Thoughts on Investment Banking

In May 2023 I graduated from college and began my career as an investment banking analyst. As with most analysts, I’ve decided to pursue a career on the buyside after my two years in investment banking conclude. And now with just 4 months left, I thought it would be fun, and possibly educational for others, to reflect on some of the things I’ve learned and experiences I’ve had.

But first I want to preface this by saying that I worked at a small middle market bank in the South. I did not work in New York. I did not work at a bulge bracket bank. The largest deal I ever worked on was around $1B in transaction value. My experience is limited to two years in the 2023-2025 deal making environment. So take everything I say with a grain of salt. Your experience could be totally different based on geography, firm, industry, client size, client type, M&A markets, etc.

What is IB

Most people don’t know a whole lot about what investment banking is other than the fact that people who do it make a lot of money. It’s viewed as a black box. But what investment bankers do isn’t really that complicated at a high-level.

Broadly speaking, a banker is to a business what a real estate agent is to a house - they’re a broker. Whenever a business owner, whether that be a private equity group or a founder/family owned business, wants to sell their company, they approach a banker to run the sale process for them. 

In theory bankers are valuable for a few reasons:

1. They know the industry well and know how to best position the Company to investors in a way that maximizes value. Bankers can tell the ‘story’ of the business in a way that is most appealing to buyers, emphasizing the growth opportunities and downplaying the risks. 

2. They know the buyer universe well so the seller can feel confident they are approaching all of the logical parties, selling at a fair price, and giving ownership of their business to a good steward who will grow the business, take care of employees, and generally maintain the ‘legacy’ that the founder built.

3. They are excellent negotiators and know how to increase competitive dynamics among bidding parties to achieve the highest sale price.

4. There is a lot of logistics and blocking/tackling work that goes into selling a business (creating marketing materials, managing the marketing outreach, setting up a data room, facilitating diligence, working with lawyers to hammer out a purchase agreement, negotiating miscellaneous items like working capital). For most business owners, they are only going to sell a business once in their lifetime and it will be the most important thing they do financially. This means it is something they absolutely cannot screw up, yet they have had no practice doing it! Bankers on the other hand have tons of reps doing deals - this experience is valuable when negotiating agreements that have hundreds of millions or billions of dollars hanging in the balance.

In return for the value an investment banker delivers they are given a % of the transaction value when the deal closes, the same way a real estate agent is paid. This means that when it rains it pours. When tons of deals are getting done, bankers have no cap to the amount of money they can make. But in slow deal making environments, fees can completely dry up. It’s a boom-bust industry.

Why buyside?

A lot of you are probably wondering why IB to PE is such a natural trajectory. IB is kind of like a crash course in some of the hard/soft skills necessary to be a good junior professional in PE. You get tons of modeling/excel experience, learn how to think about what makes a good or bad business, learn how to value a company, gain an understanding of how deals get executed, and generally learn how to operate in a stressful, team-oriented environment. That’s what makes junior IB professionals attractive to PE firms.

PE is attractive to IB professionals because in theory the hours and pay are better and you aren’t beholden to a client. For me, the buyside is attractive because I like the idea of thinking critically about a business and being able to put my money where my mouth is so to speak. Whereas in IB you are often tasked with painting a business in the best light possible and attempting to “put lipstick on a pig” so your client receives the highest price for their company, in PE the analysis you do is used for more intellectually honest purposes. The work you do informs senior professionals decisions on whether or not they want to buy a business and how best to grow it. At the end of the day, I’m far more interested in investing in businesses than I am brokering them. The key to becoming wealthy is owning equity in an enterprise and private equity gives you a great education in buying/selling businesses and how to grow them/make them more valuable.

Particularly, I am interested in lower middle market PE because the opportunity for multiple expansion is higher. I also think buying businesses from entrepreneurs instead of from smaller private equity groups that have already professionalized the business to some extent allows for the ability to generate far more attractive returns. PE has become increasingly competitive as capital has flooded into the space but I think there is still great opportunity in the lower middle market which is why I plan to continue my career there.

When I first started my analyst role a year and a half ago, the CEO of the bank said “I enjoy investment banking because I fall in love with the companies we work with. And because I fall in love with these companies, I want to earn them the best outcomes - I get too emotionally involved to be a good investor.” I’ve never fallen in love with a client’s business. I’ve worked on deals selling great businesses and I’ve worked on deals selling terrible businesses, and I’ve always thought critically about them - I think this a pretty good indication that my future career does not lie in investment banking.

As you grow more senior, hard skills matter less and soft skills matter more

When you first learn about investment banking, there is a heavy emphasis placed on your ability to master your ‘technical skills’. This makes sense because when you start as an analyst, you are responsible for the ‘numbers’ side of deals like building models and doing analyses on the companies you are selling. And because these are the key aspects of being an analyst you think they are the most important parts of getting deals done.

But when I started on the desk, the first deal I was staffed on was the sale of a family-owned business. The reason the family wanted to sell was that the mother and father were getting a divorce and wanted to separate both economically and personally. This made the deal extremely tense. There were calls when family members would threaten each other, calls where family members would berate the potential buyer, and an instance where the client tried to send the money back/reverse the transaction after the deal had closed.

With all of this tumultuousness I soon grew a deep respect for the MDs on that deal. Their ability to sooth the client and manage both them and the buyer allowed the deal to close. While the numbers mattered, the difference between getting the deal across the finish line or having it die at the one-yard line was the ability of our senior bankers to leverage their soft skills to keep everyone happy enough for the deal to close and the money to get wired. This was amazing to watch and made me realize that as you grow more senior hard skills matter less and soft skills matter more. 

Many investment bankers know of senior bankers (especially those of the older, pre-excel generation) whose knowledge of corporate finance is comically bad but they are fantastic with people. They know how to pitch potential clients, they know how to negotiate hard with buyers, and they are generally excellent sales people. That breed of banker succeeds not because he knows numbers, studied hard, or received a great education from a prestigious university, they succeed because they are great with people. And at the end of the day deals are done by human beings. The ability to manage people with their varying emotions and competing interests is the most valuable skill for a senior investment banker.

An analysis is only as good as your audience’s ability to understand it

During my first-year as an analyst I got the opportunity to build my first financial model for a company we were selling. This being my first model, I really wanted to knock it out of the park. So I built an elaborate excel model, with tons of levers to pull to influence projected financial performance to a remarkably nuanced level of detail. While I was very proud of what I built, I was devastated when the client said it wasn’t good.

Because it had so many levers, it was extremely complicated and difficult for someone not intimate with the model to navigate. The client would have had to spend hours with the model to understand it and with his responsibilities operating the business, that was time he couldn’t afford to spare. So after speaking with the client we went back to the drawing board, and changed the model so it was simple and easy to understand though less dynamic and robust.

This was an extremely important lesson that I will carry with me for the rest of my career. An analysis, no matter how correct or accurate it is, is only as good as the decision-makers ability to understand it. So you should always build analyses or models with the end user in mind and be able to explain it to them simply and concisely.

IB in the South is nice for some things

I’m only two years into my career so my view of this may change as I get older and look back but I am pretty glad I did investment banking in the South for a few reasons:

1. Senior guys were pretty respectful

I admire a lot of the senior bankers I worked for and the divorce rate was surprisingly low among the MDs. I think this is because people who move to the South naturally prioritize family, at least to some extent, whereas career-long New Yorkers prioritize their career, occasionally at the expense of everything else including their relationships with family.

2. Cost of Living is a Fraction of New York while Compensation is on Par with New York

My rent was $1,100/month and I lived with three roommates in a pretty nice townhouse. So I pocketed a boatload of cash that I’ve been able to plow into the market. Having this money is nice because:

• The earlier you invest, the longer your time horizon is, the greater your wealth will be. The formula for compound growth is Future Value = Present Value * (1 + rate of return)^(hold period) and the more you can maximize the “hold period” the greater your investments will be worth. Most people obsess over earning the largest returns over a short period of time but if you can earn average results over an above average period of time you’re going to end up wealthier.

• Houses are absurdly expensive in basically any American city that isn’t in the midwest today. This is pushing the timeline for starting a family/settling down back for most people and impossible for others. But the pay in IB plus the take home pay living in the South makes me feel like I’ll have the ability to settle down whenever I want - that peace of mind is extremely valuable to me.

• Private equity returns have been extremely attractive over the past few decades as most firms aim to 3x their investment in 5-7 years. As a junior employee at a PE firm you often get the opportunity to co-invest in the companies your firm purchases. Obviously this is more risky than investing in the S&P 500 but it also offers greater upside and if you can 2-3x the IB bonuses you saved up then you are going to be pretty secure financially in your 30s when marriage/family are putting a lot of demands on your wallet.

I love New York (in fact I love it so much that I wrote about it) but having a bunch of cash to do with as I please is a huge plus to living in a “lower tier” city.

Pitching is funny

One of the first parts of a deal process is the ‘pitch’. This is a meeting with the Company that is interested in raising capital and the investment bank. During the pitch, the investment bank tries to convince the Company why they are best suited to advise the Company.

This often entails going over the investment bank’s ‘tombstones’ or closed deals that were similar to the Company. For example, if an investment bank was pitching a restaurant business, they would discuss the deals they recently closed in the restaurant space, the specific nuances of those deals, who the interested buyer parties were, and how they got their clients the best possible outcome.

Another part of the pitch is the ‘Valuation’ section. Using a variety of valuation methodologies including looking at what public companies are trading for, what precedent transactions have occurred in the space, running a discount cash flow model, and running an LBO model the investment bank will come up with a preliminary range of what they think the business would sell for today.

The valuation section is supposed to be fairly objective but oftentimes the Company will view this as an indictment on their business. For example if you pitch a Company at 8-10x EBITDA and the Company thinks they are worth 12-14x EBITDA, the owners of the business will often be offended and take this as an indication that you do not ‘believe’ in the Company when in reality you're just giving an objective view of the market.

Because the companies often interpret the Valuation as the investment bank’s personal opinion of their business, some bankers will pitch companies at unrealistically high valuations. This increases the likelihood that the Company will engage the banker but it also sets unrealistically high expectations that the banker likely won’t be able to back up when they go to market. Bankers who employ this strategy hope that the momentum of a deal process will then cause the Company to accept a lower price than what they were pitched at because selling a business is exhausting and they just want to be done with the process.

This wasn’t the approach of the senior bankers I worked under. We always pitched a company at what we felt was a reasonable value but we did lose many pitches because the Company wanted to go with an advisor who ‘believed they were worth more’.

That’s the funny thing about pitching. A banker is going to market your business the same way, regardless of what they say you’re worth during the pitch, because you never truly know what a Company will trade for until you get feedback from the market. The ‘Valuation’ section of the pitch has no effect on the way a company is marketed yet it has a huge effect on which bank is selected. Especially when pitching entrepreneur/family-owned businesses.

Entrepreneurs are exceptionally bold but they aren’t necessarily geniuses

One of the things I enjoyed most about my time in IB was the ability to interact with C-suite executives of multi-hundred million dollar companies as someone who was freshly out of college. 

This is a particular advantage of middle market investment banking - the entrepreneur clients are excellent at building businesses from 0 to 1 but they don’t necessarily have finance or accounting backgrounds which means they often aren’t super sophisticated when it comes to the financials of their business. Because of this, senior bankers often feel comfortable letting the junior bankers get facetime with the C-Suite and leading calls walking through the financial models.

Something I came to realize after interacting with many of our clients was that they were exceptional people but they weren’t off-the-charts smart. When we think of entrepreneurs we often think of Elon Musk, Jeff Bezos, or Bill Gates - people who are truly geniuses and built complicated businesses leveraging their intellect. 

But our clients, while extremely smart, were by no means geniuses. The quality that allowed them to build valuable companies wasn’t necessarily their intelligence but their boldness and ability to execute often over the course of 10+ years. It was comforting to observe that you don’t have to have Elon Musk level IQ to build a company worth a life-changing amount of money. But you do need remarkable boldness, confidence, and ability to execute consistently.

As I said at the outset, all of these lessons and musings are a result of my two-year investment banking stint. You could have a totally different experience so take everything I say with a grain of salt. If you had similar or different experiences I’d love to hear about them.