I apologize in advance if this is a dumb question as I am only a freshman in undergrad...
Why do private equity firms hire investment banks as their advisors when they are buying a company? For an example, if company X is trying to sell itself, I understand why it would hire Harris Williams, Jefferies, etc. But if that bank doing sell side advisory reached out to a PE firm, why would the PE shop need to hire another investment bank like GS, BAML, etc as a buy-side advisor?
I am just a bit confused as I thought that most people in PE comes from an investment banking background and do not need any help in valuations, modeling and such.
Thanks for the help!
@hocohustle", because IBs can bring insight into complex transactions and industries that the PE shop might be unfamiliar with.
Sil Thank you for the response. I've been browsing around WSO for a few months now and I really appreciate your insights on various topics! Your comments have been really helpful for a freshmen like me trying to learn so thank you!
From most to least important:
Most importantly, the PE firm has to borrow significant amount of money for a LBO (leveraged buyout). Most of the time this requires them to hire a bank on the buy-side. The "advisory" role is a nice plus, but the real reason is typically financing. When fighting for PE business, banks might even throw in the advisory role for "free", making their fees entirely through the debt financing. Even where the sell-side bank offers to provide financing (this is called a staple), the terms/rates may not be optimal. All big LBOs require a bank that can provide leverage, the more the better.
IBs have had more deal iterations and so can provide insight into certain types of M&A, namely auction processes. If you know you can pay $1.5B, that doesn't mean you automatically bid $1.5B. You need to know who else is bidding, what they will bid, etc. IBs have more people, more resources, work with a lot of firms on a lot of deals, are generally more familiar with the dealmaking space. Thus they have better understandings of competitive dynamics. Banks also do better when there are public market concerns.
PE guys don't like running BS like sifting through data rooms, having first cut at the financial model, translating foreign docs, working with the fucking accountants etc. PE firms run lean, and you need people doing useful stuff. Banks on the other hand, can throw a legion of 22 year olds at menial tasks. They are very good at bossing around lawyers and accountants. My hours would be 3 times what they are normally if I didn't have a bank on my side. Even when it comes to "important" things like the model, the PE guys will typically build off the model from the bank instead of just doing the whole thing from scratch. Saves a lot of time.
Hope this helps.
TheOceanizer Thank you so much for clearing that up! I definitely have a clear understanding of this concept now. I've gotta say that people like you on WSO are the only reason an underclassmen like me from a non target liberal arts college can keep up with the competition!
@TheOceanizer 's post is spot on
I also would like to add that PE firms also hire BBs because they need large revolving credit facilities that mainly only large (regulated) banks can provide. This is why most PE firms doing LBOs try to compromise leverage/terms to an extent to allow BBs in their deal, because if they rely solely on non-regulated banks (Jefferies, Nomura, Macquarie) then they won't be able to raise much commitments to their RCF.
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