It has been a long time since I've posted something constructive on these fora but lately, I have been getting a lot of questions on LinkedIn about Big 4 valuation, especially from those in MSF programs and recent MSF grads. Like most MSFs, I was completely unaware of the diverse career paths that finance has to offer. I knew that there were hedge fund managers and bankers but that was basically it. There has been increased attention devoted to this field on here as well so I think it would be helpful to contribute and to share my experiences.
This post is intended for current/recent MSFs as well as those that are generally interested in Big 4 valuation. I will lay out the pros and cons as I understand them and will answer any question, about anything, insofar as it doesn't get me in trouble. I will cover a lot in this thread.
1) Background
I graduated from WUSTL's MSF in May, 2014. Since then I've had a short stint at a hedge fund and now I'm a Senior Associate working in Big 4 valuation, specializing in the Life Science Industry. As others have noted, there is a relatively wide range in engagement experience and in compensation. Because of this, my commentary will generally include a pretty wide range and a different set of recommendations.
2) Recruiting
This depends on which group and which firm you're in. Some firms like to hire exclusively from second tier MBA's and top-tier MSFs. Other firms go down the more traditional route of undergrads at the Associate level and second-tier MBAs at the Senior Associate/Manager level. I can tell you that as far as MSFs are concerned, Vanderbilt has a significant advantage in this space. Their worst graduates go to the top MSF groups in the country (typically Silicon Valley and New York). Higher ranked MBAs (top 15) will typically come in at the Manager level and will have a pretty easy time to Senior Manager.
3) Career Progression
It goes from Associate --> Senior Associate --> Manager --> Senior Manager --> Director --> Partner. At some firms, there really aren't directors. It's sort of an outdated title that's fading. A remnant of emulating banking.
It should take you about 2 - 3 year to progress at each level, excluding progression to Partner. I have seen the shittiest Associates make Senior Associate after three years. Managers and Senior Managers can hang out for a while but that usually happens when the individual lacks an impressive background. I've seen extremely competent Managers remain Manager for years because the market won't pay them more than what they're currently making with their MBA from the Gabelli or Zarb School of Business.
4) Pay
This is typically seen as the weak point in the field and why there's so much turnover at the junior level. Some people, especially those with friends in banking and the buy-side, get bonus envy. They hear their friends complain about egregious tax rates but deep down it gives them great satisfaction. In 2-3 years, you'll make as much, if not less, than a 21 year old kid with a newly minted bachelors degree from a target university that couldn't tell you the difference between alpha and beta. Such is life.
1. Associates - $65,000 - $85,000 (98% base salary)
2. Senior Associates - $90,000 - $120,00 (90% base salary)
3. Managers - $100,000 - $140,000 (80% base salary)
4. Senior Managers - ????
5. Partners - My partner lived in a building with Leonardo DiCaprio and had vacation homes all over the world. This probably isn't representative since he's a giant in the field and literally gets the biggest deals.
Big 4 valuation compensation is extremely base salary heavy. You don't really get meaningful bonuses until the Senior Manager level.
5) Work-life Balance
This is definitely a strong point. It's what keeps the good ones around even though, if they really wanted to, they could make 2x more in banking. It's all relative. At worse, if you're working in a very busy group, you'll do 70 chargeable hours a week. For those who don't know what a "chargeable hour" is, it means an hour of actual work. It works like this:
you have to charge a certain number of hours a week but you're encouraged to do more than the bare minimum (typically 40 hours a week). The more you work the higher is your "utilization" which basically determines your raise/bonus come year end (at the lower levels at least). At the same time, the engagements have certain budgets. If you charge too many hours to an engagement, you break the budget. People won't tell you this to your face, but breaking budgets gets you in trouble. A 120% utilization rate is not something to boast about.
Come summer time, you're working 9 - 5 max. At my current firm, you're allowed to leave at 3:00 PM. During this period you're mostly working with Senior Managers on proposals and pitches, trying to bring in revenue for busy season (it's busy because your working on audits as well as actual valuation projects for year end financial reporting). All in all, you can expect to work an average of 50 hours a week throughout the year.
6) Work/Engagement Experience
As I said in the introduction, there is a lot of variation in the field. In general though, there are really two types of Big 4 Valuation work:
1. Internal (Audit Assist)
2. External (Actual Valuation)
So, naturally, there are those that only do (1), those that only do (2) and those that do a combination of (1) and (2). Honestly, there are pros and cons to both types of projects.
Audit Assists - Basically you're given a valuation done by a competitors, take it apart, analyze the assumptions, methods and valuation output and determine whether or not they are reasonable. In practice, this means recreating schedules, running sensitivity analysis and writing memos highlighting the procedures performed. At some groups, this is all you do. The work is straightforward, it doesn't take a lot of time and it's relatively stress-free.
Actual Valuation - Here you create your own models, talk and present to clients, do extensive modeling and write reports highlighting the wonderful job you've done. The fees are much larger, the hours are much longer, the stress is much greater and your pay is.... exactly the same.. Remember, you don't really get bonuses in Big 4. All that work, that huge paycheck, all of it goes into your Partner's pocket and you just hope that he/she remembers you come year end evaluation time.
7) External Engagement Experience
There are different types of engagements. Some are more glamorous than others. A lot of it depends on what group and region you're in. For example, Silicon Valley groups will do a lot of VC financial reporting work and early-stage tech valuations. The East Coast gets a lot of early-stage biotech work and Houston will get a lot of oil and gas.
Below is a list of the types of projects you can expect:
1. Pre-acquisition PPAs (purchase price allocations) for Management Planning Purposes;
2. LBO modeling for ??? (no idea - have never done it and I don't know why we would do it);
3. Post-acquisition PPAs for financial reporting purposes;
4. Goodwill impairment testing for financial reporting purposes;
5. Contingent Consideration/Milestone Payment Valuation for financial reporting purposes;
6. Complex securities valuation (convertible preferred equity, tranche level valuation) for financial reporting purposes;
7. Legal entity valuation for tax purposes and for restructuring;
8, Fair Market Valuations (with cost approach) for regulatory requirements (anti-kickback) and management planning (usually team up with Consulting or Advisory for these types of projects);
9. Market research/feasibility studies for management planning purposes.
Some of you more astute observers have probably made the following observations: (1) that sounds like fucking accounting! and (2) do clients ever voluntarily seek out Big 4 valuation services without compulsion from government bodies?
To answer those questions: yes and no, not really.
There is a lot of accounting. You need to know when an engagement is ASC 718, or ASC 820 or IFRS 2. They have different definitions of fair value and different valuation standards (though they're converging). You need to know what a DTL is and how why/how a firm records one on its balance sheet. You need to know which assets are subject to amortization and which are not. So yeah, a good amount of accounting.
95% of the services you provide are mandated by government bodies. In other words, if your client did not pay for those services, big guys with large weapons would throw them in prison and would expropriate their fortunes. One bright side is that you get to help large, value producing companies lower their effective tax rate. That always makes me happy.
8) Applied Methods/Techniques
Big 4 Valuation, because it doesn't really need to cater to what the market actually cares about, has the privilege of being very academic. Some like this, some don't. I personally enjoy the wide variety of projects that I'm involved in. I feel that I'm constantly learning and I understand techniques and methods that my friends on the buy-side and sell-side know little about.
Of course, when I mention that to them, they remind me that they're not aware of these methods because no one in the real world gives a shit. I know from my experience at a Hedge Fund that if you start talking about tranche level, relevered volatility, Asian put option models to calculate DLOM, determining control premiums, etc., people start looking at you funny. The fund that I worked at basically laughed at DCF models. They only cared about observable, market inputs (comps).
So if you enjoy struggling with whether you should look at Damodoran ratings or CDS spreads to determine country risk premiums, then you will most likely enjoy your time at Big 4 valuation.
9) Exit Opportunities
This depends greatly on the engagement experience that you've accumulated. Legal entity valuation work really isn't transferable anywhere. Financial reporting valuation work, especially if you work on pre-transaction stuff, can get you into banking/buy-side if you have a strong background. I know people that transitioned from the Associate level at Big 4 Valuation to Moelis Capital, VC, UBS, Credit Suisse, etc. People that go down this path typically get a CFA and try to make the jump to buy-side/banking.
If, on the other hand, all you work on is Audit assists, then your best bet is to a CPA/ABV, progress through Big 4 valuation and one day transition into corporate finance.
I've covered a lot, so if anyone has any questions, please ask away.
