Technological advancements in IB

A while back I read an article about Lazard and Peter Orszag. In that article, one paragraph read: "True to his wonkish background, Mr Orszag is emphasising data analytics as a strength. He said Lazard has just won its first client mandate where it had used machine learning and natural language processing in its analysis." (SInce I am new here, I am not allowed to post the link of the article.)

I assume they are talking about a mandate related to M&A, but I could be wrong. Does anybody know if more companies use technological advancements (i.d. AI/ML/Big Data) to automate parts of the classic IB business (e.g. M&A, Restructuring etc.)? Will people without technological skills (i.d. programming skills) become obsolete in the future? Are other IB busy with creating software to help or replace analysts?

I would love to hear more information or opinions about it. Thus, if you have a good read, observation or opinion on the topic please share. I found one read that looks interesting: "Corporate Finance and Machine Learning" by Bo Meng.

 

I know a little bit about this because the Lazard crew basically foams at the mouth during recruiting when talking about what they're doing AI and analytics. To my (limited) understanding, they are hiring ex-merger arb guys to run the same market analysis they do to identify opportunities, but FOR clients. This way, you can identify who is in your stock, if an activist is building a position, as well as potential ways to execute a tender offer for an acquisition. You can also analyze current articles, earnings calls, market sentiment, etc, to try and suss out how the market would react to various strategic alternatives based on prior data.

While I think that they will be building out software to help with the junior banking functions, I really don't think that the actual building of the capability will fall to front office roles.

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You summed up very accurately what they claim to be building. From what I can tell (longer description in my main level post below) the complexity and usefulness of what they’re doing is vastly overstated. Take the activist example. A public co exec I know called me once bc Lazard told them their little magic machine said an activist might be building a position. I asked how Lazard came to this conclusion, client sent me the deck and it was based on jack shit. Could’ve been anyone buying and frankly wasn’t even much of a buy.

There’s only so much info that’s quantifiable and captured in public data. Best way to know an activist is buying is to know which trading desks deal with the largest activists and have an inside angle on what swaps those desks are writing. Ain’t finding that shit on Bloomberg.

 

So what exactly do they do with NLP? Btw, NLP is a subset of ML. Machine Learning is when an algorithm (algorithm = set of code, really. It sounds fancier than it is) than can take data, store it, process it, and "learn" from that data to adapt to new outputs.

I'm not familiar with the nuances of IB and it's not a field I ever worked in. But what do they use this software for? I can see looking through earnings calls and documenting them and using unsupervised learning to find common words used and patterns. You could also simulate stock market predictions (basically what quants do). Outside of that, I'm failing to see what ML does in it's current state that is that advantageous.

Again, I'm an outsider to IB so that's where I claim ignorance.

“The three most harmful addictions are heroin, carbohydrates, and a monthly salary.” - Nassim Taleb
 

Agreed, from my experiences, the only applicability of AI/ML/DL is only really useful to quantitative finance and it's mostly for the risk measurement side of the business and you'd only find that on the S&T side of the business. I seriously don't see how using an AI will help convince a client that they can help them secure financing or aid them in a potential merger or liquidation/spin off of an asset. It still falls back into the main premise that Investment Banking is a sales job and no amount of technology will ever get rid of the core component which is you must have very high social skills and constantly make the first move to thrive in the business.

 
tinus:
Will people without technological skills (i.d. programming skills) become obsolete in the future?

Not until someone builds a robot that can wine and dine clients, no.

This is a relationship business. Quite honestly, pretty much any monkey can do the work that is involved in sell-side banking. Really the only reason why you would get one bank to sell your business over another is because you went to school with one of their MDs, or their MD plays golf with a bunch of people who might be interested in your business

 

Take a look at what Matthews-South is doing. If I understand it correctly, their software performs the analytics (on converts, repurchases and maybe other capital markets deals) that banks currently do manually / with a lot of expensive people. The clients (I guess?) pay a relatively modest fee for the analytics and pay the banks - also modestly - only for distribution, with the two sets of combined fees far lower than a normal UW spread.

Apart from that, there's tons of development going on in the big banks and among startups that will or already do provide automation and data/analytics to improve execution.

 

M&A is completely different than these more quant-driven role in finance. An M&A process is a sophisticated way of saying either buyer or selling a company. There may be some some instances where it can be useful (i.e. analyzing market trends pertaining to that company, drawing analysis from large company data sets, identifying buyers based on specific criteria, etc.) but when it comes down it, no. M&A tasks such as making the CIM, reaching out to buyers, discussing potential benefits of an acquisition, etc. are much more quality-driven.

 

The only current way that AI/ML would be truly useful for IB is having a bot that will automatically send out CIMs to potential investors and can craft custom tailored emails to said investors (which would also really require another bot to scour the web to find scrape all the data it can about the potential investors and then create a custom yet bland pasted email to send).

As other users have pointed out here, IB is a relationship driven business and at the end of the day is a sales job. The tech is there to cut costs and make things run much more smoothly and efficiently. Last time I checked a robot can't sell you anything or make any emotional appeal to you.... least I hope not or else we'd be in a Blade Runner situation.

 
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