Automation in fundamental finance roles

Hi all,

As many of you, I started in M&A to keep my (finance) options open down the line. In my limited free time, I've had some time to think about the potential exit opportunities/parallel finance career paths especially in relation to many of the career paths that were the playing fields of fundamental finance guys having been taken over (to an extent) by quants.

Bear in mind that I have tried to take into consideration not only the purely automation driven effects but also considered other changes in the landscape. In some cases I have grouped similar (switchable) careers in groups, as when one of them is suffering (salary pressure), then usually the other careers in the same group also either do not have salary pressure or go along with the salary decrease, simple supply-demand of professionals.

1. Sell-side ER/Buy-side ER in AM/Equity HF
   Sell-side hit by unbundling of commissions, will probably further decrease headcount.
   Buy-side hit by move to passives and smart beta (bigger moves in that to come).
   I personally know quite many buy-siders that have been let go from larger fund complexes as they have significantly decreased fundamental finance guys' headcount. Tough industry to be in and for the foreseeable future.

2. Sell-side Credit Research/Buy-side CR in AM/Credit HF (non-distressed) (liquid, mostly bonds, not loans)
   Similar trends as in equity research "group", but due to the market being less liquid/electronic, the same changes will take more time.
   Perhaps not a tough industry to be in now, but in 10 years, probably.

3. Sell-side Credit Research loans /Buy-side CR loans in AM/Credit or Distressed HF (trading style, doesn't get involved in restructuring negotiations) (loans, not bonds)
   Exactly the same like in more liquid credit, but even more "behind time". Over the last 10 years, the private nature of loans has become more and more public. By now we have ETFs in this space and when the market becomes more electronic or at least the settlement periods would move towards the ones seen in bonds, the amount of number crunchers should also drop, as machines are able to take over the simpler tasks.

4. Distressed debt HF (involved in restructuring) / Distressed debt PE
   Difficult to automate, except for only very rudimentary tasks. Compared to normal corporate PE however, this space is much narrower, as in, at least to my understanding, to be able to execute this strategy, it would be good if there are outstanding syndicated loans/bonds on the target in order to be able to get into a position. This means the strategy is somewhere in between private and public markets and therefore, at least to an extent the competition here is fiercer than in more private markets. Also, the strategy requires scale to be able to be successful in restructuring negotiations. Difficult to do this on a small-cap level, compared to corporate PE, where one could more easily find a 50-100m fund, which can still be successful, playing at their own level. The topic is building a career over the long-term, so this should be taken into consideration.

5. Private debt (direct lending, mezzanine, special situations - when private)
   Private nature of the business shows human touch will be needed for some time. However, these lenders are not always operationally involved and do not need to go into as much detail as one would when investing for control. This leads it to be potentially open for disruption by lending platforms / crowdfunding. Secondly, as a large part of the potential loans given in this space are being driven by PE investors (LBOs), one could argue starting out in PE would be probably a very good background to get into the space later on, so there might not be a need to go into this space early on in one's career. Also, there is much more pricing pressure on the fees in this space compared to PE, which doesn't lead me to believe the paychecks in this space could on aggregate outnumber PEs.

6. PE (Corporate)
   Negotiations + private nature + the fact there are very very many small-sized PE shops shows that one could reasonably well have a long-term career in the field. Competition is huge though and PEs are taking in more and more people from the industry and consulting (to the detriment of the fundamental finance guy) but still, PE remains the top buy-side opportunity.

7. ECM/DCM/LevFin (to an extent)
   Capital markets on the IBD side will be potentially much more impacted by automation than pure M&A. A very large part of these group's job is to run a relatively predictable process, as opposed to M&A, where there are less set rules. LevFin is probably the best of the three, especially when it is providing also advice, not only pricing & execution (which has been the norm in most BBs).
   LevFin could still be a good place to go to, but would not pick it over M&A/RX for a mid-term career.

8. M&A
   Almost impossible to automate, companies need a third guy around the table just for negotiations' sake. Also, structures and process vary much more than on the cap markets side, leading this to be one of the safest places from automation perspective. Unfortunately, this is a highly cyclical business, but that could be said by most others on the list. Would be one of the strongest options, also potential for a long-term career, as the sheer number of places offering M&A advice leads me to believe that it should be possible to find a place to work somewhere. Compared to cap markets, no deep pockets are needed in setting an M&A shop up, so that also remains a possibility for the lucky few. This could also be seen by the recent emergence of boutique banks, which have favourably impacted the salary pressure on M&A professionals in large banks.

9. RX
   Negotiations + various stakeholders + private nature = impossible to automate. Slightly hindered by the fact that RX advisors are hired in only quite large and complex cases (as opposed to M&A, there are not that many mid-or small-cap RX advisory shops).

In conclusion, the M&A -> PE (or more M&A) career path looks to have a reason for why it is so popular.
As an alternative, RX -> DD PE (or more RX) is a niche field, offering similar potential for a long-term career (if one is able to break in). I would be worried about most others. I'm not saying there will not be any more fundamental equity HF analysts or something btw, don't get me wrong, I'm just saying that when there will be a drop of people of around 30% in your pressure, you will usually not be immune to it, will it be due to the fact that you were part of that 30% or because you cannot negotiate a salary raise anymore.

Sorry if I was wrong on some of the details here, unfortunately haven't worked in all these industries, so naturally there might be mistakes. Would love to hear your thoughts...