Do Investment Banker ever calculate a specific ratio by their own research?
This may be a beginner question, but I'm actually curious. I mean, for example, when identifying the WACC of a company (Market Risk premium, Beta, etc...) do analyst do the research themselves? Or simply write down WACC in a Bloomberg Terminal to and find the company and plug it into the excel model?
Yes - everything has to be done by hand ... at least it should be in all formal deliverables. You can't just pull a WACC off of some computer where it's pulling likely incorrect information. Or comps where the comp universe is totally incorrect.
You can certainly use the terminal to factchat some of your work, but you still have to do it.
It’s way less precise and the industry has way more backing into than you’d think.
Banking is more, “this asset is worth $5.1B, figure out how to justify that price” over “Our research shows the WACC is x which reveals to us a price we didn’t know prior”
Also, fwiw, been at an EB and never did a DCF and did 1 LBO which was a template in the 2.5 years I’ve been in the job. The only place you would use a valuation method is for pitching to determine value—otherwise buyers in an actual sell side process wouldn’t trust a bank to run a dcf or LBO, they would do it themselves.
This is really shocking, and valuable information at the same time. Your frase of how to frame banking was great, never saw it in that perspective.
But, wasn't the Investment Banking service highest "value" the solely process of putting things a price tag? Let that be a company, a subsidiary, or a share in an IPO etc... And valuation methods are the main way to do that.
And why wouldn't they trust the bank if they also benefit from the bank concluding a higher price? They are also paying big fees for that service. So.
I’m in real estate but there’s no difference between an investment banker and real estate brokers. Bankers are paid to sell something for the highest price (cre brokers are paid to sell a property on commission ie sell for the highest price). If client or broker says this property is worth something they back the model into showing that it’s worth that price. Doesn’t matter if it’s true or not. Either way the seller will have their own model and opinion of price and buyer will have their own model and opinion of price.
I’ll add 2 points on what value a bank adds and just reiterating what the above person is saying about real estate (he is right btw, same function).
An investment bank fills many functions buyside advisory, sell-side advisory, Growth/ debt raises, IPO’s. If you are underwriting the debt as a bank, you might actually build an LBO model to understand if an investor would be able to pay you back. Additionally, if you are doing buyside advisory, you might run a genuine valuation method to understand what buyers might potentially do. But generally, when people think of investment banking and when you are talking about the majority of the work done at EB’s, MM’s, and the bulk of the work load at BB’s it’s sell-side M&A. In this function, you might run a dcf/LBO to determine what buyers might consider paying at the start of a process and use that to inform the price you would recommend communicating to the market (so people think it is reasonable), but after that your job as an investment bank to try and get buyers to pay the highest price possible. As a result, any valuation work an investment bank provides is rightfully pretty untrustworthy from the perspective of a buyer because the investment bank is trying to show the highest price possible. In the above example, it would be like asking someone selling you a house what you should pay—they obviously are going to pick a high price lol.
To your point on the value an investment bank brings, one of the things you learn in the job is that all the valuation methods are going to come down to growth and expense projections which are impossible to know. I once heard this analogy that I think is quite good: “can you tell me with confidence, what your disposable income will be 3 years from now? Almost certainly no. So the thought that you could do that with a company with hundreds of employees and a changing tech and competitive landscape is beyond arrogant”
As a result, most sale processes the price is more often driven off conviction buyers have on the future growth or expense projections. A good investment bank helps buyers build conviction that the asset is important to buy and that they should pay enough to beat out other bidders. As a result, price is less based on dcf/lbos and more based on demand in the marketplace for that asset or similar assets—you can only know this by seeing which similar assets have been bought in the marketplace and constantly checking in the potential buyers to understand the sort of theses that exist at different funds on different trends in specific sectors.
This is a great post. I just started an internship at a local sell-side advisory boutique. It might be different at bigger banks. But so far the work is way different than I have imagined. I’m working on a project that is about to close. I’m now just updating the financial models. There’s no DCF/LBO built by our side. Those are all ran by the company itself or buyside. We are just justifying why the price is reasonable as opposed to coming up with a new one. And what really mattered is whether senior banker is a good negotiator and whether the owner of the company rlly wants to sell their business.
Correct, on sell-sides we're glorified admin assistants to keep the process organized and flowing, while senior MDs provide relationships.
On the buy-side we're often outsourced labor for sponsors.
Like you, I thought I would actually be running financial analyses, but that's just not the case. I've been pretty surprised by that.
Yeah I agree. Maybe buyside advisory runs little bit more analysis. But still, juniors do a lot of dirty grunt work, let along interns like me😂. And now I'm literally spreading comps for the client which is a pain in the ass. What kind of bank are you working at?
D
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