range (my math being that $50mm of shared revenue gets you about $2mm total comp), so he's much more focused on wining the business, and then moving on to the next one. In addition, if you're doing a $1bn sale and the fee is $5mm, the MM MD could make $1mm net off that while the BB MD is looking (VERY ROUGHLY) at $200-$500k net to his comp. the BB MD has very little reason to spend much time on the small deals, whereas the MM MD can do 2-4 in a year in a given year and BALL OUT
Agree - the MM guys tend to have better industry knowledge than BB teams
why wouldn’t somebody pick GS over Blair / Baird? Relationships - they’ve been talking to Blair and Baird for over a decade in most cases - GS comes in gun blazing with higher fees and lesser industry knowledge (MM companies tend to make fun of the psychos at BBs anyway - culture mismatch too)
Nailed it. You can identify the top of the cycle when every BB tries to move down in market. That's followed by the European banks and then finally the Asian banks. When the Asian banks are trying to buy market share.... get out. The party is over.
The biggest fees and the highest margins are always in the biggest deals, but as the bull market moves forward, big banks feel more and more like they're missing out on down market fees. In response, they try to build "regional" or "middle market" coverage groups in Dallas, Atlanta, Denver, Charlotte, etc, but once the market starts to turn down, it turns our that these are the least economic markets and smaller deals don't pay good enough fees to support regional coverage efforts. MM coverage at a bulge is up there with corporate banking as a loss leader. MM banks like Baird or HL or HW can make it work due to limited overheard, but the fee structure never makes sense for a bulge
Not in the case of CMG
Somebody has previously mentioned that the group is responsible for 20-30% of GS's ibd revenue, and it's the fastest growing
I think this is the first time GS has entered the MM space, and I think it's here to stay
Could you please elaborate on the different skill sets and how you think about them? Why do you say there isn't enough talent at BBs and why people wouldn't leave?
GS CMG
avg. TEV: $2.5bn, plenty examples of $3-6bn though.
That sounds like a boatload of fun.
Thank you! Based on the various threads, I was wondering about the below for them:
+Does this group provide more than just M&A - For example, do they do capital markets out of this group
+If cap markets, what's known as the product mix?
+A third of IB revenue? They must be doing very well. Any other anecdotes about their performance?
+Is this a "recession" motivated move, or have they been planning this for some time and have real buy in from senior management
+Are they generalist model, and you specialize in an industry as you get more senior
+How do you check out their deal flow? CapIQ / Pitchbook doesn't distinguish anything as "GS CMG," just GS
+Do they operate differently than the MM groups at JPM / BofA, which seem to be more regional groups tied in with lending? Is this a true MM practice?
+Are the MDs like the large-cap coverage groups - focused on chasing the deal, with the VP executing? I'm at a MM bank, and MDs tend to be pretty involved in execution and don't "disappear."
Simple - the BBs won’t pay as much in comp as the MM guys and won’t attract the same talent the big MM guys do. They’ll also not be able to have their bankers leverage their balance sheet as much given most of the times the balance sheet is only available to lend for larger clients, with the smaller mid market clients having their debt, if any, lent through either the banks commercial bank or through an alternate credit source such as a direct lender - so that crutch to lean on as a BB banker is taken away.
GS and Guggenheim are the only banks who have successfully done this. Can’t go wrong with GS CMG. I work at Gugg and can answer some questions if helpful. Also work with several folks who left GS CMG to come to Gugg MM so can speak to that a little bit
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