Why do PE Firms need bankers?
Basically title. If all the dudes in the PE shop are finance heads anyway and know how to run DD for purchasing price, etc, why do the PE firms need investment bankers at all?
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Assuming you're talking about buyside? Three pretty common reasons below, sure people can addmore:
1) Some bankers are very strong in a niche and they can be useful adding expertise in an industry the PE firm has less experience in. Similarly maybe the banker lead a recent deal for a competitor or someone else in the industry so they have a more current understanding of the space.
2) Bankers usually have a pretty good pulse on other deals which can be useful in providing comps, as well as knowing any add-ons that could be coming to market soon
3) Often buyside fees are just a "tip" to the banker. Basically bribing them to get inside info, early access, etc. on deals they have coming up
If running a sell-side process, partly for connections senior bankers have with potential bidders. Investment banks also have a lot of useful data points, e.g. transaction comps from their prior deals which the PE fund cannot find in the public domain.
Also LPs may want the fund to bring in M&A advisors, even if the GPs can do it all in-house.
Plus may be inefficient for the fund to waste time on process admin. The more they can outsource to a bank, the better. Opportunity cost plus all of the above likely justifies the advisory fees.
Bankers don’t really help with DD, but it’s more providing readily available comps, process intel, and financing.. It’s also just to throw them something if you think they’ll have an interesting sell side at some point in the near future.
yea consultants help with DD. need banks for lending / process work
Only thing I’d add is that the additional capacity can be useful. PE firms are generally SMEs themselves and need the outsourced capacity for a couple of weeks. Its very much a peak and trough business hours wise
All above are great points - would add often we need financing, so just easier to pick a bank to give us M&A on the soft condition they would finance it also
To outsource work that are not interesting and for market intel. PE firms also need to "feed the bankers" to keep deal flow coming. Doesn't actually cost that much to the GP because LPs are the one that pays the bankers while GP gets the benefit...
i disagree with the framing here. a) the GP is an LP of the firm itself, so by your definition they are still paying for it for their LP commit portion, b) every dollar in fees that gets paid out is less dollars for proceeds for the LPs, and thus potential carry. c) If the banker is providing value, then the LPs are getting the benefit too.
to be clear, I'm not arguing that banker fees aren't worth it, but I do disagree with the framing that the "Lps are the one that pays while the GP gets the benefit...."
You're right in that some portion of it does come out of the GPs pocket but the majority of it is in fact paid by LPs. What I'm trying to get at is most funds actually don't need to pay bankers massive fees to do those deals. Today, most MFs have their own internal capital markets team that can arrange financing but buyside advisors are good because they have a large army of analysts and associates that you can mobilise at will.
The other perspective is to say, can PE firms do those deals without hiring bankers? They definitely can, they just need to hire more people to do the sourcing and DD but all those would be paid for by the GP. Instead, they hire bankers that are primarily paid for by LPs to maximise economics for the GP.
cuz PE guys slacked in their banking analyst stint because they snagged the PE offer 1 week into banking
As far as LMM goes, it’s an interesting question. It’s pretty remarkable how little value some banks add. They don’t provide good data and try to do as little as possible. In those situations it would definitely be more ideal to work directly with the company.
Short answer: Specialization, economies of scale, and time-trade offs.
Your argument is similar to saying, “why doesn’t Amazon make its own cardboard boxes from scratch?” Or “why doesn’t McDonalds grow its own potatoes for fries?”
In theory, yeah, you might make margin, but it breaks down in practice because a scaled player has lots of advantages. A PE professionals job is to find investments to invest in and deploy capital. If they spent time trying to run a process they wouldn’t be using that time to find new companies to invest in. In theory, could a company bring an individual in-house to sell companies? Yes. But, that individual will not know every industry under the sun and they won’t have the economies of scale advantage banks have where a senior banker of a sector is constantly selling companies in a particular sector so they know the main buyers, how they behave, and most importantly the prices recent similar assets have sold at. Also, if you did have an “in-house” investment banker, what would you pay them? The level of work required and concentration to run a process is a fulltime job, so the result would be the PE firm pays a lower rate for a less experienced investment banker without sector expertise. That doesn’t seem worth it and also is hard to defend to investors if the price you get isn’t great or is less than you should have obtained.
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