Everything You Always Wanted to Know About Investment Banking
(But Were Afraid to Ask)
Gene Moldavsky
Managing Director,
Head of Corporate Finance,
Alfa-Bank
December 4th, 2009
Why am I here on a Friday night?
►Lecture objective: to share a slice of the real world
►Investment Banking Experience
- Managing Director, Head of Corporate Finance, Alfa Bank (2007-present)
- Executive Director, UBS Investment Bank (2002-2006)
- Vice President, Renaissance Capital (1997-2001)
►Education
- Boston University, School of Management
- London School of Economics
►Deals/Transactions
- Over 50 Investment Banking transactions
- Aggregate deals value exceeds US$25 billion
- Examples
 US$1.9 billion Svyazinvest privatization (1997)
 US$2.0 billion merger between Rostelecom and Moscow MMT (2000)
 US$3.4 billion public markets sale of MTS shares by Deutsche Telecom (2004/2005)
 US$4.8 billion acquisition by Mittal Steel of KryvorizhStal (2005)
 US$1.2 billion sale of Maxi Group to NLMK (2007)
 US$400 million sale of Corbina Telecom to Golden Telecom / VimpelCom (2008)
 US$1.2 billion rights offering of X5 shares (2008)
2
How is an Investment Bank different from all other banks?
Commercial banks
Retail banks
Investment banks
Universal banks
► Individuals
► Small & medium
enterprises
► Financial markets and its
players
► Corporate customers
► Small & medium
enterprises
► Individuals
► Financial markets and its
players
► A supermarket of all
products
► Alfa Bank
► Citi
► MDM
► Sberbank
► VTB
Customer
Base
► Corporate customers
► Small & medium
enterprises
Main
products
► Corporate loans
► Trade credits
► Factoring
► Cash management
► Salary management
► Consumer credit
► Mortgages
► ATMs
► Deposits
► Equity/debt issuance and
trading
► M&A / advisory
► F/X
► Syndicated loans
► Derivatives
► Loko Bank
► Zenit Bank
► Absolut
► GE Money
► Standard
► Goldman Sachs
► JP Morgan
► Morgan Stanley
► pre crises Lehman
Brothers, Bear Sterns
Examples
in Russia
3
What do Investment Bankers do all day?
1
Front Office: Where the money is made!
Department
Primary activities of professionals
Products
Investment Banking
(Corporate Finance)
► Originate and execute IB transactions
► IPOs, private placements, debt offerings,
mergers & acquisitions, general advisory,
hostile takeovers, restructurings/bankruptcies
► Calling institutional or individual clients, executing
client trades, buying/selling for own book
► Making markets for clients
Research
► Analyze sectors and companies,
► Write reports / recommendations, meeting companies
and banks’ clients
► Research reports
Investment
Management
(Private Banking)
► Develop client base, manage securities portfolios or
other assets for institutional / individuals tailored for
specific investment goals
► Mutual funds, structured products
Merchant Banking
(Private Equity)
► Use banks’ and external capital to invest in private
companies with the goal of an “exit” through the capital
markets or sale to a strategic investor
► Private equity funds
Sales and Trading
2► Middle Office: Where the money is not lost
- Risk management – market and credit analysis minimizing risk of loans and trades made by the bank
- Treasury – responsible for funding, capital structure, liquidity and maximizing return on cash on hand
- Financial control – capital flows analysis, budgeting of the bank, reporting, global risk management, etc.
3► Back office: Where the money is not made
- Operations – clearing/checking trades by Sales and Trading (settlement)
- IT – front office support (PCs, Bloomberg), hedging algorithms, electronic trading, settlement systems, financial reporting
- Compliance – compliance with government and internal regulations
4
How do Investment Bankers earn money for their firms?
Department
Revenue
Examples
► Success fees on deals
► Retainers
► IPO NLMK ($600MM) – 3%
► Mittal Steel / Krivorozhstal - $3MM flat fee
► MMK Ruble bond – 0.20%
► Spread on buying/selling
► Fixed fee on each share trading
► Proprietary trading (the “Book”)
► Europe: 0.10-0.20% per trade
► US: 0.03 cents per share
► None but supports Sales and Trading / Investment
Banking
► N/A
Investment
Management
(Private Banking)
► Management fee on funds under management
► Fees / spread on structured products
► 1% fee on funds under management
Merchant Banking
(Private Equity)
► Management fee on capital raised
► Carry on performance (with possible hurdle)
► 1-2% management fee
► 20% carry (8-12% hurdle)
Investment Banking
(Corporate Finance)
Sales and Trading
Research
5
How do Investment Bankers earn money for THEMSELVES?
► Typical Compensation structure: salary and bonus
► Stock payment / vesting an important consideration
► Disproportionate bonus at senior levels (Director / Managing Director)
Statistics
Bank
Number of employees
Compensation, US$ mln.
Compensation per
employee, US$
2007
2008
2009
2007
2008
2009
2007
2008
2009
Goldman Sachs
30 552
30 067
30 067
20 190
10 934
22 283
660 841
363 655
741 100
Credit Suisse
48 100
47 800
47 400
13 308
12 213
15 428
276 678
255 500
325 490
Morgan Stanley
48 256
46 964
62 004
16 552
12 306
14 496
343 004
262 030
233 791
Deutsche Bank
78 291
80 456
78 530
17 847
14 734
16 704
227 960
183 127
212 703
JP Morgan
180 667
224 961
220 861
22 689
22 746
29 088
125 585
101 111
131 703
Note: 2009 compensation expenses annualized. Number of employees for GS kept constant in 2009 vs 2008
Russian market compensation ranges
► Investment Banking
► Sales / Trading
► Research
► Investment Management
► Private Equity
6
What is the landscape of Investment Banking in Russia?
Global Investment Banks
Active market
participants
 Goldman Sachs, JP Morgan,
Morgan Stanley, Deutsche Bank,
UBS, Credit Suisse, Citi
Strengths




Brand
Global distribution
Industry/product knowledge
Independence
Weaknesses




Lack of long term commitment
Churn of professionals
Onerous compliance
Limited lending risk appetite
Russian Universal Banks
Russian Investments Banks
 Alfa Bank, VTB Capital,
Sberbank Capital, MDM, UralSib
 Renaissance Capital, Troika, Aton,
KIT




Deep lending relationships
Weaker compliance
Government support
Affiliation with oligarch group /
government
 Ability to do “Russian” deals
 Affiliation with oligarch group /
government
 Relatively new to investment
banking
 Limited global reach





Independence
Focused strategy
Flexible compliance
Risk taking philosophy
Ability to do “Russian” deals
 Limited lending capital
 Post crisis financial stability
 Limited global reach
7
What are the building blocks of making a career in Investment Banking?
►Proper education
- University name recognition
- Proper coursework (finance, accounting, valuation, capital markets)
- Supplemental boring reading (valuation methodology, “The Art of M&A”)
- Supplemental fun reading (“Liar’s Poker,” “Bonfire of the Vanities,” “Barbarians at the Gate,” “Den of
Thieves,” “The Last Tycoons,” “House of Cards”)
►Getting the first job
- Proactive behavior
- Existing connections / relationships
- Perfecting the interview process – making the right first impression
- Doing the homework on the employer
►Moving up the organization and making more money
- Demonstrate the basics
 outstanding mathematical skills
 no mistakes on tasks performed
 quick learner
 positive attitude even in 15 hour days
 team work behavior
 improvement of internal processes; creativity
- Develop management skills to oversee teams/departments
- Develop deal origination skills (“smelling a deal”)
8
What other secrets
do you want to know?
9