IB vs Valuations Advisory

Hello folks,

This forum I spent a lot of time in during my undergraduate years. Since then, I've stepped foot in investment banks, PE firms, and work in TAS valuations now. My TAS group is made up of ex-IB and ex-PE folks. I'm more than five years out of a target school. For what it's worth, I wanted to just give back, in an honest sense, my perspective on the IB vs Transaction services question that a number of folks have. For what its worth, I'll shed a bit of color on some aspects of IB that are less emphasized.

1. "I want to be in PE" - You can work in Big four TAS, suck at your job, and break into mid-office PE at an Apollo or equivalent. It's happened. With respect to front office, you will have a very tough time and require significant effort and experience to break into a boutique / smaller MM PE firm at the front office. It can happen, but it will be difficult. A hole in the wall ("boutique" would be the professional synonym) investment bank will not be able to get you into PE. Some boutique investment banks are really more or less minuscule financial due diligence shops that are misbranding themselves. You'll figure this out once you join one. A number of MM investment banks (especially outside of 1st tier cities) will not be able to place, also.

2. Because investment banking experience is transactions based and not operations driven, you will be pigeonholed into corporate dev or corporate M&A if you don't make it into PE (most don't). If you go into boutique IB or lower MM, this will be your post-IB option. You cannot become a CFO directly out of IB, period. This includes positions like VP and up. Ironically, at a place like audit in a big four, you could become a CFO directly out of a manager role. It is highly difficult, however, simply because corporations love to see someone operate for some length of time in the corporate realm. Nonetheless, note that investment banks focus upon a single life event at a company (IPO/M&A), when more takes place at that company over its history than what fits into a single transaction closing date. You'll be ripe for transactions and a zero outside of that.

3. "Is TAS auditing?" - No. That said, depending on what you choose, you will find increasingly more or less finance (or accounting) flavored roles. Using PwC as an example, CMAAS (technically within TAS) is accounting consulting. CMAAS will answer accounting based questions like "what is the GAAP basis of X acquisition?". They will also help with new accounting policies and consolidation / M&A accounting. If an accounting professor worked in the big four, they would probably take this role.

Similarly, financial due diligence is like not like auditing and not accounting either. Nonetheless, it requires the ability to be functional with accounting data. You will answer questions like "Is historical EBITDA reflective of the business economics?" "What would you adjust to make EBITDA comparable with other businesses?"

This is not pulling a sample of 50 things and seeing if the journal entries are recorded correctly like auditing. This is taking the revenue and expenses of a company, researching them, and communicating what is taking place (or not) that is relevant to the purchaser. For example, was 20% of revenue in one customer that the target just lost in the past quarter? Is the entire c-suite made up of the owners taking $1 salaries where EBITDA needs to be reduced to factor in the future "real" of a management team? Do all the leases have rent abatements (free rent) for their 1st year and now the corporate campus is going to pay a boatload of rent that was never paid before? The role of FDD is to get you the "perfect" historical EBITDA figures to assess your transactions pricing on. Since a high volume of transactions are driven by PE portfolio companies, these things often aggregate into significant items at businesses that are selling for well under $1 billion.

4. Middle market investment banks (and smaller) spend at most about 10% of their time "modeling." If your goal is to become highly adept in modeling, specifically, you should look at a valuations advisory group and spend some time there. At some investment banks, you could find yourself doing zero modeling (this is from an IB MM VP I am connected with and others). As one example, in real estate there are REITs, REITs have many follow-on equity offerings, post-IPO, there is already a stock price that is publicly traded. Valuation is not a discussion item (you can look up the ticker symbol). At bulge brackets, a chunk of the grunt work is passed to other folks where investment bankers spend some limited additional time modeling relative to the MM banks. A colleague of mine, who went into IB, was astonished that banks actually hired finance majors. At its core, IB should truly prioritize marketing skills (i.e. be able to talk for 100 slides about complementary products and up selling) rather than being able to search for a handful of inputs to populate an Excel model template. There is a reason that they will hire a history major; the finance is frankly not that important. The ability to churn out high volume of grunt work is what's important. What you will earn in all IB roles is to understand the "cadence" of a transaction, how they advance, what can make for a crap one, a rare bargain purchase, etc. You will build insights over time. While said, you will need to show experience under closed deals as a banker to garner any PE recruitment attention.

If you spent two years pitching non-stop where this at a best got a few nibbles of attention here and there of buyer interest, it will not serve you well. Some folks will go to good banks and not see a closed transaction in their two years. It is commonplace enough where job postings for PE will specifically call out that they seek only closed transaction experience.

5. Valuations skills and financial analysis skills don't really matter in IB. Yes, you need to be smart. Yes, if you cannot understand these things you will not do well. But your understanding of these items is used to defend a pre-conceived transaction price and pull levers to support a transaction price, not to truly establish a transaction price in the sense you would believe. The reality is that folks in due diligence see bankers make highly watered down DCF assumptions, modeling errors, etc., and have seen communications like "we'll have to come back to the DCF; we need to throw some more stuff at it to drive the implied purchase price back up" in respect to their analysis. While students would believe that most often the DCF sets the valuation, in reality, it is the discussions with management, buyers, etc., that place fenceposts around the assumptions that will go into the DCF. The role of a banker is to advise and sell at the highest price possible. They will never say to a client "We utilized a set of reasonable assumptions, your company is worth $500M, but someone is willing to pay $1B. We suggest counter offering their offer at half and leaving the extra $500M on the table."

6. Mega funds are more likely than not what you want to avoid. They are absolutely terrible to work for. If you think Houlihan is a bad culture, wait until you see Apollo. Many bankers on this forum will say that banking hours are much better and easier than what they see at mega funds. To keep it short, if you do IB, work at a BB bank then work at a large MM fund.